COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2022

Community Trust Bancorp, Inc. — Q3 2022 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 78 banking locations and trust offices. The filing covers the unaudited quarter and nine months ended September 30, 2022, with comparisons to the prior-year periods.

At September 30, 2022, CTBI reported $5.5 billion of assets, $4.5 billion of deposits, $4.8 billion of deposits plus repurchase agreements, $602.6 million of shareholders’ equity, and $3.1 billion of trust assets under management.

Key Financial Metrics

Metric	Q3 2022	Q3 2021	9M 2022	9M 2021
Net interest income	$43.5 million	$42.0 million	$124.4 million	$122.3 million
Provision for credit losses	$2.4 million	($0.2) million recovery	$3.4 million	($6.9) million recovery
Noninterest income	$14.7 million	$14.4 million	$44.1 million	$45.5 million
Noninterest expense	$31.5 million	$30.3 million	$90.8 million	$88.1 million
Net income	$19.4 million	$21.1 million	$59.4 million	$68.7 million
Basic EPS	$1.09	$1.19	$3.33	$3.86

Third-quarter net income declined 8.4% year over year; nine-month net income declined 13.6%.
Tax-equivalent net interest margin was 3.36% in Q3 2022, compared with 3.23% in Q3 2021 and 3.25% for the first nine months of 2022 versus 3.22% in the prior-year period.
Interest income increased as earning-asset yields rose, but interest expense increased substantially as deposit and funding costs rose.
Loans totaled $3.63 billion, up $221.8 million, or 6.5%, from December 31, 2021. Growth was concentrated in hotel/motel, residential, commercial real estate residential, and consumer indirect lending.
The allowance for credit losses was $44.4 million, equal to 1.22% of total loans. Reserve coverage of nonperforming loans was 324.5%.
Net loan charge-offs were $0.3 million in Q3 and $0.7 million year to date; annualized Q3 net charge-offs were 0.04% of average loans.
Nonperforming loans, excluding troubled debt restructurings, were $13.7 million, down from $16.6 million at December 31, 2021. Nonperforming assets were $15.6 million.
Cash and cash equivalents were $259.6 million. Available-for-sale securities were $1.30 billion at fair value, compared with $1.46 billion at year-end 2021.
Deposits plus repurchase agreements totaled $4.77 billion, up 3.2% from year-end 2021. Federal Home Loan Bank borrowing capacity was approximately $517.3 million, and correspondent bank lines of credit totaled $75 million.
Long-term debt was $57.8 million. Federal Home Loan Bank advances were $0.4 million.
CTBI’s community bank leverage ratio was 13.24%; Community Trust Bank’s ratio was 12.68%. Both were considered well-capitalized.

Material Changes Versus Comparable Periods

Q3 net interest income increased 3.6% year over year and 6.7% from the second quarter, driven by higher earning-asset yields and loan growth.
Year-to-date provision expense increased by $10.3 million versus 2021 because the prior year included a $6.9 million provision recovery and 2022 included additional provisioning for loan growth.
Year-to-date noninterest income decreased 2.9%, primarily because gains on loan sales fell $4.2 million as mortgage refinancing activity slowed. Deposit-related fees increased $2.2 million.
Q3 noninterest expense increased 3.8% year over year and included a $1.4 million accrual for customer refunds of re-presented returned-item fees.
Shareholders’ equity fell $95.6 million from year-end 2021, primarily because of a $134.6 million after-tax decline in accumulated other comprehensive income from unrealized losses on available-for-sale securities.
Available-for-sale securities had $188.6 million of gross unrealized losses at September 30, 2022, compared with $17.7 million at December 31, 2021. Management classified the losses as temporary, market- and interest-rate-driven, and not credit-related.
Other real estate owned declined to $1.9 million from $3.5 million at year-end 2021.

Outlook, Risks, Contingencies, and Unusual Items

The filing does not provide formal earnings or financial guidance.
Management cited inflation, rapidly rising interest rates, COVID-19 effects, economic conditions, credit performance, competition, regulatory changes, technology dependence, acquisition execution, and legal proceedings as material risks.
Interest-rate risk is significant. Management estimates that a 200-basis-point increase in the yield curve would increase net interest income by 3.83% over one year, while a 200-basis-point decrease would reduce it by 4.74% over one year. These are model estimates and actual results may differ.
Management continues to include qualitative credit-loss adjustments for COVID-19, inflation, and the rising-rate environment, although it reduced certain hotel/motel and mortgage allocations during the quarter.
The hotel/motel portfolio represented approximately 9.2% of total loans and is exposed to economic conditions, property performance, and collateral values.
Eastern Kentucky flooding affected six branches, but management determined that the event had no material impact on financial condition.
Six troubled debt restructurings totaling $6.4 million were recorded during Q3 2022; no charge-offs resulted from the presented modifications, and no restructured loans subsequently defaulted during the quarter or year to date.
Management stated that no current regulatory recommendations were known that would reasonably be expected to materially affect liquidity, capital resources, or operations. The filing reports no legal proceedings or separately disclosed risk-factor changes.
The financial statements are unaudited interim statements and are not necessarily indicative of full-year results.

Important Facts for Investors to Verify

Whether deposit pricing and funding-cost increases continue to compress or expand the net interest margin.
The sustainability and credit performance of rapid loan growth, particularly in hotel/motel, commercial real estate, and indirect consumer lending.
Whether unrealized securities losses remain temporary and whether further rate increases could materially reduce tangible capital or liquidity flexibility.
Trends in nonperforming loans, 30-to-89-day delinquencies, charge-offs, and the adequacy of the $44.4 million allowance for credit losses.
The ultimate cost and timing of customer refunds related to re-presented returned-item fees.
The impact of the slowdown in mortgage refinancing on loan-sale gains, mortgage servicing rights, and noninterest income.
Future dividend sustainability relative to earnings, capital ratios, loan growth, and accumulated other comprehensive losses.
Management’s assumptions regarding inflation, unemployment, interest rates, COVID-19 effects, and regional economic conditions used in the credit-loss models.