AGM 2021

Apr 27, 2021

Slides

Energy Trust Bancorp. Thank you for joining us this morning and allowing us to share with you information on how your company met the challenges of operating during the pandemic. We will share information regarding our financial performance during 2020 and the Q1 of 2021. Before we begin this morning, I would like to recognize the Boards of Directors of the corporation as well as its 2 subsidiaries, Community Trust Bank and Community Trust and Investment Company. And I would like to thank the directors for their continuing service to your company. The individuals listed on your screen have given up their time and talents and served your company well during 2020. I would like to particularly recognize Nick Carter, who served as a Director of your company since 2008 and did not stand for reelection due to his retirement. We thank Nick for his outstanding service and congratulate him on his retirement. I would also like to recognize our outstanding executive management team. Your company is fortunate to have such talented and experienced individuals leading your company. I thank them for their continued dedication in leading our company to a strong financial performance. Before we begin our presentation, I must direct your attention to the cautionary statement appearing on the screen as some of the comments today or information included could be considered forward looking in nature. For additional information, I would direct you to the company's 2020 Annual Report Form 10 ks. With total assets of $5, 100, 000, 000 Community Trust Bancorp is the Sasket's largest Kentucky domiciled bank holding company and it holds the 2nd largest deposit market share of all of those entities with FDIC insurance within Kentucky. For the entire Kentucky market, we hold the 6th largest deposit market share. If you look at our performance at the end of December 2020, you will see that there had been significant volatility during the year in the process of our stock and we closed out the year trading basically at the book value. 1 of the great strengths of our company, of course, is our tangible common equity ratio in excess of 11.6%. We meet all of the definitions required by the regulatory authorities of being well capitalized institution. In operating our company with our 2 subsidiaries, the bank operates with 4 regions. Each of those regions has very distinct economic drivers. In our Central Kentucky region, you have Lexington, Kentucky, which is the horse capital of the world. You have Toyota Motor Manufacturing in Georgetown, Kentucky. And of course, you have the great educational and health system of the University of Kentucky. In addition to that, there are colleges or universities in most of the markets that we serve in Central Kentucky. Our Eastern region, which is where the company was founded, is an area that has been going through a rebuilding of its economy because of the adverse impact of the energy industry shutdown. The rebuilding of the economy not only involves recruiting businesses to the area for employment, but there is a strong focus from an educational perspective on building an entrepreneurial network for business growth. The Northeast region, we are located in West Virginia in the Northeast region and have the Chemical Valley of West Virginia in our region. It is also an area where we have significant agricultural activity primarily in cattle. Our South Central region is an area that has a lot of tourism as a result of the lake systems in Kentucky and Tennessee. And it's also a geographically located area that allows for transportation of materials to the ostensibly populated areas on the East Coast within a day's drive. Our 1 line of business is a very profitable line of business, which is our indirect lending with total loans of $620, 000, 000 at year end 2020. They contributed the 3rd highest net income to the company. Our subsidiary community trust and investment company currently has assets under management of $2, 800, 000, 000 and it contributed revenues of $14, 600, 000 during 2020. As you can see on the graph, the contribution did improve in total revenue contribution over the past several years. We do believe that our trust subsidiary provides the greatest opportunity for us to increase our non interest income in the future. Now looking at our 2020 performance. At this time last year, we shared with you the goals for the performance of your company. Listed on the screen, you will see the results in comparison to the goals that we set for the performance of the company last year. We have met or exceeded all of the results of the goals that we had established. As you can see, there is 1 that is slightly less than what we had anticipated and that is the return on average assets because of the growth in the assets of the company as a result of the incentives and support given by the federal government during the pandemic. Now taking a moment to look at shareholder value. As a company, part of our operating