INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In the ordinary course of business, CTBI, through its wholly-owned commercial bank subsidiary, Community
Trust Bank, Inc. (the “Bank”), has had in the past and expects to have in the future banking transactions, including lending to its directors, officers, principal shareholders, and their associates. When these banking transactions are credit
transactions, they are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. None of the credits are disclosed as
nonaccrual, past due, restructured, or potential problem credits. In the opinion of CTBI’s Board of Directors, such transactions do not involve more than the normal risk of collectability or present any other unfavorable features.
Mr. Charles J. Baird, a director of CTBI, is a shareholder in Baird and Baird, P.S.C., a law firm that
provided services to CTBI and its subsidiaries during 2018 and is being retained by CTBI and its subsidiaries during the fiscal year 2019. Approximately $1.1 million in legal fees and $0.1 million in expenses paid on behalf of CTBI, $1.2 million
in total, were paid to Baird and Baird, P.S.C. during 2018.
The Board of Directors has determined that the Compensation Committee of the Board should review and
approve related party transactions. Accordingly, management recommends to the Compensation Committee related party transactions to be entered into by CTBI, including the proposed aggregate value of such transactions if applicable. After review,
the Compensation Committee recommends approval or disapproval of such transactions and at each subsequently scheduled meeting, management updates the Compensation Committee as to any material change to those proposed transactions. The Compensation
Committee provides a report to the Board of Directors at each regularly scheduled meeting of the related party transactions approved by the Compensation Committee since the date of its previous report to the Board.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the “Act”) requires CTBI’s executive officers and
directors and persons who own more than ten percent (10%) of the Common Stock to file initial reports of ownership and changes in ownership with the Securities and Exchange Commission (“SEC”), as well as to furnish CTBI with a copy of such report.
Additionally, SEC regulations require CTBI to identify in its Proxy Statement those individuals for whom one of the referenced reports was not filed on a timely basis during the most recent fiscal year. Based upon a review of Forms 3, 4, and 5
furnished to CTBI, there were no late filings in the year 2018.
COMPENSATION DISCUSSION AND ANALYSIS
Introduction
This Compensation Discussion and Analysis is intended to provide shareholders with an understanding of our
executive compensation philosophy, our decision making process, the key compensation-related decisions made by the Compensation Committee (“Committee”) in 2018, and any changes approved for 2019. It also describes the key components of
compensation provided to CTBI’s executive officers, including
our Chief Executive Officer, Chief Financial Officer, and the next
three most highly
compensated executive officers
(“Named Executive Officers” or “NEOs”)
. Our Named Executive Officers consist of Jean R. Hale (Chairman, President, and
Chief Executive Officer), Kevin J. Stumbo (Executive Vice President, Chief Financial Officer, and Treasurer), Mark A. Gooch (Executive Vice President and Secretary), Larry W. Jones (Executive Vice President), and James B. Draughn (Executive Vice
President).
Executive Summary
During 2018, the Committee continued its ongoing review of the compensation program for executive officers
and monitored the impact of certain changes implemented from 2012 through 2017, especially in regard to the executive incentive plans. As described below, the changes made from 2012 through 2017 were intended to increase the portion of total pay
that is performance-based and accomplish four significant objectives: (i) improve the alignment of executive pay with CTBI performance; (ii) provide executives a pay opportunity that is competitive with industry practices; (iii) attract and retain
qualified management; and (iv) maintain enterprise wide risk management.
In early 2012, the Committee adopted, and the Board of Directors approved, a new strategy for managing
executive compensation. The following summarizes the adopted strategy:
·
|
Manage executive officer salaries toward the median of market values (i.e., the middle of the range of competitive
practices), contingent on the executives meeting or exceeding performance standards.
|
·
|
Increase the cash incentive opportunity under the Senior Management Incentive Compensation Plan (“the Incentive
Plan”).
|
·
|
Slightly reduce the stock-based incentive opportunity under the Incentive Plan in order to offset some of the
increase in cash incentives and control the potential dilution to shareholders that could result from the use of stock-based incentives.
|
·
|
Introduce a performance-based long-term incentive plan.
|
During 2018, the Committee reviewed the executive compensation strategy described above and the actions
taken to implement it since 2012. The Committee concluded that the implementation of the new strategy had improved the competitiveness of the compensation opportunity provided to executive officers as well as the alignment of executive pay with
CTBI performance. As a result, the Committee determined it would be appropriate to continue managing pay in accordance with the executive compensation strategy through the remainder of 2018 and into 2019.
CTBI’s normalized earnings (Net Income and EPS) and returns (Return on Assets and Return on Equity) for
2018 were above the target (base) performance levels set by the Committee at the beginning of the year. As further described below under “2018 Annual Incentive Plan,” based on performance, the Committee approved the payment of cash bonuses and
grants of restricted stock at target (base) levels as provided by the 2018 Incentive Plan. As further described below under “Long-Term Incentive Plan – Incentives Earned for 2016-2018 Performance Period,” CTBI’s normalized cumulative net income
for the three years ended December 31, 2018 was above the minimum required level of performance but below the target (base) performance set by the Committee at the beginning of 2016. Based on these results, the Committee approved the payment in
cash of long-term incentives equal to the minimum provided by the Plan, or 75% of the executives’ target (base) incentive potential. In addition to the incentive payments earned for performance through the end of 2018, the Committee approved base
salary increases for each of the Named Executive Officers in early 2019; the base salary increases ranged from 3.37% to 5.36% over 2018 base salaries. The Committee determined these salary increases were in keeping with the executive compensation
strategy and the philosophy of managing executive base salaries toward the market median. See “Base Salaries” below for additional information about executive salary increases. Total compensation paid to the Named Executive Officers with respect
to 2018 was above the amounts paid to the Named Executive Officers with respect to 2017 due to several reasons, including base salary increases and performance-based incentive payments under both the annual and long-term incentive plans for periods
ending December 31, 2018.
