Community Trust Bancorp, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company serving eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee through Community Trust Bank and Community Trust and Investment Company. The unaudited filing covers the three and nine months ended September 30, 2021, with comparisons to September 30, 2020 and December 31, 2020. CTBI reported 79 banking locations, consolidated assets of $5.4 billion, deposits plus repurchase agreements of $4.6 billion, shareholders’ equity of $691.6 million, and trust assets under management of $3.6 billion.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $42.0 million | $37.7 million | $122.3 million | $112.4 million |
| Provision for credit losses | $(0.2) million recovery | $2.4 million expense | $(6.9) million recovery | $15.1 million expense |
| Noninterest income | $14.4 million | $14.9 million | $45.5 million | $39.3 million |
| Noninterest expense | $30.3 million | $29.5 million | $88.1 million | $85.6 million |
| Net income | $21.1 million | $17.4 million | $68.7 million | $43.7 million |
| Diluted EPS | $1.19 | $0.98 | $3.86 | $2.46 |
| Net interest margin | 3.23% | 3.16% | 3.22% | 3.37% |
Third-quarter net income increased 21.2% year over year, while nine-month net income increased 57.3%. The nine-month effective tax burden was approximately 20.6%, compared with approximately 14.4% in the prior-year period.
- Total assets were $5.386 billion, up $246.4 million from December 31, 2020.
- Total loans were $3.398 billion, down $156.0 million, or 4.4%, from year-end. Excluding PPP loans, loans increased $26.6 million during the third quarter.
- Available-for-sale debt securities were $1.526 billion, up from $997.3 million at year-end, reflecting redeployment of Federal Reserve funds.
- Total deposits were $4.296 billion; deposits plus repurchase agreements were $4.588 billion, up $216.3 million from year-end.
- Cash and cash equivalents were $207.8 million, compared with $338.2 million at December 31, 2020.
- Long-term debt was $57.8 million. Repurchase agreements were $292.0 million, down from $355.9 million at year-end.
- Operating cash flow for the first nine months was $81.9 million. Investing activities used $408.6 million, and financing activities provided $196.2 million, resulting in a $130.5 million decrease in cash and cash equivalents.
- Shareholders’ equity increased from $654.9 million at year-end to $691.6 million. CTBI’s tangible common equity to tangible assets ratio was 11.77%, and its community bank leverage ratio was 12.71%.
Material changes versus comparable periods
- Net interest income rose 11.5% year over year in Q3, primarily due to redeployment of Federal Reserve funds into securities and recognition of PPP-related fees from forgiven loans. PPP loans contributed approximately 25 basis points to the quarterly net interest margin.
- Noninterest income declined 3.5% year over year in Q3, mainly because of lower gains on loan sales, lower loan-related fees, and lower securities gains. The refinancing slowdown affected mortgage loan-sale gains.
- Noninterest expense increased 2.9% year over year in Q3, including higher personnel costs and approximately $1.8 million of additional bonuses and incentives.
- Credit performance improved. The allowance for credit losses declined to $41.2 million from $48.0 million at year-end, and the company recorded a $0.2 million quarterly recovery versus a $2.4 million provision in Q3 2020.
- Nonperforming loans were $18.7 million, or 0.55% of total loans, versus $26.6 million, or 0.75%, at December 31, 2020. Nonperforming assets were $23.0 million, down $11.2 million from year-end.
- Net charge-offs were $0.3 million in Q3 2021, compared with $1.1 million in Q3 2020. For the first nine months, CTBI reported a net recovery of $0.1 million versus $5.2 million of net charge-offs in the prior-year period.
- PPP loans outstanding declined to $99.1 million from $252.7 million at year-end. Of $401.3 million of total PPP originations, $297.7 million had been forgiven and repaid by the SBA through September 30, 2021.
Guidance, outlook, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management described improving loan portfolio quality and continued balance-sheet management, but noted that results remain sensitive to interest rates, economic conditions, credit performance, COVID-19 effects, competition, regulation, technology dependence, acquisitions, and legal matters.
- COVID-19 deferrals had declined to 27 customers totaling $15.8 million at September 30, 2021. These deferrals were excluded from reported nonperforming loans under applicable relief provisions.
- Management retained a COVID-19 qualitative factor in its allowance methodology because delinquency and nonperforming-loan metrics could be temporarily affected by payment deferrals and PPP support.
- The allowance covered 220.0% of nonperforming loans and equaled 1.21% of total loans, or 1.25% excluding PPP loans.
- Hotel and motel loans represented approximately 7.4% of total loans and remain a concentration exposed to economic and operating volatility.
- Available-for-sale securities had $11.9 million of unrealized losses, which management considered temporary and interest-rate driven rather than credit-related. Securities with unrealized losses represented 61.0% of total debt securities, compared with 16.2% at year-end.
- Interest-rate modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 3.94% over one year and 5.53% over two years. A 25-basis-point decrease was estimated to reduce net interest income by 0.62% over one year and 1.49% over two years.
- Other real estate owned declined to $4.3 million from $7.7 million at year-end; nine-month carrying costs and valuation adjustments were $1.1 million.
- 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.
- The company declared quarterly cash dividends of $0.40 per share for the October 1, 2021 payment date. No legal proceedings or risk-factor updates were reported in Part II.
Important facts for investors to verify
- Whether PPP fee income and loan forgiveness materially affect future net interest income after the remaining $99.1 million PPP balance is resolved.
- Whether improved credit metrics persist after COVID-19 deferrals and government support programs expire.
- The adequacy of the $41.2 million allowance, including management’s COVID-19 qualitative adjustment and exposure to commercial real estate and hotel/motel loans.
- The effect of interest-rate movements on the $1.526 billion available-for-sale securities portfolio, accumulated other comprehensive income, and net interest margin.
- The sustainability of mortgage loan-sale gains, trust revenue, deposit service charges, and elevated personnel and incentive costs.
- Liquidity availability, including $489.2 million of Federal Home Loan Bank borrowing capacity, $75 million of correspondent-bank lines, and the decline in cash balances.
- Capital strength and dividend capacity, including the 12.71% community bank leverage ratio and 11.77% tangible common equity-to-assets ratio.
- The filing’s interim financial statements are unaudited and may not be indicative of full-year results.