Community Trust Bancorp, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. is a bank holding company headquartered in Pikeville, Kentucky, operating Community Trust Bank and Community Trust and Investment Company. The company serves eastern, northeastern, central, and south-central Kentucky, southern West Virginia, and northeastern Tennessee through 78 banking locations and trust offices. The unaudited filing covers the three and six months ended June 30, 2022, with comparisons to the 2021 periods and December 31, 2021 balance-sheet amounts.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net interest income | $40.8 million | $40.0 million | $80.8 million | $80.2 million |
| Provision for credit losses | $0.1 million | $(4.3) million recovery | $1.0 million | $(6.8) million recovery |
| Noninterest income | $14.5 million | $15.5 million | $29.5 million | $31.1 million |
| Noninterest expense | $30.0 million | $29.5 million | $59.3 million | $57.8 million |
| Net income | $20.3 million | $23.9 million | $40.0 million | $47.5 million |
| Basic EPS | $1.14 | $1.35 | $2.24 | $2.67 |
- Tax-equivalent net interest margin was 3.20% in Q2 2022, compared with 3.11% in Q2 2021; the six-month margin was 3.19% versus 3.21%.
- Loans totaled $3.56 billion at June 30, 2022, up 4.4% from year-end 2021. Excluding PPP loans, quarterly loan growth was $57.6 million.
- Deposits totaled $4.47 billion; deposits including repurchase agreements totaled $4.71 billion, up 2.1% from year-end 2021.
- Total assets were $5.45 billion and shareholders’ equity was $632.1 million at June 30, 2022.
- The allowance for credit losses was $42.3 million, or 1.19% of loans. Reserve coverage of nonperforming loans was 305.9%.
- Nonperforming loans were $13.8 million, excluding troubled debt restructurings, and total nonperforming loans reported in the loan note were $13.8 million. Other real estate owned was $2.0 million.
- Cash and cash equivalents were $213.7 million, compared with $311.8 million at December 31, 2021. Available-for-sale securities had a fair value of $1.40 billion.
- Long-term debt was $57.8 million. Repurchase agreements were $238.7 million, while Federal Home Loan Bank advances were $0.4 million.
- Net cash provided by operating activities was $46.2 million; investing activities used $226.8 million and financing activities provided $82.5 million. Cash and cash equivalents declined by $98.1 million during the first six months.
- CTBI’s community bank leverage ratio was 13.14%, and CTB’s was 12.55%; management stated both were well-capitalized.
Material changes versus comparable periods
- Second-quarter net income declined 15.3% from $23.9 million to $20.3 million, while six-month net income declined 15.9% from $47.5 million to $40.0 million.
- The primary year-to-date earnings drag was the change from a $6.8 million credit-loss recovery in 2021 to a $1.0 million provision in 2022. Q2 2022 included a $0.1 million provision versus a $4.3 million recovery in Q2 2021.
- Net interest income increased 2.0% year over year in Q2 and 0.7% year to date, supported by higher earning-asset yields and Federal Reserve rate increases, partially offset by higher funding costs.
- Noninterest income decreased 6.6% in Q2 and 5.2% year to date. Gains on loan sales fell materially as the mortgage refinancing market slowed; deposit-related fees increased.
- Noninterest expense increased 1.6% in Q2 and 2.6% year to date, primarily due to personnel, data-processing, and loan-related costs.
- Shareholders’ equity fell $66.2 million from year-end, primarily because accumulated other comprehensive loss increased to $(97.9) million from $(4.8) million as interest-rate-driven unrealized losses expanded on the available-for-sale securities portfolio.
- Debt securities available for sale had gross unrealized losses of $132.7 million at June 30, 2022 versus $17.7 million at December 31, 2021. Management considered the losses temporary and market- and interest-rate-driven rather than credit-related.
- PPP loans declined to $7.8 million from $47.3 million at year-end, principally due to SBA forgiveness.
Outlook, commentary, risks, contingencies, and unusual items
- Management reported that 2022 Federal Reserve rate increases had a positive effect on net interest margin and could support further margin improvement as rates rise. The filing provides no formal earnings or revenue guidance.
- Key risks include economic conditions, inflation, rising interest rates, credit performance, COVID-19 effects, competition, regulatory changes, technology dependence, acquisition execution, legal matters, and changes in financial markets.
- Management continues to include a qualitative credit-risk factor for COVID-19, inflation, and the rapidly rising-rate environment. It noted that customer payment capacity could be affected after deferments ended and PPP activity largely concluded.
- Loan concentrations requiring monitoring include hotel/motel loans, which represented approximately 7.9% of total loans, and commercial real estate exposures. The company’s lending markets are concentrated in Kentucky, southern West Virginia, and northeastern Tennessee.
- Interest-rate sensitivity modeling indicated that a 200-basis-point increase in the yield curve could increase estimated net interest income by 4.03% over one year and 9.88% over two years; a 100-basis-point decrease could reduce it by 2.11% and 3.41%, respectively. Actual results may differ.
- On July 28, 2022, major flooding affected five eastern Kentucky counties in CTBI’s service area and six branch locations. The filing states that the financial impact and effects on borrowers were still being assessed at filing date.
- The Board declared a quarterly dividend of $0.44 per share payable October 1, 2022, a 10% increase from the $0.40 quarterly dividend paid during the first half of 2022.
- Six troubled debt restructurings totaling approximately $5.9 million were completed during Q2 2022; no charge-offs resulted from the presented modifications, and no restructured loans subsequently defaulted during the quarter or year to date.
Most important facts for investors to verify
- Whether the significant unrealized securities losses remain temporary and how further interest-rate changes affect tangible capital, liquidity, and regulatory capital.
- Future loan growth, particularly in commercial real estate, hotel/motel, indirect consumer, and other concentrated portfolios.
- Whether nonperforming loans, delinquencies, charge-offs, and the allowance for credit losses increase as inflation, higher rates, COVID-19 effects, and the end of borrower relief programs flow through credit quality.
- The earnings impact of declining mortgage originations, lower loan-sale gains, PPP fee runoff, and changes in mortgage servicing-rights valuations.
- The financial and operational effects of the July 2022 eastern Kentucky flooding, including borrower losses, branch disruptions, insurance recoveries, and additional credit provisions.
- Actual liquidity availability, including the reported $512.7 million of Federal Home Loan Bank borrowing capacity and $75 million of correspondent-bank lines of credit.
- The filing’s unaudited status, the use of significant management estimates in credit-loss and fair-value measurements, and the lack of formal forward earnings guidance.