Community Trust Bancorp, Inc. 2020 Q2 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 Community Trust and Investment Company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited three and six months ended June 30, 2020. CTBI reported 79 banking locations, total assets of $5.0 billion, deposits including repurchase agreements of approximately $4.3 billion, shareholders’ equity of $631.8 million, and trust assets under management of $2.3 billion.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Six months ended June 30, 2020 |
|---|---|---|
| Net interest income | $38.5 million | $74.7 million |
| Provision for credit losses | Credit of $49 thousand | $12.7 million expense |
| Noninterest income | $12.9 million | $24.4 million |
| Noninterest expense | $27.9 million | $56.1 million |
| Net income | $19.7 million | $26.2 million |
| Basic and diluted EPS | $1.11 | $1.48 |
| Tax-equivalent net interest margin | 3.41% | 3.49% |
- June 30, 2020 loans were $3.54 billion, including $267.0 million of PPP loans, and net loans were $3.49 billion after a $46.6 million allowance for credit losses.
- Total assets were $5.02 billion, compared with $4.37 billion at December 31, 2019. Cash and cash equivalents were $478.1 million, and available-for-sale securities were $740.5 million.
- Total deposits were $3.97 billion. Repurchase agreements were $296.0 million, long-term debt was $57.8 million, and Federal Home Loan Bank advances were $0.4 million.
- Six-month operating cash flow was $24.6 million. Investing activities used $426.0 million, primarily due to securities purchases and loan growth, while financing activities provided $614.8 million, principally from deposit growth.
- Nonperforming loans were $36.2 million, or 1.02% of total loans. Nonperforming assets were $53.8 million. Net charge-offs were $2.8 million in the second quarter and $4.2 million year to date.
- Capital remained strong: common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios were 17.21%, 18.93%, 20.18%, and 12.92%, respectively. Tangible common equity to tangible assets was 11.42%.
Material changes versus comparable periods
- Second-quarter net income increased 7.2% from $18.3 million in the prior-year quarter, while EPS increased from $1.03 to $1.11. The improvement was primarily attributable to the substantially lower credit-loss provision and higher net interest income.
- Six-month net income declined 21.1% from $33.3 million to $26.2 million, and EPS declined from $1.88 to $1.48. The decline primarily reflected the $12.7 million year-to-date credit-loss provision versus $1.8 million in the prior-year period.
- Second-quarter net interest income increased 6.8% year over year despite a 16-basis-point decline in net interest margin, as average earning assets grew materially and funding costs declined.
- Second-quarter noninterest income increased 5.1% year over year, supported by higher loan-sale gains, loan-related fees, and securities gains. Deposit service charges declined, including the effect of COVID-19-related overdraft fee waivers and lower overdraft activity.
- Second-quarter noninterest expense decreased 7.1% year over year, primarily due to lower personnel-related costs and other operating expenses.
- Loans increased $290.1 million, or 18.0% annualized, from year-end 2019; deposits and repurchase agreements increased $635.8 million, or 35.2% annualized. The increases reflected PPP activity, healthcare-related advance Medicare payments, stimulus payments, and retained PPP proceeds.
- 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. The allowance was $46.6 million at June 30, 2020, compared with $35.1 million at December 31, 2019.
Guidance, outlook, risks, contingencies, and unusual items
- Management did not provide formal earnings guidance. It stated that COVID-19, low interest rates, economic conditions, and future credit performance may materially affect results.
- At June 30, 2020, CTBI had 3,668 COVID-19 loan deferrals totaling $756.6 million, including $639.4 million of commercial deferrals. A further 50 customers requested assistance a second time on loans totaling $68.4 million. These loans were excluded from reported nonperforming loans under CARES Act relief.
- CTBI had authorized 2,848 PPP loans totaling $275.9 million and had closed 2,782 loans totaling $274.1 million. PPP loans are generally fully SBA-guaranteed and were assigned no credit-loss allowance, but the filing identifies risks related to borrower eligibility, SBA guaranty denial or recovery, regulatory compliance, and potential litigation.
- The hotel/motel portfolio represented approximately 7.3% of total loans and was identified as particularly sensitive to economic conditions. Other risks include commercial real estate, small and mid-size businesses, unemployment, collateral values, prolonged low interest rates, cybersecurity, vendor disruptions, and possible changes in consumer behavior.
- Other real estate owned was $17.7 million, down from $19.5 million at year-end 2019. Management expects foreclosed properties to remain elevated as it works through current market conditions. Two properties totaling approximately $1.0 million had been held for at least nine years and are subject to disposal requirements.
- Management elected regulatory relief that delays the estimated capital impact of CECL for up to five years and elected the modified community bank leverage ratio framework. Management stated that CTBI and CTB remained well-capitalized.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 5.79% over one year, while a 25-basis-point decrease would reduce it by 0.77% over one year.
- The filing states that legal proceedings were none as of the filing date, but PPP-related litigation and SBA guaranty risks remain identified contingencies.
Most important facts for an investor to verify
- Whether COVID-19 deferrals resume payments or migrate into delinquency, nonaccrual status, charge-offs, or higher CECL reserves.
- The ultimate forgiveness, servicing economics, and SBA guaranty performance of the $267.0 million funded PPP portfolio.
- Credit performance in hotel/motel, commercial real estate, and small-business exposures, including trends in criticized loans and collateral values.
- Whether low interest rates continue to compress asset yields and net interest margin despite lower funding costs.
- The sustainability of second-quarter earnings given the $12.8 million sequential improvement in the credit-loss provision and the contribution from securities gains and mortgage activity.
- Liquidity and capital effects of continued loan growth, deposit normalization, repurchase agreements, dividends, and any future deterioration in credit quality.