philosophy has always been to share part of our earnings with our investors. Our desired level of dividends is between 40% 50%. Our dividend payout ratio for 2020 was 45.7%. We have increased the cash dividends to our shareholders for 40 consecutive years. As you can see, the dividend yield to our customers, our investors 4.16% at year end 2020. Shareholders' equity, we continue to retain the balance of the earnings for the continued growth of our company. We have increased the shareholders' equity by 28.6 percent during the past 5 years and that represents a compounded growth rate of 6.4%. The book value of your shares has continued to increase. It's increased to $8.37 in the past 5 years. And as mentioned earlier, the tangible common equity ratio of your company is very strong and meets all regulatory guidelines will well capitalize. The total market capitalization of your company, as you can see, there was significant volatility during 2020 in the price not only of Community Trust stock, but of all stocks. I'm pleased to say that as of yesterday, the market capitalization of your company was $803, 000, 000 That's an increase from the $659, 900, 000 at year end 2020. Looking at the comparisons that we make on an annual basis, the 5 year cumulative total return on an investment in Community Trust Bank stock in comparison to the NASDAQ stock market and the NASDAQ bank stock, you will see that we have underperformed. We also compare our performance to that of the Russell 2, 000 index of various small cap stocks. Again, we have underperformed the Russell 2, 000. Your management and Board of Directors continue to believe that your that the company provides an opportunity for a core value long term investment. That's based upon the information appearing on your screen. We are pleased that your stock was a founding stock in the NASDAQ Dividend Achievers Index and the NASDAQ Bank Stock Index. We believe that the increases that we have had over the past 40 years in our cash dividends as well as the stock splits and stock dividends that have occurred over the years support the fact that we are a long term core value investment. And that appears to be recognized because of the diversity that we have in our shareholder base. We currently have 186 institutional investors that is including our subsidiary Community Trust and Investment Company that holds 55.3% of the company's stock. Our stock is also included in 309 mutual funds that's representing 28.6% of our stock. We believe that your company has strong franchise value. It's based upon our consistent financial performance. It's based on our solid investor returns and of course the strong capital position that we continue to maintain. The economic diversity that we have within our markets allows for the company to continue to be profitable when certain sectors of the economy are down. We have a very strong experienced management team and very dedicated employees. The largest shareholders for our company is our employees. They hold approximately 6% of the company's stock. And of course, our shareholders who continue to support us and allow us to manage the company from a longer term perspective and not quarter to quarter. Now I'd like to call on Mark Gucci to review the earnings and the balance sheet for 2020. Mark? Thank you, Gene. It's always a privilege and a pleasure to talk about Community Trust Bancorp, Community Trust Bank, Community Trust Investment Company. And bankers like to talk about the Cs when they talk about credit. This past year, we had some different Cs we had to deal with. Instead of capital and capacity and cash, we had to deal with COVID, the CARES Act and the CDC. And I'm very pleased to say that our employees stepped up big time and performed admirably under a very difficult situation. We didn't have as much earnings as we would have liked to have had. But all things considered, we had a pretty good year. And we had strong earnings. We had increased earnings as far as total revenue, significantly increased asset quality metrics, and we're positioned to do much better for the remainder of 2021 and into the future. As Gene referenced earlier, our EPS was $3.35 We're still a margin bank, still driven by our net interest margin, which is declining. That represented about 73.5% of our total revenue last year compared to normally 75% and noninterest income represents 25%. ROA, as Gene had referenced earlier, down primarily because assets grow so much, grew so much. Net income was actually a little above what we had budgeted it to be, but we did not anticipate our asset growth being as large as it was. Net income, as I referenced earlier, dollars 59, 500, 000 down $5, 000, 000 But as I said earlier, total revenue was up and we controlled expenses. And if you just high level gave a primary reason that we did not grow revenue during 2020, early on during COVID-nineteen, the CARES Act, we had additional provision expense that we chose to do because of the uncertainty in several