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 company provides commercial and consumer banking, mortgage, trust, wealth management, brokerage, and related services through 80 banking locations and trust offices. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, with comparisons to September 30, 2015 and balance-sheet comparisons to December 31, 2015.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net income | $12.3 million, compared with $11.2 million | $35.5 million, compared with $34.6 million |
| Basic and diluted EPS | $0.70, compared with $0.64 | $2.02, compared with $1.98 |
| Net interest income | $33.2 million, compared with $33.0 million | $99.6 million, compared with $99.1 million |
| Provision for loan losses | $2.2 million, compared with $2.5 million | $5.8 million, compared with $6.7 million |
| Noninterest income | $13.2 million, compared with $12.0 million | $35.9 million, compared with $35.0 million |
| Noninterest expense | $26.7 million, compared with $27.5 million | $80.1 million, compared with $79.7 million |
| Net interest margin | Not separately stated in the filing tables; management reported an 11-basis-point year-over-year decline | 3.71%, compared with 3.84% |
| Net cash provided by operating activities | $53.1 million, compared with $38.4 million |
Total assets were $3.93 billion at September 30, 2016, compared with $3.90 billion at December 31, 2015. Loans were $2.93 billion, up 2.0% from year-end, while securities increased to $632.4 million from $596.6 million. Total deposits were $3.05 billion and repurchase agreements were $262.3 million. Shareholders’ equity was $500.1 million, compared with $475.6 million at year-end.
Cash and cash equivalents declined to $121.2 million from $187.6 million at December 31, 2015, primarily as cash was redeployed into securities and loan growth. Available-for-sale securities totaled $631.2 million and were available for liquidity needs. Federal Home Loan Bank advances declined to $1.0 million from $101.1 million, while available FHLB borrowing capacity increased to approximately $292.0 million. The company also had $57 million of correspondent-bank lines of credit.
The allowance for loan and lease losses was $35.8 million, or 1.22% of total loans, providing 126.5% coverage of nonperforming loans. Nine-month net charge-offs were $6.1 million, or 0.28% of average loans. Nonperforming loans were $28.3 million, nonperforming assets were $66.1 million, and other real estate owned was $37.7 million at September 30, 2016.
Material Changes Versus Prior Comparable Period
- Third-quarter net income increased 9.7% and nine-month net income increased 2.7% year over year. EPS increased to $0.70 for the quarter and $2.02 year to date.
- Net interest income increased modestly despite margin pressure from the low-rate environment. The nine-month net interest margin fell 13 basis points to 3.71%, as asset yields declined and funding costs increased.
- The provision for loan losses declined 13.5% year to date, although nonperforming loans increased $3.6 million from June 30, 2016.
- Third-quarter noninterest income increased 9.6%, supported by higher deposit service charges, trust revenue, loan-related fees, loan-sale gains, and securities gains. Nine-month noninterest income increased 2.7%.
- Third-quarter noninterest expense declined 3.1%, but nine-month expense increased 0.6%, primarily because of higher personnel, medical and life-insurance costs.
- Loans grew $57.3 million from year-end, led by consumer indirect loans, which increased 11.6%; commercial construction loans declined 12.5% and equipment lease financing declined 26.7%.
- Commercial credit risk remained concentrated in commercial real estate, with $1.08 billion of commercial loans secured by real estate. Total impaired loans increased to $55.0 million from $49.9 million at December 31, 2015.
- Other real estate owned declined $3.0 million from year-end, although management expects foreclosed properties to remain elevated while local market conditions are addressed.
- Accumulated other comprehensive income increased to $4.4 million from $1.0 million, primarily reflecting changes in unrealized available-for-sale securities gains and losses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects continued pressure on net interest margin from the extended low-interest-rate environment and notes that actual results will depend on interest rates, loan growth, credit performance, competition, economic conditions, regulation, technology, and legal matters.
Management stated that regional economic conditions, including elevated unemployment and weakness in the coal industry affecting parts of the company’s service area, could adversely affect borrowers, collateral values, loan demand, and credit quality. Interest-rate risk is material: the company estimates that a 200-basis-point increase in the yield curve would increase net interest income by 2.78% over one year and 4.52% over two years, while a 25-basis-point decrease would reduce net interest income by 0.22% over one year and 0.01% over two years.
Third-quarter securities gains were $458 thousand, compared with $12 thousand in the prior-year quarter. The company recorded $0.4 million of other real estate owned valuation adjustments during the quarter. All identified investment-security impairments were considered temporary and interest-rate driven rather than credit-related.
CTBI reported Basel III common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios of 14.97%, 17.05%, 18.30%, and 12.69%, respectively, and stated that it remained well capitalized. The company declared dividends of $0.32 per share for the quarter and had 67,371 shares remaining under its repurchase authorization, although it had not repurchased shares under the program since February 2008.
The company adopted several accounting updates without a material effect. It was evaluating the future impact of the new lease standard and the expected-credit-loss standard, with the latter effective for SEC filers beginning in 2020. Management reported effective disclosure controls, no material changes in internal control over financial reporting, and no legal proceedings or separately disclosed risk factors for the period.
Important Facts for Investors to Verify
- Whether the increase in nonperforming loans and impaired loans is temporary or signals further deterioration in commercial real estate and other commercial portfolios.
- The adequacy of the $35.8 million allowance as the company transitions to the future expected-credit-loss model.
- The sustainability of the 3.71% net interest margin amid potential changes in interest rates, deposit costs, asset yields, and loan mix.
- The valuation and liquidation prospects of $37.7 million of other real estate owned, including properties held more than five years.
- The quality and duration of the $631.2 million available-for-sale securities portfolio and the potential effect of interest-rate movements on accumulated other comprehensive income and capital.
- Whether consumer indirect-loan growth and commercial real estate exposure produce higher future charge-offs than indicated by current reserve coverage.
- The effect of regional economic weakness, including coal-industry conditions, on borrowers and collateral values in the company’s markets.
- The filing’s unaudited interim results, which management states are not necessarily indicative of full-year results.