Community Trust Bancorp, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. It provides commercial and consumer banking, mortgage lending, trust, wealth management, brokerage, and related services across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022 and December 31, 2022 balances.
Key financial metrics
| Metric | Q1 2023 | Comparable period |
|---|---|---|
| Total interest income | $61.0 million | $43.5 million in Q1 2022 |
| Net interest income | $43.9 million | $40.0 million in Q1 2022 |
| Net interest margin, tax-equivalent | 3.49% | 3.18% in Q1 2022; 3.51% in Q4 2022 |
| Noninterest income | $13.7 million | $15.0 million in Q1 2022 |
| Provision for credit losses | $1.1 million | $0.9 million in Q1 2022; $1.5 million in Q4 2022 |
| Noninterest expense | $31.9 million | $29.4 million in Q1 2022 |
| Net income | $19.3 million | $19.7 million in Q1 2022; $22.4 million in Q4 2022 |
| Basic and diluted EPS | $1.08 | $1.11 in Q1 2022; $1.26 in Q4 2022 |
| Total assets | $5.53 billion | $5.38 billion at December 31, 2022 |
| Total loans | $3.78 billion | $3.71 billion at December 31, 2022; $3.52 billion at March 31, 2022 |
| Total deposits | $4.54 billion | $4.43 billion at December 31, 2022 |
| Deposits plus repurchase agreements | $4.75 billion | $4.64 billion at December 31, 2022 |
| Shareholders’ equity | $656.8 million | $628.0 million at December 31, 2022 |
Total reported revenue, calculated as net interest income plus noninterest income, was $57.6 million. Net income represented approximately 33.5% of that amount; this is not a company-reported revenue margin and excludes gross interest income presentation.
- Cash and cash equivalents were $235.9 million, compared with $128.7 million at year-end 2022.
- Operating cash flow was $25.2 million, compared with $27.4 million in Q1 2022.
- Investing cash flow used $27.6 million, while financing cash flow provided $109.6 million, producing a $107.2 million increase in cash.
- Long-term debt was $64.4 million at March 31, 2023, compared with $57.8 million at December 31, 2022. Repurchase agreements were $208.8 million.
- Liquidity sources totaled approximately $770.4 million, including Federal Reserve cash, cash on hand, unpledged available-for-sale securities, and unused credit lines.
- CTBI’s community bank leverage ratio was 13.71%, above the 9.00% required threshold; Community Trust Bank’s ratio was 13.10%.
- The allowance for credit losses was $46.7 million, or 1.24% of total loans. Reserve coverage of nonperforming loans was 382.3%.
Material changes versus prior comparable periods
- Net interest income increased 9.7% year over year, primarily reflecting higher loan yields and securities income, but declined $0.8 million from Q4 2022 as funding costs rose.
- Interest expense increased to $17.1 million from $3.5 million in Q1 2022, driven mainly by higher deposit and borrowing costs. The cost of interest-bearing funds rose to 2.06% from 0.42%.
- Net income declined 2.1% year over year and 13.8% from Q4 2022. Management attributed the sequential decline partly to a $1.0 million increase in income taxes related to tax credits recognized in Q4 2022.
- Noninterest income decreased 8.6% year over year, primarily because mortgage servicing rights produced a $0.2 million fair-value loss in Q1 2023 versus a $1.0 million gain in Q1 2022. Loan-related fees also declined.
- Noninterest expense increased 8.6% year over year, including higher personnel costs and FDIC insurance premiums.
- Loans grew $68.1 million, or 7.4% annualized, from year-end 2022. Growth included commercial, residential, and indirect consumer loans.
- Nonperforming loans declined to $12.2 million from $15.3 million at December 31, 2022 and $13.7 million at March 31, 2022. Net charge-offs were $414 thousand, or 0.04% of average loans annualized.
- Accumulated other comprehensive loss improved to $112.4 million from $129.2 million at year-end 2022, primarily due to a $16.7 million after-tax gain on available-for-sale securities.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal earnings or revenue guidance. It stated that liquidity and capital remained strong following early-2023 banking-sector failures and that it had not experienced a deposit decline attributable to industry turmoil. Management did not intend to use the Federal Reserve’s Bank Term Funding Program, expected no significant change in investment portfolio composition, did not anticipate stock repurchases or a change in cash dividend policy during 2023, and reported no wholesale funding.
- The available-for-sale securities portfolio had $149.9 million of gross unrealized losses at March 31, 2023. Management considered the losses temporary, interest-rate-driven, and not credit-related; no credit-loss allowance was recorded for these securities.
- Interest-rate risk remains material. Management’s rate-ramp model estimated that a 200-basis-point increase in rates would increase one-year net interest income by 5.65%, while a 200-basis-point decrease would reduce it by 4.71%. A separate disclosure estimated a 200-basis-point decrease would reduce one-year net interest income by 4.74%; the filing presents both model disclosures.
- Management highlighted risks from inflation, elevated interest rates, economic conditions, credit performance, commercial real estate collateral values, hotel and motel exposure, competition, regulation, technology dependence, acquisitions, and legal matters.
- Hotel and motel loans represented approximately 9.2% of total loans. Management noted that rising capitalization rates could reduce income-producing commercial real estate values and increase credit risk.
- Uninsured deposits were 27.6% of deposits at March 31, 2023, compared with 27.5% at year-end 2022.
- ASU 2022-02, eliminating creditor troubled-debt-restructuring accounting and adding enhanced modification and vintage disclosures, was implemented with no significant reported impact.
- The interim financial statements were unaudited and prepared using normal recurring adjustments; quarterly results are not necessarily indicative of full-year results. No legal proceedings or reportable risk-factor changes were disclosed in Part II.
Important facts for investors to verify
- Whether higher deposit and borrowing costs continue to compress the net interest margin.
- The sustainability of loan growth, particularly in commercial real estate, hotel and motel lending, and indirect consumer loans.
- Trends in delinquencies, charge-offs, nonperforming loans, and the allowance for credit losses as economic forecasts and collateral values change.
- The magnitude and duration of unrealized securities losses and their potential effect on tangible capital or liquidity if securities must be sold.
- The level and stability of uninsured deposits and the availability of pledged and unpledged liquidity sources.
- Whether noninterest income remains pressured by mortgage servicing-rights valuations and lower loan-related fees.
- The assumptions and methodology underlying management’s interest-rate sensitivity models and CECL estimates.