Community Trust Bancorp, Inc. — 2018 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 8, 2018. Condensed consolidated financial statements are unaudited and include normal recurring adjustments. CTBI is a bank holding company headquartered in Pikeville, Kentucky, operating Community Trust Bank and a trust company across Kentucky, southern West Virginia, and northeastern Tennessee.
Business Context and Financial Position
- Total assets were $4.17 billion, compared with $4.14 billion at December 31, 2017.
- Loans totaled $3.18 billion, up $54.9 million, or 1.8%, from year-end 2017.
- Total deposits were $3.27 billion; deposits plus repurchase agreements were approximately $3.5 billion.
- Shareholders’ equity was $550.3 million, up from $530.7 million at year-end 2017. Tangible common equity to tangible assets was 11.80%.
- Trust assets under management, excluded from consolidated assets, were $2.2 billion.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net interest income | $36.1 million, up 3.3% year over year | $105.9 million, up 3.5% |
| Provision for loan losses | $1.5 million, versus $0.7 million | $4.4 million, versus $4.7 million |
| Noninterest income | $12.7 million, up 3.8% | $39.7 million, up 10.0% |
| Noninterest expense | $28.1 million, up 4.4% | $89.2 million, up 8.6% |
| Income before taxes | $19.2 million, versus $19.6 million | $51.9 million, versus $51.6 million |
| Net income | $16.1 million, up 17.0% | $43.5 million, up 19.0% |
| Basic earnings per share | $0.91, versus $0.78 | $2.46, versus $2.08 |
| Dividends declared per share | $0.36, versus $0.33 | $1.02, versus $0.97 |
- The nine-month effective tax rate was approximately 16%, compared with 28% in the prior-year period, primarily reflecting the reduction in the federal corporate tax rate to 21% and the use of tax-exempt investments, loans, bank-owned life insurance, and low-income housing projects.
- For the nine-month period, tax-equivalent yield on average earning assets was 4.34%, cost of interest-bearing funds was 0.97%, and net interest margin was 3.65%, down three basis points from the prior year.
- Net cash provided by operating activities was $52.0 million. Investing activities used $49.8 million and financing activities used $6.1 million, resulting in a $3.9 million decrease in cash and cash equivalents to $171.3 million.
- Available-for-sale securities were $569.2 million. Management considered the $14.4 million of gross unrealized losses to be temporary and primarily caused by interest-rate increases rather than credit deterioration.
- Long-term debt was $59.3 million. Repurchase agreements were $251.0 million, and Federal Home Loan Bank advances were $0.8 million.
Material Changes Versus Comparable Periods
- Third-quarter net income increased $2.3 million from the prior year, while nine-month net income increased $6.9 million.
- Net interest income benefited from a $130.1 million increase in average earning assets and a 21-basis-point increase in asset yields, partially offset by a 34-basis-point increase in funding costs.
- Noninterest income increased due mainly to higher deposit service charges, trust revenue, loan-related fees, and bank-owned life insurance income. Securities activity changed from a $58 thousand gain in the prior-year nine-month period to a $288 thousand loss in 2018, including a $436 thousand loss on the sale of CRA investment funds.
- Noninterest expense rose $7.1 million year to date, including a $3.6 million customer reimbursement accrual and higher personnel costs.
- Third-quarter noninterest income declined sequentially by $1.1 million because the second quarter included a $1.0 million gain on the sale of a partnership interest related to a low-income housing tax credit recapture. Third-quarter noninterest expense declined sequentially by $4.3 million because the second quarter included the customer reimbursement accrual.
- Loans grew most notably in indirect consumer lending, residential lending, and consumer direct lending, while commercial loans declined modestly from year-end.
Credit Quality, Liquidity, Capital, and Outlook
- Nonperforming loans were $21.0 million, or 0.66% of total loans, down from $28.3 million, or 0.91%, at December 31, 2017. Nonperforming assets were $50.8 million, down $9.7 million from year-end.
- The allowance for loan and lease losses was $35.8 million, or 1.13% of total loans, providing 170.1% coverage of nonperforming loans. Nine-month net charge-offs were $4.8 million, or 0.20% of average loans.
- Other real estate owned was $29.7 million, down from $32.0 million at year-end. Management expects foreclosed properties to remain elevated while it works through current market conditions. Third-quarter OREO valuation charges were $0.7 million; nine-month charges were $2.0 million.
- Liquidity included $171.3 million of cash and cash equivalents and $569.2 million of available-for-sale securities. CTBI reported $352.3 million of available Federal Home Loan Bank borrowing capacity and $57 million of correspondent-bank credit lines, including a $12 million line not intended for renewal after November 30, 2018.
- Wholesale brokered deposits declined to $42.3 million from $82.3 million at year-end. The filing states that CTBI does not rely on any single liquidity source.
- At September 30, 2018, regulatory capital ratios were 16.08% common equity Tier 1, 17.94% Tier 1, 19.11% total capital, and 13.37% Tier 1 leverage. Management stated that CTBI and its bank subsidiary were well capitalized and expected to remain above applicable requirements.
- The filing provides no formal earnings or revenue guidance. Management’s outlook is subject to economic conditions, interest rates, credit performance, competition, regulation, technology dependence, acquisitions, legal matters, and conditions in CTBI’s Kentucky, West Virginia, and Tennessee markets.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 5.96% over one year and 10.95% over two years; a 200-basis-point decrease would reduce it by 4.86% and 8.49%, respectively.
- CTBI adopted several accounting updates in 2018 without material impact. Implementation work continued for the leases standard and the current expected credit loss standard, which was effective for CTBI after December 31, 2019 unless early adopted.
Most Important Facts for Investors to Verify
- Whether loan growth, particularly in indirect consumer lending, remains consistent with underwriting standards and whether charge-offs or delinquencies increase.
- The sustainability of earnings improvement after isolating the lower tax rate and unusual items, including the customer reimbursement accrual, partnership-interest gain, and CRA investment fund loss.
- Changes in net interest margin as deposit and wholesale funding costs rise with interest rates.
- The valuation and disposition pace of the $29.7 million OREO portfolio, including properties held for extended periods and recurring appraisal-related write-downs.
- The impact of unrealized losses on the securities portfolio if interest rates rise further or liquidity needs require securities sales.
- Implementation effects of the forthcoming leases and expected-credit-loss accounting standards, including potential changes to reserves, capital, and reported earnings.
- The filing reports no legal proceedings or separately identified risk-factor updates, but management’s forward-looking risks include regional economic weakness, unemployment, interest-rate volatility, regulatory changes, technology disruptions, competition, and legal or acquisition-related matters.