Role of the Compensation Committee
The principal duties of the Committee are to establish the executive compensation strategy of CTBI; approve
compensation plans that support the implementation of the strategy; assess and monitor the potential risks associated with various compensation arrangements, especially incentive compensation plans; approve the compensation of the CEO; review the
recommendations of the CEO and approve the compensation of the other executive officers of CTBI; and make recommendations to the Board of Directors concerning executive officer and outside director compensation. The Committee is responsible for
establishing, implementing, and continually monitoring adherence with CTBI’s executive compensation philosophy.
To accomplish these responsibilities, the Committee reviews and approves corporate goals and objectives
relevant to the compensation of CTBI’s CEO, and it evaluates the performance of the CEO relative to the approved goals and objectives. The Committee considers this evaluation of performance when it determines and approves the CEO’s compensation.
Additionally, the Committee reviews compensation levels for CTBI’s other executive officers relative to goals and objectives relevant to their responsibilities, considers the CEO’s evaluation of their achievements, and approves their compensation
based on this evaluation.
The Committee strives to establish and maintain compensation plans that are: (i) focused on rewarding
performance; (ii) aligned with the interests of shareholders; (iii) competitive with the practices of peer companies; (iv) sufficient to enable CTBI to attract and retain a strong management team; and (v) designed to avoid creation of undue risk
for CTBI.
The Committee has followed certain guiding principles to ensure the effectiveness of CTBI’s executive
compensation strategy. The Committee recognizes the importance of perceived fairness of compensation practices, both internally and externally, and believes that the long-term success of CTBI and its ability to create value for shareholders is
dependent on attracting, motivating, rewarding, and retaining skilled executives. Significant time is devoted by the Committee to monitoring the relationship between executive pay and CTBI performance, and adjusting compensation plans and
practices as needed from year to year to maintain an appropriate alignment of pay with performance. The Committee recognizes that the competition for talented executives among financial institutions similar to CTBI is intense, and it considers
compensation data and other labor market indicators as it reviews CTBI’s compensation plans. Current economic and industry environments are considered when reviewing executive compensation. Full disclosure is made to the independent members of
the Board of Directors of CTBI’s executive compensation policies, practices, and issues to ensure that all directors understand the implications of the Committee’s decisions. Likewise, the Committee works with management to ensure that public
filings related to executive compensation are transparent and comply with applicable regulations.
The Committee has established various processes to assist it in ensuring CTBI’s executive compensation
program is achieving its objectives. Among these are:
·
|
Assessment of Company
Performance
– The Committee considers various measures of company and industry performance, including but not limited to asset growth, asset quality, earnings per share, return on assets, return on equity, total shareholder
return, and execution of CTBI’s growth strategy and annual business plan. In addition, the Committee considers general economic conditions within CTBI’s primary markets, as well as CTBI’s relationships with its regulators and the results
of any recent exams. The Committee does not apply a formula or assign relative weights to these measures. Instead it makes a subjective determination after considering such measures individually and collectively.
|
·
|
Assessment of Individual
Performance
– Individual performance assessments impact the compensation of all CTBI employees, including the CEO and other Named Executive Officers. The Committee evaluates CEO performance relative to company performance and
other factors, such as leadership, strategic planning, board relations, and relationships with customers, regulators and others outside the company. As with its assessments of company performance, the Committee does not apply a formula
or assign relative weights to any of these measures, and the measures deemed most important by the Committee may vary from year to year. The process is subjective, but it results in an informed judgment of CEO performance. The Committee
reviews the performance of other executive officers and considers the CEO’s recommendations concerning the officers’ achievements. Additionally, the Committee applies its own judgment based on the interactions of the Board and/or the
Committee with each executive officer, their contributions to CTBI’s performance and other leadership accomplishments.
|
·
|
Total Compensation Review
– The Committee annually reviews each executive’s base salary, annual incentive compensation, and stock-based incentives. In addition to these primary compensation elements, the Committee reviews other executive compensation
arrangements, including, for example, payments that could be required under various severance and change in control scenarios. This “holistic” review process ensures that the Committee considers the executive’s total compensation prior
to changing any single component.
|
·
|
Risk Management
–
The Committee reviews all incentive plans and compensation programs to insure the plans do not create any risks that are reasonably likely to have a material adverse impact on CTBI.
|
The Committee meets in executive session without management or guests present when making decisions about the compensation
arrangements for Named Executive Officers and at other times as needed.
In addition to its responsibilities for executive compensation, the Committee periodically reviews the
compensation provided to the CTBI Board of Directors to ensure that the compensation provided for service on the Board and its committees is commensurate to the amount of work required from the individual directors as well as from the Board in
aggregate. The Committee periodically compares the pay arrangements for the Board and the actual amounts earned by individual directors to amounts paid to outside directors of banking companies in the Peer Group (as defined below) and to survey
data for director compensation. In late 2018, the Committee reviewed the existing compensation program for outside directors of CTBI. An analysis prepared by Pearl Meyer, the Committee’s independent compensation consultant, revealed that CTBI’s
director compensation was significantly below the market median pay for outside directors of other similar financial institutions. To ensure that CTBI could continue to attract and retain outside directors with the skills and experience necessary
to provide sufficient oversight, the Committee adjusted certain components of the outside director compensation plan. The annual retainer paid to all outside directors was increased from $35,000 to $42,500, and the Committee established an
incremental annual retainer of $5,000 for the lead independent director. The Committee maintained the incremental retainers for the Chairman of the Audit and Asset Quality Committee ($10,000), as well as the incremental annual retainers for the
Chairman of the Risk and Compliance Committee ($5,000) and the Chairman of the Compensation Committee ($5,000). The Committee’s adjustments to outside director compensation were approved by the Board of Directors and became effective January 1,
2019. For additional information, see “Directors’ Compensation.”
Executive Compensation Philosophy
The Committee believes that executive officer compensation is an integral component of CTBI’s business and
human resources strategies. It is important to CTBI’s success that highly talented and experienced individuals serve as executive officers. The Committee strives to provide compensation which is sufficient to attract and retain such executives.
