Community Trust Bancorp, Inc. 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. It serves eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee through 79 banking locations and trust offices. The filing covers the unaudited three and nine months ended September 30, 2020, with comparisons to September 30, 2019 and December 31, 2019.
- Total assets were $5.02 billion and shareholders’ equity was $644.5 million at September 30, 2020.
- Total deposits were $3.89 billion; deposits including repurchase agreements were approximately $4.26 billion.
- Trust assets under management, excluded from consolidated assets, were $2.5 billion.
Key financial metrics
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Net interest income | $37.7 million | $36.5 million | $112.4 million | $108.5 million |
| Provision for credit losses | $2.4 million | $1.3 million | $15.1 million | $3.0 million |
| Noninterest income | $14.9 million | $12.4 million | $39.3 million | $36.8 million |
| Noninterest expense | $29.5 million | $29.9 million | $85.6 million | $89.0 million |
| Net income | $17.4 million | $15.3 million | $43.7 million | $48.5 million |
| Basic and diluted EPS | $0.98 | $0.86 | $2.46 | $2.74 |
- Third-quarter net interest margin was 3.16%, down 25 basis points from the second quarter and 43 basis points from the prior-year quarter. The nine-month tax-equivalent net interest margin was 3.37%, compared with 3.62% in 2019.
- Average earning assets increased 11.0% year over year for the nine-month period, while the yield on average earning assets declined 66 basis points and the cost of interest-bearing funds declined 55 basis points.
- Loans totaled $3.56 billion, up 9.5% from year-end 2019. Net loans were $3.51 billion after a $48.0 million allowance for credit losses.
- The allowance for credit losses was 1.35% of total loans and provided 160.7% coverage of nonperforming loans.
- Cash and cash equivalents were $257.8 million. Available-for-sale securities were $949.1 million and represented the principal liquid investment portfolio.
- Operating cash flow was $42.2 million for the first nine months, compared with $62.1 million in 2019. Investing activities used $652.3 million, principally for securities purchases and loan growth; financing activities provided $603.2 million. Cash and cash equivalents declined $6.9 million during the period.
- Long-term debt was $57.8 million. Repurchase agreements were $367.8 million, federal funds purchased were $2.4 million, and Federal Home Loan Bank advances were $0.4 million.
- Regulatory capital ratios remained strong: common equity Tier 1 of 17.25%, Tier 1 of 18.94%, total capital of 20.19%, and Tier 1 leverage of 12.65%.
Material changes versus comparable periods
- Third-quarter net income increased 14.3% from the prior-year quarter, but nine-month net income declined 10.0%, primarily because of the substantially higher credit-loss provision.
- Nine-month provision for credit losses increased $12.1 million, or 402.1%, to $15.1 million, reflecting CECL adoption and COVID-19-related economic uncertainty.
- Noninterest income increased 20.3% year over year in the third quarter, led by higher gains on loan sales and loan-related fees. Nine-month noninterest income increased 6.8%.
- Nine-month noninterest expense declined 3.8%, aided by lower incentive compensation and other real estate owned expense.
- Deposits including repurchase agreements increased $629.5 million, or 23.1% annualized, from December 31, 2019. Management redeployed Federal Reserve funds into securities, increasing the investment portfolio by $348.7 million from year-end.
- Nonperforming loans declined to $29.9 million, or 0.84% of loans, from $33.6 million, or 1.03%, at December 31, 2019. Other nonperforming assets totaled $45.5 million, down $7.6 million from year-end.
- Net charge-offs were $5.2 million for the first nine months, compared with $4.1 million in 2019. Other real estate owned declined to $15.6 million from $19.5 million at year-end.
- Accumulated other comprehensive income increased to $12.6 million from $4.3 million at year-end, primarily reflecting unrealized gains on available-for-sale securities.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management stated that future results remain difficult to predict because of the COVID-19 pandemic and related economic conditions.
- Through September 30, 2020, CTBI approved 3,274 CARES Act payment deferrals totaling $715.8 million, including $620.5 million of commercial, $59.7 million of mortgage, and $35.6 million of consumer deferrals. A total of $504.2 million had resumed payments. Additional second- and third-time deferrals totaled approximately $211.9 million.
- CTBI originated 2,962 PPP loans totaling $277.0 million. The loans are 100% SBA-guaranteed and generally carry a 1% interest rate. The PPP program expired on August 8, 2020, and the timing of SBA forgiveness remained uncertain. CTBI had not accessed the Federal Reserve PPP Lending Facility as of the filing date.
- Management increased qualitative CECL factors because payment deferrals may have temporarily understated delinquency and nonperforming-loan trends. The allowance increased $1.4 million during the third quarter.
- COVID-19 risks include higher borrower defaults, pressure on collateral values, reduced interest income from low rates, liquidity and capital pressure, operational and cybersecurity risks, and potential PPP-related litigation or SBA guarantee disputes.
- Hotel and motel loans were approximately 7.3% of total loans and were identified as particularly sensitive to economic conditions. Commercial real estate, small and mid-sized businesses, and consumer borrowers also present heightened pandemic-related credit risk.
- Other real estate owned remained elevated. Management expects foreclosed properties to remain elevated while current market conditions are addressed; four properties totaling $7.0 million had been held for at least nine years.
- CTBI adopted CECL effective January 1, 2020. The adoption increased the allowance by approximately $3.0 million and reduced shareholders’ equity by $2.4 million, net of tax. CTBI elected the regulatory capital transition relief permitted under the CARES Act.
- The company paid a quarterly dividend of $0.385 per share and repurchased 32,664 shares during the first quarter under its repurchase program. No additional repurchases occurred during the second or third quarters.
Important facts for investors to verify
- Whether deferred borrowers resume payments or migrate into nonaccrual status after CARES Act relief expires.
- Whether the $48.0 million CECL allowance adequately reflects potential losses in hotel, commercial real estate, small-business, consumer, and other pandemic-sensitive portfolios.
- The pace and amount of SBA forgiveness for the $277.0 million PPP portfolio and whether any guarantee claims or compliance disputes arise.
- Future net interest margin performance in the prolonged low-rate environment, including the effect of PPP fee recognition and asset repricing.
- Trends in charge-offs, delinquency, nonperforming loans, troubled debt restructurings, and other real estate owned.
- Liquidity availability, including the $513.2 million Federal Home Loan Bank borrowing position, $75 million of correspondent-bank lines, and reliance on repurchase agreements.
- Potential effects of COVID-19 on capital, dividends, collateral values, goodwill, deferred tax assets, securities impairment, and operating continuity.
- The filing is unaudited and interim results are not necessarily indicative of full-year performance.