different industries within our company. We also had an increase in our loan loss reserve balances due to CECL implementation early during 2020. As I said earlier, revenue is up $10, 400, 000 5.4 percent increase. Non interest income also up, driven primarily from gains on sales of loans, security gains and loan related fees. We saw a decline in deposit related fees, which typically is the largest portion of our non interest income expense, non interest income. CARES money that came in assisted our customer base. We did not have near the fee related revenue with deposit accounts, primarily checking accounts for individuals. Net interest revenue increased, while the margin decreased 27 basis points. Average earning assets up over $500, 000, 000 nearly 13%. As I mentioned earlier, the margin down still stronger than our peer group. We'll continue to see pressure on our margin during 2021 as there is fierce competition for strong commercial credits. That's just going to be part of doing business as long as rates stay as low as they've been. Net non interest expense, down. Our efficiency ratio, 58.3 percent at the end of 2020. We have always historically outperformed our peer group, and we continue to consider expense control something that our employees do on a daily basis, not just once a month or twice a year. We take that extremely seriously. If you look at our balance sheet, assets were up a significant amount, dollars 773, 000, 000 driven by over $300, 000, 000 in loans, dollars 277, 000, 000 of that was PPP loans, and we had some other growth across the indirect area and the mortgage lending area. Had record year in mortgage production last year, by far the largest number of mortgage loans that we've ever done as a company. And our deposit growth was remarkable and continues to be the same as Kevin will talk about during the Q1. If you look at our mix, the commercial ended up being a larger percentage than we've had in years past. We would like that to be 50% commercial, 25% residential and 25% retail. Big part of our retail now is indirect automobile lending. It's well managed. We make good money on that product, and the asset quality remains pristine for that particular asset for us. During the CARES Act and during the COVID-nineteen crisis, particularly early on, there was so much uncertainty and so many businesses closing and particularly the hospitality industry that we, along with many other financial institutions, granted deferrals in line with what the CARES Act provided that we do, had a large number of first time deferrals, significantly less the second time, significantly less the third time and just a handful most recently. We feel pretty good about where our portfolio is across the board, commercial, residential and on the retail side regarding our customers' ability to resume payments and make the payments. The majority, as you can see by the small number that's still outstanding, are making their payments. We had 2800 and 17 loans that were under $350, 000 of our $277, 000, 000 in PPP loans last year. We've continued with the PPP loans with the 2nd offering this year and have actually done more in number, significantly more in number during 2021 than we did last year, but way less in dollar amount. We've had a large amount of those loans forgiven and it's been a tremendous tool for us to develop additional relationships with customers that were unable, for whatever reason, to do their PPP loans with other financial institutions. We got opportunities to take care of some customers that super regional or regional banks had, and we've now had the opportunity to do additional business. Our community banking model suited us very well during that time period and it continues to suit us well now. If you look at our concentrations of credit, it's the same concentrations we've had for the last several years. Hotel, motel, the largest, followed by nonresidential real estate rental, then apartment and rental housing, we had 0 non performing loans in any of these categories at the end of the year, and for that, we're very thankful. That was prior to COVID after COVID had hit. Net charge offs were flat in 20 20 compared to what occurred in 2019, higher than our peer group. Our model has always caused us to be somewhat higher than our peer group. We try to work with our customers. We also will not automatically just sell other real estate on to get it off our books. We try to sell it in a more reasonable manner in order that we do not affect overall property values throughout. If you notice the losses in commercial, by far the largest number of losses, followed by consumer indirect. That's pretty much typical for what has occurred in previous years. Really good trends in our nonperforming loans continue to decline as do our non performing assets. Our other real estate owned was at $7, 700, 000 at the end of the year. We moved a large property that had been on our books for many years. It's at a much more manageable level, still higher than