The Committee seeks to establish executive compensation at fair, reasonable, and competitive levels. The Committee also believes that executive compensation should be strategy-focused and recognize individual achievements as well as group
contributions and CTBI results. Therefore, the Committee desires to offer a competitive, market-driven executive officer compensation package which provides for a meaningful portion of compensation to be based upon performance. As a result,
CTBI’s executive compensation package includes incentive-based cash and equity compensation in addition to base salary and employee benefits.
The goal of the Committee is to offer market competitive compensation, without being the highest or lowest
provider. Total compensation packages, including base salaries plus cash- and stock-based incentives, are set at levels the Committee believes are sufficient to attract and retain qualified executives whose performance and success should
contribute to shareholder value. The compensation of Named Executive Officers is based on the same criteria and performance factors used for all other executive officers.
Compensation Consultant
The Committee may engage outside advisors as necessary to assist with its oversight of executive
compensation. Pearl Meyer & Partners (“Pearl Meyer” or “Consultant”) has been retained annually since 2012 to review CTBI’s executive compensation plans. The role of the Consultant is to provide analyses, information, and advice to assist
the Committee in making decisions related to compensation of executive officers. The Committee believes that the Consultant is independent and no conflicts of interest are raised by the work of the Consultant under the criteria specified in SEC
rules.
During November 2018, Pearl Meyer performed a compensation review which included: (i) evaluating the
competitiveness of pay for twelve executive officers, including each of the Named Executive Officers, and (ii) developing recommendations for managing executive pay in 2019. Pearl Meyer’s analysis revealed that the competitiveness of CTBI’s
executive compensation in 2018 (somewhat below median) was approximately the same as in 2017. The analysis revealed that the mix of base salary and incentive compensation in 2018 was similar to market practices, with slightly heavier weight on
base salaries. Although it has been necessary to occasionally provide certain executives with larger than average salary increases in order to position their salaries closer to the market median, the Committee’s actions in recent years have begun
to shift the executive pay mix toward variable, performance-based pay, resulting in a mix of pay which is more closely aligned with trends in the banking industry. Compensation competitiveness also has improved significantly from the 2011 – 2012
period, but it remains below median market values for comparable executives in similar banks.
Additionally, based on separate analyses of banking industry
performance prepared by Pearl Meyer for the one-year and three-year periods ending December 31, 2017 (the last full year for which both pay and performance data were available for CTBI and the Peer Group) and the one-year and three-year periods
ending September 30, 2018 (the most recent quarter for which financial results were available for both CTBI and the Peer Group), CTBI’s performance on a variety of metrics (such as EPS growth, ROE, and ROA) was between the 25
th
and 50
th
percentiles of the Peer Group, resulting in CTBI’s executive pay and business performance being relatively well aligned versus its peers due to both being below median.
These results were similar to
the outcome of its 2017 analysis of CTBI’s executive pay. Pearl Meyer recommended the Committee continue to refine and implement the executive compensation strategy it had adopted in early 2012. As described previously in the Executive Summary,
the thrust of the executive compensation strategy and the changes made since 2012 has been to increase the portion of executive pay that is contingent on performance and provide a total compensation opportunity that is more competitively positioned
with current practices in the banking industry. In early 2019, the Committee considered the impact of changes made in prior years and determined it would be appropriate to continue the current executive compensation strategy. As a part of this
strategy, the Committee examined the compensation components in light of current industry practice.
During November 2018, Pearl Meyer reviewed the compensation program for the Board of Directors and found
that CTBI’s compensation program for outside directors was structured in a manner that was consistent with banking industry practices, in terms of providing retainers and meeting fees for board and committee service. However, the amount of
compensation provided to CTBI directors was below the median levels of compensation paid to outside directors of banks within the Peer Group and median values reported in survey data for comparable banks. Pearl Meyer developed alternatives for
adjusting the compensation of the Board of Directors. As described above, after reviewing the alternatives for Board Compensation, the Committee agreed to increase Board compensation by adjusting the annual retainers for Board members from
$35,000 to $42,500 and establishing an incremental annual retainer of $5,000 for the Lead Director. Incremental annual retainers for the Chairman of the Audit and Asset Quality Committee, the Chairman of the Risk and Compliance Committee, and the
Chairman of the Compensation Committee were maintained at their current levels ($10,000, $5,000, and $5,000, respectively). For more information on director compensation and changes made for 2019, please see “Directors’ Compensation.”
Peer Group
CTBI periodically compares its executive pay and business performance, as well as the compensation of the
Board of Directors, to a group of comparable, publicly traded financial institutions (“Peer Group”). In establishing a Peer Group, CTBI seeks to include regional bank holding companies that are similar to CTBI in terms of assets, business lines,
and geographic footprint. During 2018, the Committee worked with Pearl Meyer to review the Peer Group to ensure it continued to include organizations that were comparable to CTBI. Based on this review, the Committee determined that the existing
Peer Group, which the Committee had approved in 2017, was still appropriate, with one exception. The Committee removed State Bank Financial Corporation due to its acquisition by Cadence Bancorporation. This adjustment resulted in the Peer Group
of fourteen companies listed below. The Committee believes the Peer Group provides a reasonable basis of comparison for CTBI due to their similar business lines and geographic locations, as well as their comparable size, as reflected in their
assets. Following the Committee’s review and adjustment of the Peer Group, the median assets of the Peer Group were about $4.6 billion, as compared to CTBI’s assets of approximately $4.2 billion. The companies included in the Peer Group ranged in
asset size from $2.3 billion to $10.8 billion.
