Community Trust Bancorp, Inc. 2018 Q1 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 months ended March 31, 2018, compared primarily with the three months ended March 31, 2017 and December 31, 2017. CTBI reported 80 banking locations, approximately $4.2 billion of assets, $3.6 billion of deposits and repurchase agreements, $537.5 million of shareholders’ equity, and $2.2 billion of trust assets under management at March 31, 2018.
Financial performance and key metrics
| Metric | Q1 2018 | Comparable period | Change |
|---|---|---|---|
| Net interest income | $34.6 million | $33.1 million | Up 4.5% year over year |
| Provision for loan losses | $0.9 million | $1.2 million | Down 23.0% year over year |
| Noninterest income | $13.3 million | $11.6 million | Up 14.9% year over year |
| Noninterest expense | $28.7 million | $27.6 million | Up 3.8% year over year |
| Income before taxes | $18.3 million | $15.8 million | Up 15.7% year over year |
| Net income | $15.8 million | $11.3 million | Up 40.2% year over year |
| Diluted EPS | $0.89 | $0.64 | Up $0.25 |
| Dividends declared per share | $0.33 | $0.32 | Up $0.01 |
- Tax-equivalent net interest margin was 3.65%, compared with 3.68% in Q1 2017. Average earning assets increased 4.5%, while the cost of interest-bearing funds rose to 0.87% from 0.56%.
- The reported effective tax rate was approximately 13.5%, versus approximately 28.6% in Q1 2017. Management expects a full-year effective tax rate of 13% to 17% following the reduction in the federal corporate tax rate.
- Net charge-offs were $1.9 million, or 0.25% of average loans on an annualized basis. The allowance for loan and lease losses was $35.2 million, or 1.13% of loans, and provided 135.6% coverage of nonperforming loans.
- Loans totaled $3.12 billion, down $4.7 million from year-end 2017 but up $148.4 million, or 5.0%, from March 31, 2017. Deposits and repurchase agreements totaled approximately $3.56 billion, up $56.8 million from year-end.
- Nonperforming loans were $25.9 million, or 0.83% of total loans; nonperforming assets were $58.1 million. Impaired loans totaled $48.2 million and other real estate owned totaled $32.0 million.
- Cash and cash equivalents were $194.5 million, and available-for-sale securities were $604.9 million. Long-term debt was $59.3 million, repurchase agreements were $244.8 million, and Federal Home Loan Bank advances were $0.8 million.
- Shareholders’ equity increased to $537.5 million. Tangible common equity to tangible assets was 11.43%; reported regulatory capital ratios exceeded well-capitalized requirements.
- Net cash used in operating activities was $12.6 million, net cash used in investing activities was $19.5 million, and net cash provided by financing activities was $51.3 million. Cash and cash equivalents increased $19.2 million to $194.5 million.
Material changes versus comparable periods
- Net income benefited from higher net interest income, stronger noninterest income, lower loan-loss provision expense, and the lower corporate tax rate.
- Noninterest income included a $1.2 million increase in bank-owned life insurance revenue resulting from death benefits, partly offset by $0.3 million of securities losses, including a $0.4 million loss on the sale of CRA investment funds.
- Noninterest expense increased because of personnel costs, bank franchise taxes, operating losses, other real estate owned expense, and repossession expense.
- The investment portfolio increased $19.1 million from year-end, while unrealized after-tax losses in accumulated other comprehensive income increased to $7.5 million from $3.5 million. Management considered the securities’ unrealized losses temporary and interest-rate driven rather than credit-related.
- Nonperforming loans and nonperforming assets declined from December 31, 2017, while nonperforming loans increased modestly from March 31, 2017. Net charge-offs were higher than in Q1 2017 but lower than in Q4 2017.
- CTBI adopted ASU 2016-01, ASC 606 and ASU 2016-15 effective January 1, 2018, generally with no material impact on reported results. The company also adopted ASU 2017-08, which increased quarterly amortization expense by approximately $27,000.
Guidance, outlook, risks and unusual items
- Management expects a 13% to 17% effective tax rate for full-year 2018. No broader earnings, revenue or loan-growth guidance was provided.
- Interest-rate risk remains significant. CTBI estimated that a 200-basis-point increase in the yield curve would increase net interest income by 3.31% over one year, while a 100-basis-point decrease would reduce it by 1.26% over one year.
- Liquidity included $347.6 million of available Federal Home Loan Bank borrowing capacity, $57 million of correspondent-bank lines of credit, and $82.3 million of wholesale brokered deposits. Management stated that it does not rely on a single liquidity source.
- Management expects foreclosed properties to remain elevated while it works through current market conditions. First-quarter OREO valuation adjustments were $0.5 million, and regulatory approval may be required for properties held beyond applicable time limits.
- CTBI is implementing the current expected credit loss standard, ASU 2016-13, which is effective for the company after December 15, 2019. Initial data analysis began in Q1 2018; the filing does not provide a quantified implementation impact.
- CTBI stated that it may be required to reimburse customers relating to two deposit add-on products. The timing and amount remain undetermined, and the ultimate amount may materially differ from management’s current estimate.
- Principal risks include economic conditions in the company’s regional markets, credit performance and collateral values, interest-rate changes, competition, regulatory changes, technology dependence, acquisitions, legal matters, and potential changes in monetary or fiscal policy.
Important facts for investors to verify
- Confirm the sustainability of the $15.8 million quarterly earnings level, particularly the $1.2 million bank-owned life insurance benefit and the benefit from the lower tax rate.
- Monitor deposit pricing and funding costs, which increased materially as interest-bearing funding costs rose, and assess the effect on the 3.65% net interest margin.
- Review trends in nonperforming loans, net charge-offs, criticized commercial credits, OREO balances and valuation adjustments.
- Assess the potential effect of ASU 2016-13 on the allowance for credit losses and capital when implemented.
- Evaluate exposure to interest-rate-driven unrealized securities losses, liquidity needs, repurchase agreements and pledged collateral.
- Determine the eventual amount and timing of customer reimbursements related to the deposit add-on products.
- Verify regulatory capital ratios and dividend capacity if credit losses, interest rates or liquidity conditions deteriorate.