we would like it to be, but certainly moving in the right direction. Our loss reserve beefed up during 2020, primarily due to the uncertainty. And if you were to take out the PPP loans, it's actually at 1.45% at the end of the year. Of course, all of those loans have 100% SBA guarantee. If you look at our allowance for credit losses, which I had referenced earlier, you see a large increase between January 1, 2020, on the commercial side to March 31 when we adopted CECL. Big portion of that was the uncertainty in many of our commercial areas. Also see a pretty significant increase in the consumer indirect from $7, 400, 000 to $9, 300, 000 All those portfolios continue to perform extremely well now and management looks at our allowance for credit losses on a regular basis. We have many people involved in those discussions, and we'll continue to make sure we have adequate allowance for our potential credit loss. Referenced earlier, other real estate owned significantly down. We expect that to continue to go down during 2021. I believe the high watermark for us unfortunately was about $85, 000, 000 about 12, 15 year ago. We're thankful that it's down to a much more manageable number. Part of our franchise has always been our strong deposit base. We had significant deposit growth over the last year as did most financial institutions. We're very fortunate to have a large portion of our deposits in non interest bearing deposits and other transaction accounts way more than 50%. We expect to maintain a large portion of deposits that we've had come in, but like other bankers, we're just not sure. We've been amazed at how the dollars have stayed on the books for us as consumers and small businesses have not really spent the money that came about either from the CARES Act or from proceeds from the PPP line. I'll now turn it over to Kevin Stumbaugh, our CFO, to talk about our Q1. Thank you, Mark. It is an absolute pleasure to be able to speak with you today, especially given the performance of our company in the Q1. This is going to be a nice conversation to have. The metrics that are on the screen right now in comparison to December 31 all show improvement except for 1 and I'll get to that in a minute. We've grown assets by $300, 000, 000 Our market cap has increased by $120, 000, 000 which is amazing and it's good for our shareholders to see that market cap value go up. The 1 that didn't improve for us is the cash dividend yield. It went down, but that's because the price of your stock went up making the dividend as a percentage of that price a little bit lower, but I'll take that trade off. Our price earnings ratio, all of those numbers have improved since year end. So we're glad to see those numbers. Earnings per share grew $0.44 from the Q4 of last year and it grew $0.96 from the Q1 of last year. That's 2.59 percent improvement over the Q1 of last year. Net income at $23, 600, 000 also improved dramatically. It was record earnings for a quarter and that's a very strong improvement over the $6, 600, 000 we reported in the same quarter last year. Net interest income of $40, 200, 000 was driven by forgiveness of the first round of the PPP loans that triggered recognition of the fees that were paid by SBA to us to process those loans. Instead of recognizing bad debt expense in the Q1, what we refer to as a provision for credit loss, in the Q1 we recognized a recovery of previously recognized bad debts. This was driven by our unusually strong performance in net charge offs this quarter of 2 basis points in the preceding 4 quarters. This required us to lower our expectations for losses based on historical loss experience. Non interest expense was helped by substantial increase in the fair value of our mortgage servicing rights, which we are required to adjust to fair value each quarter end. Gains on sale of loans, mortgage loans also remained high as the current low interest rate environment continues to sustain the refinancing move. Non interest expense was positively impacted by the reduction in personnel expenses that saw among other things higher than normal charges in the Q4 of last year for post retirement benefits and the shift in 2021 to a Kentucky income tax for banks shifting the cost from franchise tax expense to income tax expense. Expense. The steady growth in non interest income has primarily been the result of the refinancing boom, which has been steady over the last 4 quarters. Also impacting the refinancing boom was the adjustment in the fair value of our mortgage servicing rights. This is an asset that we create when we sell a mortgage loan to Freddie Mac and retain the right to service the loan. We take the payments, we make collection efforts, etcetera. We are paid a fee for this service and the fair value is based upon the expected cash flows from these fees. As mortgages with record low rates are being sold in service, the expected cash flows extend on that making the asset worth more. In the Q1, this increase was $1, 000, 000 In