Bank
|
Ticker
|
Bank
|
Ticker
|
1st Source Corporation
|
SRCE
|
First Merchants Corporation
|
FRME
|
City Holding Company
|
CHCO
|
German American Bancorp
|
GABC
|
First Busey Corporation
|
BUSE
|
Lakeland Financial Corporation
|
LKFN
|
First Bancorp
|
FBNC
|
Park National Corporation
|
PRK
|
First Community Bancshares, Inc.
|
FCBC
|
Peoples Bancorp
|
PEBO
|
Home Trust Bancshares
|
HTBI
|
S.Y. Bancorp, Inc.
|
SYBT
|
First Financial Corporation
|
THFF
|
Towne Bank
|
TOWN
|
Executive Compensation Components
CTBI’s executive compensation program includes the following major components, each of which are described
further below.
·
|
Long-Term Incentive Plan
|
·
|
Benefits and Perquisites
|
·
|
Employment Contracts, Termination of Employment, and Change in Control Arrangements
|
Base Salaries
Salaries for CTBI’s executives are established based upon the scope of their responsibilities, taking into
account competitive market compensation paid by other similarly situated companies for comparable positions. The Committee sets the CEO’s base salary, subject to approval of the Board of Directors. Any salary increase for the CEO is determined
based on the Committee’s review of the CEO’s leadership and contributions to the achievement of performance objectives for CTBI, which for 2018 included asset and revenue growth, asset quality, core earnings performance, identification of strategic
opportunities, and execution of the current business strategy and operating plan. The Committee also considers how the CEO’s salary compares to salaries of CEO’s within the Peer Group. Base salaries for other executive officers, including the
other Named Executive Officers, are approved by the Committee after considering recommendations from the CEO. In approving any salary increases for Named Executive Officers, the Committee considers performance for the prior year, responsibilities
for the upcoming year, how the current salaries compare to those paid by peer companies to executives with similar responsibilities, and CTBI’s budget for salary increases for employees other than executive officers. The Committee’s objective is
to pay base salaries which will be sufficient to attract, retain, motivate, and reward management for successful performance while maintaining affordability within CTBI’s business plan.
The Committee has established a policy of managing executive officer salaries to the market median,
recognizing that a series of increases over several years may be required to adjust salaries to the desired level for any executive whose current salary is significantly below the market (contingent upon the executive sustaining the required level
of performance). After considering the performance of both CTBI and each executive, as well as how individual officer salaries compared to the market median, the Committee determined that it was appropriate to increase executive salaries for
2019. The salary increases for 2019 reflect the Committee’s desire to balance the need to compensate our Named Executive Officers at levels that are competitive with the market and recognize their performance and value to CTBI with the need to
control expenses in an economic and regulatory environment that continues to be challenging for CTBI and other financial institutions. The salary increases approved for the Named Executive Officers for 2019 ranged from 3.37% to 5.36%. The
increase for Kevin Stumbo included both a merit increase and a market adjustment in order to provide a base salary more in line with market salaries for chief financial officers in comparable financial institutions. The following table shows the
2018 and 2019 base salary for each Named Executive Officer and the percentage increase over 2018.
|
|
Base Salary
|
|
|
Base Salary
|
|
|
% Increase
|
|
|
|
2018
|
|
|
2019
|
|
|
2018 to 2019
|
|
Jean R. Hale
Chairman, President, and Chief Executive Officer
|
|
$
|
625,000
|
|
|
$
|
650,000
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kevin J. Stumbo
Executive Vice President, Chief Financial Officer and Treasurer
|
|
$
|
280,000
|
|
|
$
|
295,000
|
|
|
|
5.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark A. Gooch
Executive Vice President and Secretary
|
|
$
|
445,000
|
|
|
$
|
460,000
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry W. Jones
Executive Vice President
|
|
$
|
280,000
|
|
|
$
|
290,000
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Draughn
Executive Vice President
|
|
$
|
277,500
|
|
|
$
|
290,000
|
|
|
|
4.50
|
%
|
Annual Incentive Plan
The Named Executive Officers, other executive officers, and other members of senior management may earn
annual cash incentive bonuses as well as stock-based awards under the Senior Management Incentive Compensation Plan. Bonuses and stock awards are earned for achieving targets set for earnings per share (“EPS”) and return on average assets (“ROAA”)
of CTBI. The Incentive Plan is designed to reward participants for meeting or exceeding annual profit goals, and it is intended to achieve the following objectives:
·
|
Increase the profitability and growth of CTBI in a manner which is consistent with other goals of the company.
|
·
|
Provide an incentive opportunity which is competitive with other financial institutions in the Peer Group.
|
·
|
Attract and retain executive officers and other key employees and encourage excellence in the performance of
individual responsibilities.
|
·
|
Motivate and appropriately reward those members of senior management who contribute to the success of CTBI.
|
At the beginning of each year, the Committee establishes a target (base) level of performance for EPS and
ROAA. The Committee also establishes a performance range relative to the base level and an associated payment scale which defines the percent of salary that participants may earn as a cash bonus for a given level of performance. In addition, the
Committee establishes a separate payment scale which defines the percentage of salary that participants may receive as a stock award for a given level of performance. Stock awards under the Incentive Plan may be granted as either restricted shares
or stock options.
