COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2023

Community Trust Bancorp, Inc. — 2023 Q3 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 a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited three and nine months ended September 30, 2023, compared primarily with the corresponding 2022 periods and December 31, 2022 balance-sheet amounts.

At September 30, 2023, CTBI reported 79 banking locations, total assets of $5.6 billion, deposits including repurchase agreements of approximately $4.9 billion, shareholders’ equity of $653.0 million, and trust assets under management of $3.2 billion.

Key financial metrics

Metric	Q3 2023	Q3 2022	9M 2023	9M 2022
Total interest income	$69.5 million	$51.4 million	$195.3 million	$140.3 million
Net interest income	$43.1 million	$43.5 million	$130.1 million	$124.4 million
Provision for credit losses	$1.9 million	$2.4 million	$5.0 million	$3.4 million
Noninterest income	$15.5 million	$14.7 million	$43.9 million	$44.1 million
Noninterest expense	$30.8 million	$31.5 million	$93.8 million	$90.8 million
Net income	$20.6 million	$19.4 million	$59.3 million	$59.4 million
Basic EPS	$1.15	$1.09	$3.32	$3.33
Fully tax-equivalent net interest margin	3.27%	3.36%	3.37%	3.25%

Q3 net income increased 6.5% year over year; nine-month net income was essentially unchanged.
Q3 total revenue, defined as net interest income plus noninterest income, was approximately $58.6 million, compared with $58.2 million in Q3 2022. Nine-month total revenue was approximately $174.1 million, compared with $168.5 million.
Interest income benefited from higher yields and loan growth, but funding costs rose substantially. Q3 interest expense was $26.4 million versus $7.9 million a year earlier.
The Q3 net interest margin declined 8 basis points sequentially and 9 basis points year over year to 3.27%. Management reported a Q3 earning-asset yield of 5.25% and a rate paid on interest-bearing liabilities of 2.93%.

Balance sheet, credit, debt, and liquidity

Total assets were $5.635 billion, up $254.6 million, or 4.7%, from December 31, 2022.
Loans were $3.985 billion, up $275.7 million, or 7.4%, from year-end. Residential loans increased 11.6%, consumer loans 8.7%, and commercial loans 4.7%. Hotel/motel loans represented approximately 9.7% of total loans.
The allowance for credit losses was $48.7 million, equal to 1.22% of total loans. Provision expense was $1.9 million in Q3 and $5.0 million year to date.
Net loan charge-offs were $1.2 million in Q3, or 0.12% of average loans annualized, and $2.3 million year to date, or 0.08% annualized.
Total nonperforming loans were $13.0 million, compared with $15.3 million at December 31, 2022. Nonperforming assets were $15.2 million, versus $19.0 million at year-end. ACL coverage of nonperforming loans was 375.2%.
Deposits were $4.628 billion, up $201.7 million from year-end. Repurchase agreements were $232.6 million, resulting in deposits plus repurchase agreements of $4.860 billion. Noninterest-bearing deposits declined 5.8% from year-end, while time deposits increased 33.1%.
Cash and cash equivalents were $219.3 million, compared with $128.7 million at December 31, 2022. CTBI also reported approximately $163.3 million of unpledged available-for-sale securities, $478.9 million of available Federal Home Loan Bank borrowing capacity, and $50 million of correspondent-bank lines of credit.
Debt included $64.3 million of long-term debt, $232.6 million of repurchase agreements, $0.3 million of Federal Home Loan Bank advances, and $0.5 million of federal funds purchased.
CTBI’s community bank leverage ratio was 13.78%; Community Trust Bank’s ratio was 13.32%, both above the 9% qualifying threshold described in the filing.

Cash flow and securities

For the first nine months, operating activities provided $65.8 million of cash, investing activities used $177.4 million, and financing activities provided $202.2 million. Cash and cash equivalents increased $90.6 million to $219.3 million.
Net cash used for loan growth was $277.5 million. Securities purchases totaled $9.4 million, while proceeds from securities sales, prepayments, calls, and maturities totaled $113.8 million.
Available-for-sale debt securities had a fair value of $1.136 billion and gross unrealized losses of $188.4 million at September 30, 2023. Management attributed the losses to interest-rate movements rather than credit factors and stated that CTBI did not intend, and was not expected, to sell the securities before recovery of amortized cost.
Accumulated other comprehensive loss was $141.4 million, principally reflecting unrealized securities losses, compared with $129.2 million at year-end.

Material changes versus comparable periods

Compared with Q3 2022, loan interest income rose $16.6 million, but interest expense increased $18.5 million, causing net interest income to decline $0.4 million.
Q3 noninterest income increased $0.8 million, led by higher deposit-related fees, trust revenue, securities gains, and bank-owned life insurance income. Gains on loan sales and loan-related fees were lower.
Q3 noninterest expense declined $0.6 million year over year, primarily because of lower personnel costs.
Year-to-date net interest income increased 4.6%, but provision expense increased 48.4%, noninterest expense increased 3.2%, and net income was essentially flat.
The loan portfolio increased 7.4% from year-end, while the investment portfolio declined $120.3 million, or 12.8%.
During the second quarter of 2023, CTBI implemented third-party allowance software and shifted to discounted cash-flow methodology for all loan segments. Management reported that the June 30 reserve allocation increased by approximately $0.1 million versus the prior internal model.
CTBI adopted ASU 2022-02, eliminating the creditor troubled-debt-restructuring framework and enhancing disclosures for modifications to borrowers experiencing financial difficulty. The filing states that the adoption did not materially affect the financial statements.

Outlook, commentary, risks, and unusual items

No formal earnings or financial guidance is provided in the filing.
Management highlighted inflation, global uncertainty, and a significant rising-rate environment with no immediate end foreseen. Higher deposit and other funding costs remain a principal pressure on net interest margin.
Interest-rate sensitivity modeling estimates that a 200-basis-point increase in the yield curve would increase net interest income by 3.98% over one year and 9.60% over two years; a 200-basis-point decrease would reduce it by 2.74% and 3.13%, respectively.
Key credit risks include economic weakness, unemployment, borrower bankruptcies, commercial real estate and hotel/motel exposure, consumer indirect lending, changing collateral values, and deterioration in the regional economies served by CTBI.
Five loans to borrowers experiencing financial difficulty subsequently defaulted during Q3, and nine such loans defaulted during the first nine months.
Management reported $3.829 million of loans with term extensions and $0.269 million with interest-rate reductions during Q3 for borrowers experiencing financial difficulty; additional modifications involved combined concessions and payment changes.
Legal proceedings arise in the ordinary course of business. Management believes pending matters are without merit or will not materially affect consolidated financial position or results of operations.
Management concluded that disclosure controls were effective as of September 30, 2023, and reported no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether rising deposit costs continue to compress the 3.27% net interest margin.
Loan growth and credit performance in commercial real estate, hotel/motel, and indirect consumer portfolios.
Changes in nonperforming loans, charge-offs, and the 1.22% allowance-to-loans ratio under the new discounted-cash-flow reserve model.
The liquidity impact of the $188.4 million gross unrealized loss on available-for-sale securities and the level of unpledged securities available for funding.
Trends in noninterest-bearing deposits, time deposits, repurchase agreements, and other funding costs.
Future dividend sustainability relative to earnings, capital ratios, and the reported 5.37% annualized dividend yield.
Any future share repurchases under the remaining 1,034,706-share authorization and the related 1% excise tax under the Inflation Reduction Act.