non interest expense, we'd like to say that we don't take cost cutting initiatives because managing our cost structure is an everyday process. As you can see from the chart, we've been successful in maintaining a consistent cost base over the last 5 quarters. The Q4 of last year included a $2, 400, 000 charge to post retirement obligations to reflect our updated assumptions on our life insurance premiums for current and future retirees who participate in our bank owned life insurance program. Additionally, the shift from a bank franchise tax to a corporate income tax that are reduced or that I mentioned earlier also reduced the 1st quarter expenses by $1, 500, 000 Total assets grew by $221, 000, 000 in the quarter. This combined with rapid growth we experienced in the last 3 quarters of 2020 give us total asset growth since March 31, 2020 of $1, 000, 000, 000 The growth in assets in the Q1 was invested primarily in our investment portfolio at $158, 000, 000 and deposited to the Federal Reserve Bank of $72, 000, 000 Loan activity during the quarter was all about the pay day protection loans with the most other segments decreasing in balance. The exceptions being commercial residential real estate which grew $17, 000, 000 and commercial other which grew $5, 000, 000 The PPP segment grew $2, 000, 000 during the quarter, but as I will detail later on, there was plenty of activity with the PPP program in the Q1 of this year. The CARES Act gave us the opportunity to show our customers what being a community bank is all about. We work with our customers during a very difficult time to provide them with the suspension of payments they needed to work through the economic shutdown and get them ready to stay open and get back to work. At June 30th last year, we had 3, 668 customers with active loan deferrals starting $756, 000, 000 in outstanding balances. At March 31, we had 226 customers with an outstanding balance of only $81, 800, 000 So we'd like to feel that we are very, very successful in helping our customers through a very difficult time. Our PPP loan balances grew by $2, 000, 000 during the quarter. That small net growth doesn't tell the whole story. Our staff has been overwhelmed in underwriting 1857 new PPP loans, totaling $99, 000, 000 in the Q1. At the same time, these same loan officers and underwriters were working with 1st round recipients to get $97, 000, 000 in 1st round loans forgiven. Again, this is where our community bank model thrives. We were fortunate to be able to provide PPP loans to our existing customers who needed them and also help out new customers who got to appreciate how a good community bank can help them get the job done when maybe others couldn't. Our non performing loans defined as loans that are 90 days past due and still accruing and loans that are not accruing interest continues to decline since the end of Q1 last year to this year, this measurement has dropped by 49 basis points. Non performing assets, which include non performing loans plus any other real estate owned or other channel assets owned has also reduced significantly, a total of 76 basis points. OREO has been reduced to a very manageable number at $6, 200, 000 Equally important, we now have only 3 properties with a book value exceeding $500, 000 with no property carried at $1, 000, 000 or more. At March 31, the book value of properties under contract to sell was $900, 000 Net charge offs for the quarter were extremely low. The loan category with the largest charge offs were commercial secured by real estate with only $159, 000 with approximately $1, 300, 000, 000 in outstanding loans, that's 5 basis points on an annualized basis. That's a really impressive number for that portfolio. Our residential real estate home equity loans and consumer indirect portfolios continue to perform well. Each of those segments had 0 basis points in losses during the quarter. And as you see on the slide, we had a total of 2 basis points annualized for the Q1 altogether. The allowance for the credit losses, the provision for credit losses recovery was due primarily to the improvement in net charge off experience affecting our vintage loss analysis in several segments. The most significant of those being indirect lending and residential lending. Our credit loss reserve as a percentage of total loans outstanding was 1.28% at quarter end and it was 1.38% if you exclude the PPP loans. This compares favorably to 135 at December 31st and that was at 146 excluding the PPP loans and 1.50 at March 31, 2020 before we had PPP loans. Deposits have grown by $956, 000, 000 over the last 4 quarters, increasing by $216, 000, 000 this quarter alone. The growth is driven by PPP loan funding, stimulus funds provided to consumers and targeted industries and by an increase in the savings rate for consumers. The efficiency ratio is the measure of how efficiently revenue could be generated. The chart shows us that in the Q1 of 2020, we spent roughly $0.59 to generate $1 in revenue. In