2018 Annual Incentive Plan
For 2018, the target (base) level of ROAA was 1.42%, and the target (base) level of EPS was $3.36 for
payout under the Incentive Plan. The Committee believed the target (base) levels of performance were challenging, but appropriate given the expectations at the beginning of 2018. For the year 2018, CTBI’s ROAA was 1.41% and EPS was $3.35. In
January 2019, the Committee evaluated these results and determined that, for purposes of the Incentive Plan, the charges recorded for the additional accrual required for the Federal Reserve Consent Order, disclosed in a Form 8-K dated July 25,
2018, should not be included in the final results to determine the performance level achieved for purposes of meeting the incentive targets. The resulting normalized measures for ROAA and EPS were 1.46% and $3.46, respectively. The normalized
results were above the minimum level required to earn a payment at the 2
nd
tier bonus payment (i.e., above the target or base level). After deliberation, the Compensation Committee concluded that incentives above the target (base)
payment amount should not be earned through the normalization process. Accordingly, the Committee exercised discretion and approved payment of annual incentives at the target (base) level. Specifically, the CTBI CEO earned a cash incentive of
50% of base salary, the CEO of Community Trust Bank, Inc. (“CTB CEO”) earned a cash incentive of 40% of base salary, and other NEOs earned cash incentives equal to 30% of their base salaries. The amounts of the 2018 cash incentives paid to the
NEOs in early 2019 for performance in 2018 are included in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
A portion of the total annual incentive earned under the Incentive Plan is paid in restricted shares which
vest ratably over four years. Beginning in 2012, the Committee reduced the portion of the annual incentive paid in restricted shares in order to offset some of the increase in the cash portion of the annual incentive. Restricted stock awards
granted in January 2019, as a result of performance in 2018, were granted at the target (base) performance level, consistent with the adjusted results for ROAA and EPS and the cash bonus payment determination described above. As a result, the
CTBI CEO, the CTB CEO, and the other NEOs earned restricted stock grants for 2018 performance equal to 20.0%, 17.515%, and 15.0% of base salary, respectively. The value of these awards is shown in the Stock Awards column of the Summary Compensation
Table.
2019 Annual Incentive Plan
Prior to setting the terms of the Incentive Plan for 2019, the Committee considered the outcomes for 2018,
the adjustments made to the Incentive Plan since 2012, and the executive compensation strategy adopted in January 2012.
As a result of these discussions, the Committee recommended, and the Board approved, maintaining the
Incentive Plan for 2019 in substantially the same form as 2018, except for updating the performance targets to reflect the 2019 business plan. Key features of the 2019 Incentive Plan are listed below:
·
|
Maintain the cash incentives payable at the same levels as 2018 if results are within the performance ranges
established by the Committee for ROAA and EPS.
|
·
|
Maintain the stock-based incentives payable to Named Executive Officers at the same levels of the 2018 plan if
results are within the performance ranges established by the Committee for ROAA and EPS.
|
·
|
Maintain the continued service period of four years for executive officers to fully vest in stock awards made under
the Incentive Plan, which vest in 25% increments each year.
|
·
|
Continue to allow executives to earn modest cash and stock incentives if results are slightly below the target
(base) level, so long as performance meets or exceeds minimum levels of performance approved by the Committee; maintain the minimum required level of ROAA performance at 95% of the target (base) level, and maintain the portion of the cash
and stock incentives earned for minimum levels of performance at 50% of the target (base) incentive award.
|
·
|
Continue to allow executives to earn target (base) level incentives if the goal for net income is achieved.
|
·
|
Maintain the maximum incentive potential provided by the plan at 200% of the target (base) award, the same
percentage applicable in the 2018 plan.
|
This approach is consistent with the Committee’s strategy of shifting the mix of executive compensation so that a larger
portion of executive pay is contingent upon performance while controlling the cost of the plan.
The following table shows the target (base) level of ROAA performance and the cash incentive awards that
may be earned by the CTBI CEO, the CTB CEO, and other Named Executive Officers (“Other NEOs”) for various levels of performance in 2019:
Target/ROAA*
|
% of Target Award Earned
|
Cash Incentive Award as a % of Salary
|
|
|
|
CTBI CEO
|
CTB CEO
|
Other NEOs
|
|
1.38%
|
50%
|
25%
|
20%
|
15%
|
Base
|
1.45%
|
100%
|
50%
|
40%
|
30%
|
|
1.48%
|
150%
|
75%
|
60%
|
45%
|
|
1.51%
|
200%
|
100%
|
80%
|
60%
|
*These results are after accrual of the incentive.
As shown in the table above, executives would earn no incentives for performance below the minimum required
level. To ensure that executive pay varies with company performance, executives earn less than target for results above the minimum required level but below the target (base) level, and they may earn larger incentives if results exceed the target
(base) level. Payments are “capped” at a maximum level to preclude overpayment and control the cost of the plan. The maximum payment provided under the 2019 plan, as well as prior versions of the plan from 2015 through 2018, is 200% of the target
(base) opportunity, which was reduced from the maximum 450% of target applicable to the 2014 plan, in recognition of actions taken in prior years, including salary adjustments and increases to the target (base) amounts.
CTB officers responsible for the various consolidated functions as selected by the CTB CEO, the presidents
of each market, and the Community Trust and Investment Company officers responsible for various departments as selected by the CTIC CEO (“Group II Participants”) may receive awards for the year ending December 31, 2019 based on the same performance
measures and targets applicable to executive officers. Potential cash incentive awards for Group II participants, expressed as percentages of base salary, range from 3.50% to 8.75% of salary. Senior vice presidents of consolidated functions who
are selected for participation by the Compensation Committee (“Group III Participants”) may receive awards for the year ending December 31, 2019 based on the targets applicable to executive officers, ranging from 2.75% to 6.71% of salary.
