COMMUNITY TRUST BANCORP INC quarterly report, Q2 FY2021

Community Trust Bancorp, Inc. — 2Q 2021 Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2021. The condensed consolidated financial statements are unaudited and include normal recurring adjustments. CTBI is a bank holding company headquartered in Pikeville, Kentucky, operating Community Trust Bank and a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The company reported 79 banking locations, $5.5 billion of consolidated assets, $4.7 billion of deposits and repurchase agreements, and $3.3 billion of trust assets under management at quarter-end.

Financial performance and condition

Metric	2Q 2021	2Q 2020	Six months 2021	Six months 2020
Net interest income	$40.0 million	$38.5 million	$80.2 million	$74.7 million
Provision for credit losses	$(4.3) million	$(0.05) million	$(6.8) million	$12.7 million
Noninterest income	$15.5 million	$12.9 million	$31.1 million	$24.4 million
Noninterest expense	$29.5 million	$27.9 million	$57.8 million	$56.1 million
Net income	$23.9 million	$19.7 million	$47.5 million	$26.2 million
Basic EPS	$1.35	$1.11	$2.67	$1.48

Second-quarter net income increased 21.8% year over year; six-month net income increased 81.3%. Management described 2Q 2021 earnings as a record and the second consecutive quarterly earnings record.
Tax-equivalent net interest margin was 3.11%, down from 3.41% in 2Q 2020 and 3.31% in 1Q 2021. Management attributed margin pressure primarily to deposit growth, weak loan demand, increased lower-yielding liquidity and securities, and lower loan yields. PPP fee recognition contributed approximately 23 basis points to the quarterly margin.
Noninterest income increased 20.5% year over year, led by deposit service charges, trust and wealth management revenue, gains on loan sales and loan-related fees. Noninterest expense increased 5.7%, primarily from personnel costs and higher bonus and incentive accruals.
Total assets were $5.49 billion at June 30, 2021, up from $5.14 billion at December 31, 2020. Loans were $3.45 billion, down 3.0% from year-end, while debt securities available for sale increased to $1.36 billion from $997.3 million.
Deposits were $4.32 billion and repurchase agreements were $370.6 million at quarter-end. Cash and cash equivalents were $454.4 million, and available-for-sale securities provided approximately $1.4 billion of additional liquidity.
Long-term debt was $57.8 million. Federal Home Loan Bank advances were $0.4 million, with approximately $482.9 million of additional borrowing capacity. CTBI reported a 12.45% community bank leverage ratio and described both CTBI and its bank subsidiary as well-capitalized.
Shareholders’ equity was $684.1 million, compared with $654.9 million at December 31, 2020. Tangible common equity to tangible assets was 11.39%.
Six-month operating cash flow was $69.9 million, compared with $24.6 million in the prior-year period. Investing activities used $262.9 million, principally reflecting purchases of available-for-sale securities, while financing activities provided $309.1 million, primarily from deposit growth.

Material changes versus comparable periods

The provision for credit losses shifted to a $4.3 million recovery in 2Q 2021 from a $49 thousand recovery in 2Q 2020 and to a $6.8 million year-to-date recovery from $12.7 million of expense in the prior-year period.
The allowance for credit losses declined to $41.7 million from $48.0 million at December 31, 2020. Coverage was 197.2% of nonperforming loans, and the allowance was 1.21% of total loans, or 1.27% excluding PPP loans.
Nonperforming loans were $21.1 million, or 0.61% of total loans, compared with $26.6 million, or 0.75%, at December 31, 2020. Nonperforming assets were $27.0 million, down $7.3 million from year-end.
CTBI recorded net recoveries of loan losses of approximately $0.6 million in the second quarter and $0.4 million for the first six months, compared with net charge-offs of $2.8 million and $4.2 million, respectively, in the corresponding 2020 periods.
PPP loans outstanding declined to $176.0 million from $252.7 million at year-end. CTBI had originated 6,312 PPP loans totaling $401.3 million and had received SBA forgiveness for $217.2 million through June 30, 2021.
At June 30, 2021, 60 customers had COVID-19-related payment deferrals totaling $28.6 million. These loans were excluded from nonperforming loans under applicable CARES Act provisions.
Other real estate owned declined to $5.8 million from $7.7 million at year-end, although CTBI recorded $0.4 million of second-quarter fair-value adjustments and expenses.
Available-for-sale securities increased substantially, while unrealized losses affected 43.6% of total debt securities versus 16.2% at December 31, 2020. Management concluded the losses were temporary, interest-rate driven and not credit-related.
The quarterly cash dividend increased from $0.385 per share to $0.40 per share beginning with the dividend declared July 27, 2021, payable October 1, 2021.

Outlook, risks and unusual items

Management did not provide formal earnings or revenue guidance. Management expects continued pressure on net interest margin from excess deposits, soft loan demand, higher liquidity and low interest rates, while noting improved credit metrics and industry conditions. The recovery of credit-loss reserves was driven by improved portfolio performance and outlook; future reserve levels remain sensitive to economic conditions, industry concentrations, loan performance and the eventual expiration of pandemic-related deferrals and PPP support.

Key risks include COVID-19 effects, borrower bankruptcies, commercial real estate and hotel/motel concentration, interest-rate changes, competition, regulatory changes, technology dependence, acquisition execution and legal matters.
Hotel/motel loans represented approximately 7.6% of total loans. Commercial real estate nonresidential loans were $718.3 million, with $8.1 million classified as nonperforming.
At quarter-end, CTBI had $28.6 million of COVID-19 deferrals that were not included in nonperforming loans, creating potential risk as borrowers resume normal payments.
Six-month 2021 troubled debt restructurings totaled seven loans with a post-modification balance of $2.7 million. Two previously restructured loans totaling $1.4 million subsequently defaulted during the six-month period.
Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 4.10% over one year, while a 25-basis-point decrease would reduce it by 0.59% over one year. Actual results may differ from modeled results.
CTBI adopted ASU 2019-12 and ASU 2020-01 effective January 1, 2021 without significant impact. Management did not anticipate a material adverse effect from LIBOR transition.

Important facts for investors to verify

Whether the reserve recovery and unusually favorable credit-loss provision are sustainable after pandemic deferrals and PPP forgiveness activity subside.
Future net interest margin performance as deposits remain elevated, loan balances decline and securities replace loans as earning assets.
Credit performance of hotel/motel and commercial real estate exposures, including collateral values and the $28.6 million of deferred loans.
The pace of PPP forgiveness and the effect of declining PPP balances and fee amortization on net interest income.
Interest-rate effects on available-for-sale securities, accumulated other comprehensive income and liquidity.
Growth in personnel costs and incentive accruals relative to noninterest income.
The filing reports no legal proceedings or separately identified risk factors for this quarter; investors should nonetheless review the forward-looking statement risks and the prior Form 10-K.