the Q1 of 2021, this was reduced to $0.50 Higher revenues with lower non interest expense drove this change. The reduction year over year in non interest expense was primarily the change in Kentucky from a franchise tax to an income tax moving almost $4, 500, 000 out of the non interest expense calculation. And now Jean will finish up with key strategic initiatives. Thank you, Kevin. I'm sure that everyone enjoyed the positive results for the Q1. As we execute on our community banking business model, it's important for us to have priorities in our operations. And being a community bank, we need to build on our core earnings capacity. And in today's environment, we need quality loan growth, which is going to be a challenge during 2021, not just for Community Trust Bank, but for all of the industry as we continue our recovery from the pandemic. Growth in deposits, low cost deposits is extremely important as a margin driven institution. We look to continue to grow the company through expansion and growth opportunities with acquisitions and new branches. Our operational efficiency, as both Kevin and Mark indicated, is a way of life for us as a company and it will always be a continuing focus. In today's world, regulations abound and we must constantly have our compliance management working properly for the continued growth of the company. We will continue to focus on increasing the non interest revenue and we believe that our trust and wealth management and brokerage provide us that opportunity. And it's understood that we need to have strong asset quality and small other real estate owned in order to meet our goals. The management is very much committed to our strategic plan and the continuing implementation of that plan with the support of our 1, 000 employees is vital to obtaining our goals. The support of you, our shareholders, is also vital to our company. You have the opportunity to refer your friends and neighbors and business associates to do business with your company. Okay. We have completed the presentation. I would now ask for the certification of the minutes to our April 28, 2020 meeting. Mark Guich, can you certify the minutes? I am glad to certify the minutes of our April 28, 2020 meeting. Okay. Thank you. I would now call on Mark to give us an affidavit that notice was provided to all shareholders of record That did occur timely as required. Okay. We are open for voting during this time period. The Board of Directors appointed a proxy committee and the proxy committee consisted of James Brown, Marilyn Justice and Blake Robinson. The proxy committee has previously met and verified the proxy votes sent to Broadridge. I would now call on Blake Robinson to report on the proxy votes. Thank you, Gene. We, the undersigned, first being duly sworn, have received and reviewed a report attached hereto from Broadridge tabulation agent for Community Trust Bank. With respect to the annual meeting of shareholders held today, April 27, 2021, based on this report, we have determined that shares of CTBI's common stock were duly voted by proxy as follows. The voting power totaled outstanding shares 17, 826, 076 total shares voted 13, 854, 521 or 77.72 percent of total share. Okay. With the voting just announced by Mr. Robinson, we do have a quorum to conduct business today. The proxy committee will be voting all the proxies except those naming specific individuals. The closing time period for voting is now closed. The first item for consideration is the election of the Directors for Community Trust Bancorp. The nominees included in the proxy were Charles Baird, David Collins, Franklin H. Farris, Jr, Jean R. Hale, Eugenia Critt Llewellyn, Ina Michelle Missy Matthews, James E. McGee II, Frankie Menifeild, Ilmeline Parrish, Anthony W. St. Charles and Chad C. Street. I would now call for the vote of the proxy. The total shares voted for all directors was 113, 000, 000 664, 693, dollars Being an average for each director of 10, 359, 456. The shares withheld, 1, 189, 102. The director average shares withheld was 100 and 1, 100. Okay. There has been an election through the proxy vote of the Directors. The second item on the agenda for business today is the call for approval of BKD LLP as the outside auditors for year 2021. I will call for the proxy vote results. To ratify, there was 13, 747, 067 shares for 63, 295 shares against 44, 159 shares abstained. The last item on our agenda included in the proxy for 2021 was the approval of the advisory non binding resolution relating to executive compensation. I would call on Mr. Robinson for the proxy results. The proposal to approve, there were 9, 000, 000 881, 822 shares for 477, 571 shares against 108, 164 shares abstained. So the non binding resolution has been approved by proxy vote. Is there any additional business to be brought before our meeting today? Move to adjourn. We have a motion to adjourn and a second. Any opposition? Hearing none, the meeting is adjourned. Thank you for your participation today.