The following table shows the target (base) level of ROAA performance and the stock awards that may be
earned by the CTBI CEO, the CTB CEO, and other executive officers, including the Other NEOs, for 2019 performance. The stock awards shown below as percentages of salaries are the same as those used in the 2018 Incentive Plan. Beginning in 2016, the
Committee reduced the percentage of the target (base) award earned for performance at the minimum level from 90% to 50% for cash and stock awards. In keeping with the changes made to the cash portion of the Incentive Plan in 2015, the maximum
potential stock award is 115% of the target award, reduced from 150% of the target (base) award in 2014:
Target/ROAA*
|
% of Target Award Earned
|
Stock Award as a % of Salary
|
|
|
|
CTBI CEO
|
CTB CEO
|
Other NEOs
|
|
1.38%
|
50%
|
10%
|
8.757%
|
7.50%
|
Base
|
1.45%
|
100%
|
20%
|
17.515%
|
15.00%
|
|
1.48%
|
105%
|
21%
|
18.375%
|
15.75%
|
|
1.51%
|
115%
|
23%
|
20.125%
|
17.25%
|
*These results are after accrual of the incentive.
Group II Participants may receive stock awards for the year ending December 31, 2019 based on the same performance targets
applicable to executive officers, ranging from 5.0% to 11.5% of salary. Group III Participants may receive stock awards for the year ending December 31, 2019 based on the same performance targets applicable to executive officers, ranging from
2.25% to 5.00% of salary.
The Committee at its sole discretion may choose to issue restricted stock, stock options, or a combination
of options and restricted stock in the proportion recommended by the Committee and approved by the Board of Directors of Community Trust Bancorp, Inc. subject to any limitations of the 2015 Stock Ownership Incentive Plan. For the last several
years, the Committee has determined that any stock awards earned under the Incentive Plan would be granted as restricted shares, and the restrictions would lapse pro-rata over four years from the date of grant, contingent upon the executive’s
continued service with CTBI. In the event of certain participant employee termination events occurring within 24 months of a change in control of CTBI or the death of a participant, the restrictions will lapse on any unvested restricted shares on
the date employment is terminated. In the event the participant becomes disabled, restrictions will lapse on a pro-rata basis, dependent on time served from the date of grant through the date of termination due to disability. In the event of a
participant’s retirement prior to the lapse of all restrictions, the Committee will have discretion to review and revise any restrictions. The actual number of any restricted shares granted will be determined based on the stock price on the date
of grant (which would be in early 2020, after the Committee has the opportunity to review the achievement of performance goals for 2019).
For reference, the EPS and Net Income targets associated with the 2019 target (base) level of ROAA are
$3.49 and $61,984,000, respectively. For comparison, the cash incentive percentages of salary at target (base) for the CEO and other NEOs are unchanged from 2018, and the stock award percentages of base salary at target (base) for the CEO and
other NEOs are also unchanged from 2018. The Committee may adjust the cash and stock incentive percentages of salary in future years as it continues to implement the executive compensation strategy it adopted in 2012. During the last several
years, by gradually increasing the cash portion of the Incentive Plan and the total annual incentive opportunity, the Committee has brought CTBI’s plan more in line with typical market practices and increased the portion of total pay that is earned
for performance.
CTBI has structured its incentive compensation plans in a manner which is designed to permit a large
percentage of the total potential incentive compensation to be paid to participants who are not Named Executive Officers. During 2019, qualifying executive officers, other members of senior management, and other full-time employees are eligible to
participate in various company incentive compensation plans. Based on the number of participants and structure of CTBI’s incentive compensation plans, if CTBI achieves its 2019 targets at the target (base) level, participants other than the Named
Executive Officers will receive 75% of the total amount paid under all company-sponsored incentive compensation plans.
Long-Term Incentive Plan
A key component of the executive compensation strategy approved by the Committee in 2012 was the
implementation of a forward-looking, performance-based long-term incentive compensation plan. The long-term incentive plan is intended to balance the other, more short-term components of pay (such as base salaries and annual cash incentives), and
increase the portion of total pay that is contingent upon performance.
After considering several potential plan designs, the Committee recommended, and the Board approved the use
of performance units beginning in 2012. Performance units are long-term incentives which are earned for achieving one or more financial performance goals over a multi-year period. Awards of performance units are permitted under CTBI’s
shareholder-approved 2015 Stock Ownership Incentive Plan. Only executive officers of CTBI (including the CEO and the other NEOs) participate in the performance unit plan, as they are the individuals who are held accountable for creating
shareholder value. As it reviewed the executive compensation program in late 2018, the Committee decided to continue granting performance units. Accordingly, in early 2019, the Committee approved long-term awards to the CEO and other NEOs, as
further described below.
The Committee believes that earnings growth, when sustained over a period of time, will create value for
CTBI shareholders. For this reason, the Committee approved awards of performance units that require executives to achieve a target for cumulative net income over a three-year period. In early 2019, the Committee approved grants for a three-year
period covering 2019, 2020, and 2021. The Committee believes the cumulative net income performance requirement is achievable but challenging, given the gradual improvement in the U.S. economy, but notwithstanding the regulatory environment of the
banking industry and the challenges to the local economy in some of the markets served by CTBI. Targets for cumulative net income growth were set after giving consideration to CTBI’s results in prior years, CTBI’s forecasts of future results
within its strategic plan, local economic conditions, and industry performance.
The Committee believes the performance units will focus the executive officers on creating shareholder
value through sustained growth in earnings, improve the alignment of pay with performance for all executive officers, and create a more balanced incentive compensation program. The use of cash-based performance units avoids any potential dilution
to existing shareholders (as might occur if awards were stock-based). The Committee gradually adjusted the target incentive percentages of salary associated with the awards of performance units in 2012, 2013, and 2014 in order to change the mix
of executive compensation, resulting in a greater portion of executive compensation being contingent on performance.
