Community Trust Bancorp, Inc. — 2018 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 a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited three and six months ended June 30, 2018, compared primarily with the same periods in 2017 and December 31, 2017 for balance-sheet items.
- 80 banking locations and five trust offices.
- Total assets were $4.21 billion; deposits, including repurchase agreements, were approximately $3.56 billion.
- Trust assets under management were $2.2 billion.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | YTD 2018 | YTD 2017 |
|---|
| Net interest income | $35.1 million | $34.2 million | $69.7 million | $67.3 million |
| Provision for loan losses | $1.9 million | $2.8 million | $2.9 million | $4.0 million |
| Noninterest income | $13.7 million | $12.3 million | $27.1 million | $23.9 million |
| Noninterest expense | $32.4 million | $27.6 million | $61.1 million | $55.2 million |
| Income before taxes | $14.5 million | $16.2 million | $32.8 million | $32.0 million |
| Net income | $11.6 million | $11.5 million | $27.4 million | $22.8 million |
| Basic and diluted EPS | $0.66 | $0.65 | $1.55 | $1.29 |
- YTD net income increased 20.1%, primarily reflecting higher net interest income and noninterest income, lower loan-loss provisions, and the reduced federal corporate tax rate.
- YTD net interest margin on a tax-equivalent basis was 3.63%, down from 3.68%; the yield on earning assets increased 20 basis points while the cost of interest-bearing funds increased 34 basis points.
- YTD effective tax rate was approximately 16%, compared with 28% in 2017, following the reduction in the federal corporate tax rate to 21%.
- Quarterly dividends declared were $0.33 per share. On July 24, 2018, the board declared a quarterly dividend of $0.36 per share, a 9.1% increase.
Balance Sheet, Credit Quality, Liquidity, and Capital
| Metric | June 30, 2018 | December 31, 2017 |
|---|
| Total assets | $4.21 billion | $4.14 billion |
| Total loans | $3.17 billion | $3.12 billion |
| Net loans | $3.13 billion | $3.09 billion |
| Allowance for loan losses | $35.8 million | $36.2 million |
| Total deposits | $3.31 billion | $3.26 billion |
| Shareholders’ equity | $542.2 million | $530.7 million |
| Cash and cash equivalents | $198.4 million | $175.3 million |
- Loans increased $46.1 million, or approximately 3.0% annualized, from year-end; growth included commercial, residential, and consumer lending.
- Nonperforming loans were $22.0 million, or 0.69% of total loans, down from $28.3 million, or 0.91%, at year-end.
- Nonperforming assets were $52.3 million, while other real estate owned was $30.3 million.
- Net loan charge-offs were $3.3 million for the first six months, or 0.21% of average loans. Allowance coverage of nonperforming loans was 162.6%.
- Available-for-sale securities were $585.8 million. Unrealized losses increased as interest rates rose; management considered the losses temporary and not credit-related.
- Six-month cash flow from operating activities was $36.1 million; investing activities used $53.2 million and financing activities provided $40.3 million. Cash and cash equivalents increased $23.1 million.
- Long-term debt was $59.3 million. Repurchase agreements were $248.8 million, federal funds purchased were $8.0 million, and Federal Home Loan Bank advances were $0.8 million.
- Liquidity included $344.1 million of available Federal Home Loan Bank borrowing capacity and $57 million of correspondent-bank lines of credit. Brokered deposits were $82.3 million.
- Reported regulatory capital ratios were well above well-capitalized requirements: common equity Tier 1 of 15.80%, Tier 1 of 17.67%, total capital of 18.84%, and Tier 1 leverage of 13.11%.
Material Changes Versus Comparable Periods
- Second-quarter net income increased modestly from $11.5 million to $11.6 million, but declined from $15.8 million in the first quarter because of a customer reimbursement accrual and higher operating expenses.
- Second-quarter noninterest expense increased 17.7% year over year, driven principally by the customer reimbursement accrual, higher bonuses, and increased group medical and life insurance costs.
- YTD noninterest income increased 13.2%, including higher deposit service charges, trust revenue, and a gain on the sale of a tax-credit partnership interest.
- YTD provision expense declined 28.0%, although second-quarter provision expense increased sequentially to $1.9 million.
- Accumulated other comprehensive loss increased to $8.9 million from $3.5 million at year-end, primarily due to unrealized losses on available-for-sale securities.
- The company adopted several accounting standards in 2018, including guidance on equity securities, revenue recognition, cash-flow classification, and premium amortization. Management reported no material impact from most adoptions; ASU 2016-01 resulted in a cumulative-effect adjustment at January 1, 2018.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings or financial guidance was provided.
- On July 25, 2018, Community Trust Bank entered into a Federal Reserve Consent Order concerning specified deposit add-on products. The order requires corrective compliance actions and restitution to affected accountholders.
- CTBI increased its related accrual from $1.2 million to $4.75 million on June 14, 2018. The increase reduced second-quarter earnings by approximately $2.8 million after tax, or $0.16 per share. The eventual reimbursement amount may differ from the required segregated deposit.
- A tax-credit partnership interest sale generated approximately $1.0 million of noninterest income and caused an $0.8 million recapture of previously claimed tax credits.
- Management expects foreclosed properties to remain elevated while it works through market conditions. Properties held for extended periods may require additional regulatory approval or a full write-down if not sold within the applicable regulatory period.
- Key risks include interest-rate movements, rising funding costs, regional economic conditions, borrower credit performance, commercial and residential real-estate values, competition, regulatory changes, compliance remediation, technology dependence, and litigation.
- A 200-basis-point increase in the yield curve was modeled to increase net interest income by 5.97% over one year and 11.96% over two years; a 200-basis-point decrease was modeled to reduce it by 4.23% and 8.86%, respectively.
- Management stated that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Final restitution costs and remediation requirements under the Federal Reserve Consent Order.
- Whether the decline in nonperforming loans is sustained and whether charge-offs or loan-loss provisions rise as the portfolio grows.
- Trends in net interest margin as deposit and wholesale funding costs increase.
- Valuation and disposition progress for the $30.3 million of other real estate owned, including properties held for six years or longer.
- Potential effects of interest-rate changes on securities’ accumulated other comprehensive loss, liquidity, and capital.
- Implementation impact of the forthcoming current expected credit loss standard, ASU 2016-13, and the lease standard.
- The filing’s interim financial statements are unaudited and may not be indicative of full-year results.
