Community Trust Bancorp, Inc. — Q2 2019 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. The interim financial statements are unaudited and include normal recurring adjustments. CTBI 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. It reported 79 banking locations, total assets of $4.4 billion, deposits including repurchase agreements of $3.7 billion, and trust assets under management of $2.1 billion.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $36.0 million | $35.1 million | $72.0 million | $69.7 million |
| Provision for loan losses | $1.6 million | $1.9 million | $1.8 million | $2.9 million |
| Noninterest income | $12.3 million | $13.7 million | $24.4 million | $27.1 million |
| Noninterest expense | $30.0 million | $32.4 million | $59.1 million | $61.1 million |
| Net income | $18.3 million | $11.6 million | $33.3 million | $27.4 million |
| Basic and diluted EPS | $1.03 | $0.66 | $1.88 | $1.55 |
| Comprehensive income | $23.2 million | $10.2 million | $42.9 million | $21.5 million |
- Margins: Six-month tax-equivalent net interest margin was 3.63%, unchanged from the prior-year period. Q2 net interest margin was 3.57%, down 4 basis points year over year and 13 basis points sequentially. Q2 yield on average earning assets rose 32 basis points year over year, while cost of funds increased 52 basis points.
- Balance sheet: Assets were $4.377 billion versus $4.202 billion at December 31, 2018. Loans were $3.192 billion, down $16.4 million, or 0.5%, from year-end. Deposits were $3.437 billion and repurchase agreements were $233.2 million.
- Liquidity: Cash and cash equivalents were $321.6 million, compared with $141.5 million at year-end. Available-for-sale securities were $591.6 million. CTBI reported $341.3 million of available Federal Home Loan Bank borrowing capacity and $45 million of correspondent-bank credit lines.
- Debt and funding: Long-term debt was $59.3 million; Federal Home Loan Bank advances were $0.4 million; and federal funds purchased were $3.9 million. Wholesale brokered deposits were $42.3 million.
- Capital: Shareholders’ equity was $594.7 million. Common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios were 16.83%, 18.67%, 19.80%, and 13.61%, respectively; management stated CTBI remained well capitalized.
- Cash flow: Six-month operating cash flow was $21.6 million, investing cash flow was $36.4 million, and financing cash flow was $122.2 million, producing a $180.2 million increase in cash and cash equivalents.
Material changes versus comparable periods
- Q2 net income increased 58.0% from Q2 2018; six-month net income increased 21.3%. The second quarter benefited from a $3.6 million tax benefit, or approximately $0.21 per share, related to reversal of a valuation allowance after Kentucky legislation permitted combined state tax filing and use of certain net operating losses.
- Six-month net interest income increased 3.3%, while the provision for loan losses declined 39.0%. Noninterest income decreased 9.7%, primarily because Q2 2018 included a gain on sale of a partnership interest and 2019 had lower loan-related fees and other operating revenue.
- Noninterest expense declined 3.3% for the first six months, partly because Q2 2018 included a $3.6 million customer-reimbursement accrual. Personnel costs increased year over year.
- Net loan charge-offs were $1.6 million in Q2, or 0.20% of average loans annualized, versus $1.3 million, or 0.17%, in Q2 2018. Six-month net charge-offs declined to $2.7 million from $3.3 million.
- Nonperforming loans were $24.0 million, or 0.75% of total loans, compared with $22.1 million at December 31, 2018. The allowance for loan losses was $35.0 million, equal to 1.10% of loans and 146.0% of nonperforming loans.
- Other real estate owned declined to $22.5 million from $27.3 million at year-end, although Q2 included $0.7 million of valuation charges. Management expects foreclosed properties to remain elevated while it works through current market conditions.
- Accumulated other comprehensive income improved to $3.1 million from a $6.6 million loss at year-end, primarily due to higher unrealized gains on available-for-sale securities.
Guidance, outlook, risks, and unusual items
- No formal earnings or revenue guidance was provided. Management reported record Q2 earnings and expects to continue managing liquidity, capital, credit quality, and interest-rate exposure within policy limits.
- CTBI adopted the new lease standard on January 1, 2019, recording approximately $15.5 million of right-of-use assets, $16.1 million of lease liabilities, and a $0.5 million cumulative-effect adjustment to retained earnings.
- CTBI is preparing for adoption of the current expected credit loss standard, ASU 2016-13. Management planned to begin parallel model operation in the third quarter of 2019; the filing does not provide a clear estimate of the eventual earnings or capital impact.
- Interest-rate risk is material. Management estimated that a 200-basis-point yield-curve increase would raise net interest income by 5.87% over one year and 8.52% over two years; a 200-basis-point decrease would reduce it by 5.82% and 9.42%, respectively.
- LIBOR is scheduled to cease publication after 2021. CTBI identified approximately $29.0 million of variable-rate loans, $21.2 million of available-for-sale securities, and $59.3 million of LIBOR-linked debentures with exposure to the transition.
- Credit risk is concentrated in the company’s regional markets and commercial real estate portfolio. Economic weakness, unemployment, collateral values, bankruptcies, interest rates, and competition could adversely affect results.
- Available-for-sale securities had $2.5 million of unrealized losses at June 30, 2019. Management considered the losses temporary and interest-rate driven rather than credit-related.
- The board declared a quarterly dividend of $0.38 per share on July 23, 2019, payable October 1, 2019, a 5.6% increase from the prior quarterly dividend. No legal proceedings were reported, and management concluded disclosure controls were effective.
Investor verification checklist
- Verify the sustainability of Q2 earnings excluding the $3.6 million tax benefit and other fair-value or unusual items.
- Monitor net interest margin pressure from rising funding costs and the disclosed interest-rate sensitivities.
- Review trends in nonperforming loans, 30-to-89-day delinquencies, impaired loans, charge-offs, and commercial real estate exposure.
- Assess potential implementation effects of CECL, including any future change in reserves, earnings, and regulatory capital.
- Track liquidation and valuation of other real estate owned, including properties held for extended periods and the 10-year disposition requirement.
- Confirm progress and contractual outcomes for the LIBOR transition, including the $59.3 million of LIBOR-linked debentures.
- Evaluate liquidity dependence on deposits, repurchase agreements, brokered deposits, and available Federal Home Loan Bank capacity.