The table below shows the percentage of salary that may be earned by the CTBI CEO, the CTB CEO, and the
Other NEOs, based on achievement of the cumulative net income goal for 2019 through 2021. Any earned performance units will be paid in early 2022, after the Committee evaluates actual results for 2019 through 2021 versus the cumulative net income
goal.
|
Performance Unit Award as a % of Salary
|
Cumulative Net Income vs. Target
|
CTBI CEO
|
CTB CEO
|
Other NEOs
|
90% of Target
(Minimum)
|
10.0%
|
7.5%
|
5.0%
|
93% of Target
|
20.0%
|
15.0%
|
10.0%
|
96% of Target
|
30.0%
|
22.5%
|
15.0%
|
100% of Target Cumulative Net Income (Target)
|
40.0%
|
30.0%
|
20.0%
|
103% of Target
|
48.0%
|
36.0%
|
24.0%
|
107% of Target
|
54.0%
|
40.5%
|
27.0%
|
110% of Target
(Maximum)
|
60.0%
|
45.0%
|
30.0%
|
For reference, the 2019 performance unit awards for the CTBI CEO, the CTB CEO, and the Other NEOs (expressed as percentages of
salary at target performance) are the same as in 2018. In addition, for 2018, the Committee established the minimum potential payment for the Other NEOs at 5.0%, which reflected an increase from 2.50% in the 2017 plan, in order to provide a
payment at minimum levels of performance that is consistent with the minimum payments that may be earned by the CTBI CEO and the CTB CEO. The cumulative net income target for the 2019 Long-Term Incentive Plan is $190.0 million.
Voluntary or involuntary termination of employment prior to the end of the performance period and/or prior
to the payment of any earned performance units will result in forfeiture of any outstanding performance units, except as noted below. In the case of termination of employment by reason of death, disability, or retirement prior to the expiration
of the performance period, any outstanding performance units will be deemed to have been earned in an amount equal to the amount payable at the maximum level multiplied by the percentage that would have been earned, assuming that the rate at which
the performance goal has been achieved as of the date of such termination of employment would have continued until the end of the performance period. Upon the occurrence of certain termination events within the 24 month period beginning on the
date of a change in control, any outstanding performance units granted under the 2015 Stock Ownership Incentive Plan will become fully vested and payable in an amount which is equal to the greater of (a) the maximum amount payable under the
performance unit at the target level multiplied by the percentage that would have been earned, assuming that the rate at which the performance goal has been achieved as of the date of such change in control termination event would have continued
until the end of the performance period or (b) the maximum amount payable under the performance unit at target level multiplied by the percentage of the performance period completed at the time of the change in control termination event.
Long-Term Incentive Plan – Incentives Earned for 2016-2018 Performance Period
In early 2019, the Committee reviewed performance for the three-year period ended December 31, 2018. The
cumulative net income goal for 2016-2018 was $153.0 million, and actual cumulative net income for the period was $158.1 million. The Committee determined it would be appropriate to adjust the calculation of results for the three-year period ending
December 31, 2018 to exclude the windfall benefits from the Tax Cuts and Jobs Act and the additional one-time bonuses (paid only to non-executive employees) in 2017; reflect a higher effective tax rate for 2018 consistent with the actual effective
tax rate for 2017; and exclude the additional accrual in 2018 required for the Federal Reserve Consent Order discussed above. The adjusted cumulative net income for the 2016-2018 period was $147.3 million. Adjusted results were below the target
(base) amount of $153.0 million, but slightly above the performance level ($147.0 million) which would trigger an incentive equal to 75% of the executives’ target (base) incentive potential. Accordingly, the Committee approved incentive payments
to the CEO and other Named Executive Officers equal to 75% of their target incentive potentials under the Long-Term Incentive Compensation Plan for the 2016-2018 performance period. Amounts earned under the plan and paid to executives in early
2019 are shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.
Benefits and Perquisites
CTBI’s policy is to minimize the use of executive benefits and perquisites. The Named Executive Officers
participate in the same benefit plans as other CTBI employees, with the few exceptions described below. During 2018, there were no changes to the benefits and perquisites provided to Named Executive Officers, and none have been approved for 2019.
To align the interests of all employees, including Named Executive Officers, with those of shareholders,
CTBI has implemented an Employee Stock Ownership Plan (“ESOP”) which provides awards of CTBI stock subject to vesting requirements. Participation in the ESOP is available to any employee of CTBI or its subsidiaries who has been employed for one
year, completed 1,000 hours of service, and attained the age of 21. CTBI currently contributes 4.0% of covered employees’ gross wages to the ESOP. ESOP contributions are used to acquire shares of CTBI stock on the open market.
CTBI has established a 401(k) Plan under which employees can contribute from 1.0% to 20.0% of their annual
salary, up to applicable limits. CTBI provides a matching contribution equal to 50% of the first 8.0% of salary contributed by the employee. CTBI also provides health insurance, life insurance, and other benefit programs that are usual and
customary within the banking industry in order to attract and retain employees. Named Executive Officers are eligible to participate in these plans on the same basis as other employees, subject to IRS limits.
CTBI provides supplemental life insurance to its Named Executive Officers, as well as other senior and key
management. The plan provides a split-dollar share of death benefits at an amount necessary to provide the Named Executive Officers with a total company-provided death benefit of three times their annual salary. This amount is consistent with the
death benefit provided to other eligible employees. Additionally, each Named Executive Officer and other senior and key employees are provided a post-retirement death benefit equal to one times his or her annual salary at the time of
retirement. The benefits are funded with bank-owned life insurance policies. CTBI will recover its plan costs upon the death of the covered individual, and the executive’s beneficiary will receive a portion of the insurance proceeds. The
Committee believes the supplemental life insurance program is common within the banking industry and provides an incentive for long-term employment with CTBI.
CTBI does not provide significant perquisites or personal benefits to executive officers. The Named
Executive Officers, as well as other executive officers, members of senior management, and key employees, are provided country club memberships and other perquisites with an aggregate individual annual value of less than $10,000.
