Community Trust Bancorp, Inc. — Q2 2023 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. It serves eastern, northeastern, central, and south-central Kentucky, southern West Virginia, and northeastern Tennessee through 79 banking locations and trust offices. The unaudited report covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods and December 31, 2022 balance-sheet data.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total interest income | $64.8 million | $45.4 million | +42.9% |
| Net interest income | $43.1 million | $40.8 million | +5.6% |
| Provision for credit losses | $2.0 million | $0.1 million | +$1.9 million |
| Noninterest income | $14.8 million | $14.5 million | +1.8% |
| Noninterest expense | $31.0 million | $30.0 million | +3.5% |
| Net income | $19.4 million | $20.3 million | -4.3% |
| Diluted EPS | $1.08 | $1.14 | -5.3% |
| Tax-equivalent net interest margin | 3.35% | 3.20% | +15 basis points |
For the six months ended June 30, 2023, net income was $38.7 million, or $2.17 basic EPS, versus $40.0 million, or $2.24 basic EPS, in the prior-year period. Net interest income increased 7.6% to $87.0 million, while the provision for credit losses rose 228.2% to $3.1 million, noninterest income declined 3.5% to $28.4 million, and noninterest expense increased 6.0% to $62.9 million.
At June 30, 2023, total assets were $5.52 billion, loans were $3.93 billion, net loans were $3.88 billion, deposits were $4.52 billion, repurchase agreements were $229.0 million, long-term debt was $64.4 million, and shareholders’ equity was $660.1 million. Loans increased $220.4 million, or 12.0% annualized, from December 31, 2022. Deposits plus repurchase agreements were $4.75 billion, up $104.1 million from year-end.
Cash and cash equivalents were $109.5 million, down from $128.7 million at December 31, 2022. Management reported approximately $213.5 million of unpledged available-for-sale securities, $539.2 million of available Federal Home Loan Bank borrowing capacity, and $50 million of correspondent-bank lines of credit. Six-month operating cash flow was $40.6 million; investing activities used $155.2 million, primarily because of $220.6 million of net loan growth; financing activities provided $95.4 million.
The allowance for credit losses was $48.0 million, equal to 1.22% of loans, compared with 1.24% at March 31, 2023 and 1.19% at June 30, 2022. Nonperforming loans were $11.7 million, and allowance coverage was 408.9%. Net charge-offs were $674 thousand in Q2, or 0.07% of average loans annualized.
Material changes versus comparable periods
- Interest income rose substantially as loan balances and asset yields increased, but interest expense increased to $21.7 million from $4.6 million because deposit and borrowing costs rose sharply.
- Q2 net interest margin declined 14 basis points from Q1 2023 to 3.35%, although it remained 15 basis points above Q2 2022. Management reported a 48-basis-point quarter-over-quarter increase in the cost of funds.
- Loans grew across commercial, residential, and consumer categories, with Q2 growth including increases of $73.5 million in commercial loans, $44.6 million in residential loans, and $33.5 million in indirect consumer loans.
- Nonperforming loans declined from $15.3 million at December 31, 2022 to $11.7 million at June 30, 2023. Foreclosed properties declined from $3.7 million to $2.0 million.
- CTBI implemented third-party allowance software and shifted all loan segments to discounted-cash-flow methodologies. The change produced a June 30 reserve of $48.0 million, $111 thousand higher than the prior internal-model allocation.
- Unrealized after-tax losses in accumulated other comprehensive income were $121.3 million at June 30, 2023, compared with $129.2 million at year-end 2022. The $1.20 billion available-for-sale securities portfolio had $161.6 million of gross unrealized losses, which management characterized as temporary and interest-rate driven rather than credit-related.
- The quarterly cash dividend was $0.44 per share, compared with $0.40 in the comparable 2022 quarter. On July 25, 2023, the board declared a $0.46 dividend payable October 1, 2023.
Outlook, commentary, risks, and unusual items
Management emphasized continued inflation, global uncertainty, and a significant rising-rate environment with no immediate end foreseen. Results remain sensitive to deposit pricing, funding costs, loan growth, credit performance, economic conditions, inflation, interest rates, financial-market valuations, competition, regulation, technology systems, acquisitions, and legal matters.
The loan portfolio includes a material hotel/motel concentration of approximately 9.5% of total loans. Other relevant exposures include commercial real estate, indirect consumer lending, and regional borrowers in CTBI’s concentrated geographic markets. Management noted that collateral values, delinquency trends, industry concentrations, underwriting exceptions, and economic forecasts affect the allowance for credit losses.
Interest-rate sensitivity modeling estimates that a 200-basis-point increase in the yield curve would increase net interest income by 3.92% over one year and 7.36% over two years, while a 200-basis-point decrease would reduce net interest income by 3.63% over one year and 2.89% over two years. These estimates depend on assumptions regarding repricing, deposit behavior, prepayments, and market conditions.
CTBI’s community bank leverage ratio was 13.82%, and Community Trust Bank’s ratio was 13.24%, both above the 9% framework threshold. Management reported no current regulatory recommendations expected to have a material adverse effect on liquidity, capital, or operations. No legal proceedings or reportable risk-factor changes were disclosed in Part II.
Important facts for investors to verify
- Whether deposit-cost increases continue to compress net interest margin and earnings despite loan growth.
- Whether the new discounted-cash-flow allowance model produces further reserve changes or higher provisions in subsequent quarters.
- Trends in nonperforming loans, 30-to-89-day delinquencies, charge-offs, consumer indirect credit quality, and commercial real estate performance.
- The liquidity impact of pledged securities, the $161.6 million unrealized AFS loss position, deposit composition, and available borrowing capacity.
- The sustainability of loan growth, dividend increases, and capital ratios under adverse economic or interest-rate scenarios.
- The assumptions supporting fair values for AFS securities, mortgage servicing rights, Visa Class B shares, and other Level 3 assets.