Community Trust Bancorp, Inc. — Q1 2021 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 months ended March 31, 2021, with comparisons to March 31, 2020 and December 31, 2020. CTBI reported 79 banking locations, total assets of $5.4 billion, deposits including repurchase agreements of $4.6 billion, shareholders’ equity of $662.1 million, and trust assets under management of $3.0 billion at quarter-end.
Key financial metrics
| Metric | Q1 2021 | Comparable period or change |
|---|---|---|
| Net interest income | $40.2 million | Up 11.0% from Q1 2020 |
| Provision for credit losses | $(2.5) million credit | $12.7 million provision in Q1 2020 |
| Noninterest income | $15.6 million | Up 35.2% from Q1 2020 |
| Noninterest expense | $28.3 million | Up 0.3% from Q1 2020 |
| Net income | $23.6 million | Up 259.0% from $6.6 million |
| Basic and diluted EPS | $1.33 | $0.37 in Q1 2020 |
| Net interest margin, tax equivalent | 3.31% | Down 27 basis points year over year |
| Total assets | $5.36 billion | Up $221.0 million from year-end 2020 |
| Total loans | $3.54 billion | Down 0.4% from year-end; up 7.6% year over year |
| Allowance for credit losses | $45.3 million | 1.28% of loans; 1.38% excluding PPP loans |
| Nonperforming loans | $21.0 million | 0.59% of loans |
| Cash and cash equivalents | $423.1 million | $338.2 million at December 31, 2020 |
| Shareholders’ equity | $662.1 million | Tangible common equity/assets ratio of 11.27% |
Net cash provided by operating activities was $31.7 million. Investing activities used $156.3 million, primarily reflecting $304.2 million of available-for-sale securities purchases, partly offset by security maturities and prepayments and a $15.7 million decrease in net loans. Financing activities provided $209.5 million, principally from a $217.7 million increase in deposits. Cash and cash equivalents increased $84.9 million during the quarter.
Total debt-related funding included $354.2 million of repurchase agreements, $57.8 million of long-term debt, $0.4 million of Federal Home Loan Bank advances, and $0.5 million of federal funds purchased. CTBI reported approximately $509.9 million of available Federal Home Loan Bank borrowing capacity and $75 million of correspondent-bank lines of credit.
Material changes versus comparable periods
- Record first-quarter earnings increased substantially, primarily due to higher net interest income, a $2.5 million credit for credit losses versus a $12.7 million provision in Q1 2020, and higher noninterest income.
- Net interest income benefited from lower funding costs and recognition of PPP loan fees. PPP fee income recognized during the quarter was $3.3 million and contributed approximately 27 basis points to the net interest margin.
- Average earning assets increased 21.1% year over year, but the yield on average earning assets declined 78 basis points. The cost of interest-bearing funds declined 71 basis points.
- Noninterest income increased primarily from higher loan-related fees and gains on loan sales. Mortgage servicing rights also generated a $1.0 million positive fair-value adjustment.
- Loans declined modestly from year-end because of a $30 million commercial loan payoff, soft loan demand, and residential refinancing activity. The investment portfolio increased $157.7 million from year-end as excess liquidity was deployed into securities.
- Deposits including repurchase agreements increased $216.1 million, or 20.0% annualized, from year-end and $956.0 million, or 26.3%, year over year.
- Asset quality improved. Nonperforming loans declined from $26.6 million at year-end 2020 and $35.4 million at March 31, 2020 to $21.0 million. Net charge-offs were $0.2 million, or 0.02% of average loans annualized.
- Other real estate owned declined to $6.2 million from $7.7 million at year-end and $19.8 million a year earlier.
- Accumulated other comprehensive income declined by $10.0 million, primarily because of unrealized losses on available-for-sale debt securities. Management considered the impairment temporary and interest-rate driven rather than credit-related.
Guidance, outlook, commentary, risks, and unusual items
- Management did not provide formal earnings or revenue guidance in the filing. It stated that it intends to continue participating in the PPP.
- At March 31, 2021, 226 customers had CARES Act loan deferrals totaling $81.8 million, including $73.8 million of commercial loans. These deferrals are excluded from reported nonperforming loans under applicable CARES Act provisions.
- CTBI had closed 2,962 PPP loans totaling $277.0 million; 1,563 loans totaling $117.2 million had been forgiven by the SBA, including $98.1 million during the quarter. A second PPP phase included 1,857 loans totaling $99.1 million.
- Management maintained a COVID-19 qualitative factor in the credit-loss model because payment deferrals and PPP support may have temporarily masked future credit deterioration. Key exposures include commercial real estate, hotel/motel lending, economic conditions, unemployment, interest rates, loan demand, and the eventual expiration of pandemic assistance.
- Available-for-sale securities totaled $1.16 billion at fair value. Securities with unrealized losses represented 53.2% of total debt securities at March 31, 2021, compared with 16.2% at year-end 2020. Management concluded the losses were temporary and not credit-related.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 5.58% over one year and 9.42% over two years. A 25-basis-point decrease would reduce net interest income by 0.69% over one year and 1.58% over two years.
- CTBI’s community bank leverage ratio was 12.70%, and CTB’s was 12.12%; management stated both entities were well-capitalized.
- The filing identifies risks from COVID-19, PPP participation, credit performance, economic and interest-rate conditions, competition, regulation, technology dependence, acquisitions, and legal proceedings. No legal proceedings or additional risk factors were reported in Part II.
Most important facts for investors to verify
- Whether the unusually strong earnings benefit from PPP fee recognition and the credit-loss recapture is repeatable.
- The performance of the $81.8 million of deferred loans after deferrals expire and pandemic assistance declines.
- Credit quality trends in commercial real estate, hotel/motel, and other commercial portfolios, including the adequacy of the $45.3 million allowance.
- The effect of interest-rate movements on the 3.31% net interest margin and the fair value of the $1.16 billion available-for-sale securities portfolio.
- The pace of PPP loan forgiveness, related fee recognition, and the effect of declining PPP balances on future net interest income.
- Loan-demand trends, residential refinancing activity, deposit growth, and the deployment of excess liquidity into securities.
- Changes in accumulated other comprehensive income and tangible capital if unrealized securities losses persist or increase.
- The filing’s unaudited status and the limitation that interim results are not necessarily indicative of full-year performance.