Community Trust Bancorp, Inc. — 1Q 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 8, 2020. The interim financial statements are unaudited. CTBI is a Kentucky-based bank holding company operating through Community Trust Bank and Community Trust and Investment Company across Kentucky, southern West Virginia, and northeastern Tennessee.
Business Context and Financial Position
- Total assets were $4.35 billion, compared with $4.37 billion at December 31, 2019.
- Total loans were $3.29 billion, up $38.9 million, or 1.2%, from year-end and up 3.1% year over year. Commercial loans represented $1.68 billion, residential loans $910.7 million, and consumer loans $699.9 million.
- Total deposits were $3.40 billion; deposits plus repurchase agreements were approximately $3.63 billion.
- Shareholders’ equity was $612.9 million, compared with $614.9 million at year-end. Tangible common equity to tangible assets was 12.77%.
Key Financial Metrics
| Metric | 1Q 2020 | 1Q 2019 | Change |
|---|---|---|---|
| Total interest income | $44.7 million | $45.9 million | (2.6%) |
| Net interest income | $36.2 million | $36.0 million | +0.7% |
| Provision for credit losses | $12.7 million | $0.2 million | +$12.5 million |
| Noninterest income | $11.5 million | $12.2 million | (5.3%) |
| Noninterest expense | $28.2 million | $29.1 million | (3.0%) |
| Income before taxes | $6.8 million | $18.9 million | (63.8%) |
| Net income | $6.6 million | $14.9 million | (56.0%) |
| Basic and diluted EPS | $0.37 | $0.84 | (56.0%) |
| Tax-equivalent net interest margin | 3.58% | 3.70% | (12 bps) |
Cash flow and liquidity: Operating activities provided $13.7 million of cash. Investing activities used $74.6 million, primarily reflecting purchases of available-for-sale securities and a $41.2 million increase in net loans. Financing activities used $11.1 million. Cash and cash equivalents declined to $192.7 million from $264.7 million at December 31, 2019. Available-for-sale securities totaled $633.5 million. CTBI reported $436.1 million of available Federal Home Loan Bank borrowing capacity and $75 million of correspondent-bank credit lines.
Credit and capital: The allowance for credit losses was $49.4 million, or 1.50% of loans, compared with $35.1 million, or 1.08%, at year-end. Net charge-offs were $1.4 million, or 0.17% of average loans annualized. Nonperforming loans were $35.4 million, or 1.08% of loans, and nonperforming assets were $55.2 million. Regulatory capital ratios remained well-capitalized: CET1 17.04%, Tier 1 18.79%, total capital 20.03%, and Tier 1 leverage 13.99%.
Material Changes Versus Comparable Periods
- Net income fell $8.4 million year over year, principally because of the $12.5 million increase in the credit-loss provision.
- CTBI adopted CECL on January 1, 2020. Adoption increased the allowance by approximately $3.0 million and reduced shareholders’ equity by $2.4 million, net of tax.
- Management recorded substantial additional reserves for expected COVID-19-related losses, including approximately $3.5 million from industry-concentration model changes and approximately $7.3 million related to increased unemployment assumptions.
- Noninterest income declined due partly to a 30-day waiver of overdraft and returned-item fees and an $0.8 million decline in the fair value of mortgage servicing rights.
- Nonperforming loans increased from $33.6 million at December 31, 2019 and $25.4 million at March 31, 2019. Other real estate owned was $19.8 million, including $0.5 million of first-quarter valuation charges.
- The quarterly dividend was $0.38 per share, compared with $0.36 per share in the prior-year quarter. CTBI repurchased 32,664 shares and received authorization for up to 1.0 million additional repurchases.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or financial guidance. Management expects COVID-19, reduced interest rates, increased unemployment, and economic disruption to adversely affect credit quality, net interest income, noninterest income, liquidity, and potentially capital. The Federal Reserve reduced the federal funds target range to 0%–0.25% during March 2020, creating additional pressure on asset yields and profitability.
- As of April 30, 2020, CTBI reported 2,837 COVID-19 loan deferrals totaling $681.7 million, including $576.6 million of commercial deferrals.
- As of May 3, 2020, CTBI had approved or closed 2,462 PPP loans totaling $268.3 million; the loans are SBA-guaranteed and carry a 1% interest rate.
- CTBI elected CARES Act relief permitting qualifying COVID-19 loan modifications to avoid troubled-debt-restructuring classification and elected the regulatory-capital transition relief for CECL.
- Key concentrations and risks include hotel/motel lending, commercial real estate, small and mid-sized businesses, residential and commercial property values, borrower payment deferrals, interest-rate compression, prolonged unemployment, liquidity demands, cybersecurity, vendor disruption, and potential goodwill or deferred-tax-asset impairment.
- Management stated that securities with unrealized losses were temporarily impaired due to market and interest-rate factors rather than credit deterioration.
Important Facts for Investors to Verify
- Whether COVID-19 deferrals and PPP exposure translate into higher delinquencies, charge-offs, nonperforming assets, and future CECL provisions.
- Whether the $49.4 million ACL remains adequate as unemployment, hotel, commercial real estate, and small-business conditions evolve.
- The effect of sustained near-zero interest rates on the 3.58% net interest margin and future net interest income.
- Liquidity trends, deposit stability, borrowing capacity, repurchase-agreement collateral requirements, and cash usage following the decline in cash equivalents.
- Future trends in nonperforming loans, other real estate owned, collateral values, and troubled or modified loans.
- Whether capital ratios remain well-capitalized after applying CECL transition adjustments and absorbing potential credit losses.
- The filing’s interim results are unaudited and are not necessarily indicative of full-year results.