Unlike some other banks in its Peer Group, CTBI does not provide any supplemental executive retirement
plan. CTBI allows executives to voluntarily defer receipt of any cash bonuses earned under the annual Incentive Plan.
Employment Contracts, Termination of Employment, and Change in Control Arrangements
CTBI does not provide employment agreements to executives. Due to ongoing industry consolidation, CTBI has
established termination of employment and change in control agreements (“Severance Agreements”) with each of its Named Executive Officers, other executive officers, and certain other senior officers. Severance Agreements are provided in order to
attract and retain key executives by protecting them in the event of a change in control. The Severance Agreements are effective for a term equal to the longer of three years or the covered period should a change in control of CTBI occur during
such three-year period. These agreements are automatically renewable for additional one-year periods. The covered period during which the terms and conditions of the Severance Agreements are effective is the period of time following a change in
control equal to: (i) two years following the occurrence of the change in control in the event of an involuntary termination or a voluntary termination following a change in duties or (ii) the thirteenth month following the change in control in the
event of a voluntary termination not preceded by a change in duties.
The Severance Agreements require the payment to a Named Executive Officer, other executive officer, or
senior officer of a severance amount in the event of an involuntary or voluntary termination of employment after a change in control of CTBI during the covered period. The severance amount payable under the Severance Agreements is equal to: (i)
2.99 times the Named Executive Officer’s or other executive officer’s base annual salary in the event of involuntary termination or in the event of a voluntary termination of employment preceded by a change in duties subsequent to a change in
control of CTBI, or (ii) 2.00 times the Named Executive Officer’s or other executive officer’s annual base salary in the event of a voluntary termination of employment not preceded by a change in duties subsequent to a change in control of CTBI.
For purposes of the Severance Agreements, a change in control occurs when: (i) any person, including a
group under Section 13(d)(3) of the Securities Exchange Act of 1934 is or becomes the owner of 30% or more of the combined voting power of CTBI’s outstanding securities; (ii) as a result of, or in connection with, any tender offer, exchange offer,
merger or other combination, sale of assets or contested election, the persons who were directors of CTBI before such transaction(s) cease to constitute a majority of the Board of Directors of CTBI or successor of CTBI; (iii) a tender or exchange
offer is made and consummated for the ownership of 30% or more of the combined voting power of CTBI’s outstanding voting securities; or (iv) CTBI transfers substantially all of its assets to another corporation that is not a wholly-owned
subsidiary of CTBI.
The Committee believes the use and structure of the Severance Agreements are consistent with CTBI’s
compensation objectives to attract, motivate, and retain highly qualified executives. The Committee also believes that the Severance Agreements promote job stability, provide a measure of financial security, preserve morale and productivity, and
encourage retention during the period of uncertainty that accompanies an actual or potential change in control. The Committee periodically reviews the terms of the Severance Agreements in the context of CTBI’s other executive compensation
arrangements, changes in government regulations and trends in competitive practices.
No termination of employment or change in control payments were made under the Severance Agreements in
2018, and there were no changes made to the terms of the Severance Agreements during 2018 or to date in 2019.
Compensation Governance and Oversight
The Committee is responsible for the oversight of compensation risk. The Committee annually reviews the
Senior Management Incentive Compensation Plan, the Long-Term Incentive Compensation Plan, and the Employee Incentive Compensation Plan, as well as other compensation arrangements, to evaluate their potential for creating or increasing risk to
CTBI. During 2018, the Committee reviewed the compensation risk assessment performed by management and concluded that CTBI’s compensation plans do not motivate or reward management for taking inappropriate risks and do not create any risks that
are reasonably likely to have a material adverse impact on CTBI.
The Committee has adopted a recoupment policy applicable to members of CTBI’s Executive Committee. The
policy provides, in general, that in the event any such person’s fraud, dishonesty or recklessness substantially contributes to CTBI’s material noncompliance with financial reporting requirements under securities laws resulting in CTBI’s obligation
to prepare an accounting restatement, the Committee will direct CTBI to use prompt and reasonable efforts to recover from such person the amount of specified performance-based compensation determined by the Committee to have been materially
affected by the restatement that is in excess of the amount of performance-based compensation which would have otherwise been received by such person, assuming the financial statements had originally been prepared as restated. The Committee may
approve amendments to the recoupment policy at any time, including amendments to conform to regulations adopted by the Securities and Exchange Commission or applicable listing requirements.
Tax Deductibility
Federal income tax law caps at $1,000,000 the deductible compensation per year for each of
the NEOs, subject to certain exceptions. In developing and implementing executive compensation policies and programs, the Committee considers whether particular payments and awards are deductible for federal income tax purposes, along with other
relevant factors. The Committee has taken what it believes to be appropriate steps to maximize the deductibility of executive compensation. It is the general intention of the Committee to meet the requirements for deductibility whenever
possible. However, considering the repeal of the performance-based compensation exception under Tax Code Section 162(m), the Compensation Committee expects in the future to approve compensation that is not deductible for income tax purposes. The
Committee will continue to review and monitor the deductibility of compensation.
Say on Pay Resolutions
In 2018, we submitted our executive compensation program to an advisory, nonbinding vote of shareholders
(i.e., “say on pay”). At the 2018 annual shareholders meeting, approximately 96% of votes cast were voted in favor of a resolution approving our executive compensation program. Based on these results, the Committee concluded that shareholders
supported CTBI’s approach to executive compensation. In addition, at the 2017 annual shareholders meeting, more than 80% of votes cast were in favor of having an annual say on pay vote. Accordingly, at the 2019 annual meeting, shareholders are
being asked to approve an advisory, nonbinding resolution in favor of CTBI’s executive compensation arrangements. Although the results of annual say on pay resolutions are not binding on CTBI, the Committee welcomes feedback from shareholders, and
it will consider the outcome of each year’s say on pay vote as part of its ongoing review of the executive compensation program.