Community Trust Bancorp, Inc. 2017 Second-Quarter 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 Community Trust and Investment Company. It provides commercial and personal banking, lending, trust, wealth management, brokerage, and related services through 80 banking locations and trust offices in Kentucky, southern West Virginia, and northeastern Tennessee.
This unaudited Form 10-Q covers the three and six months ended June 30, 2017, with comparisons to the three and six months ended June 30, 2016 and balance-sheet comparisons to December 31, 2016. At June 30, 2017, CTBI reported $4.1 billion of assets, $3.4 billion of deposits including repurchase agreements, $514.9 million of shareholders’ equity, and $2.2 billion of trust assets under management.
Financial Performance and Key Metrics
| Metric | Q2 2017 | Q2 2016 | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|
| Total interest income | $38.4 million | $36.4 million | $75.2 million | $72.9 million |
| Net interest income | $34.2 million | $33.1 million | $67.3 million | $66.4 million |
| Provision for loan losses | $2.8 million | $1.9 million | $4.0 million | $3.6 million |
| Noninterest income | $12.3 million | $11.8 million | $23.9 million | $22.7 million |
| Noninterest expense | $27.6 million | $27.2 million | $55.2 million | $53.4 million |
| Net income | $11.5 million | $11.6 million | $22.8 million | $23.2 million |
| Diluted EPS | $0.65 | $0.66 | $1.29 | $1.32 |
| Net interest margin | 3.68% | Not separately provided | 3.68% | 3.74% |
- Q2 net interest income increased 3.6% year over year, supported by higher average earning assets. The net interest margin was flat sequentially but declined three basis points year over year.
- Q2 net income declined slightly year over year despite higher net interest and noninterest income, primarily because of higher loan-loss provision and other real estate owned expense.
- Six-month net income declined 1.5% year over year. Net interest income rose 1.4%, noninterest income rose 5.1%, and noninterest expense rose 3.3%.
- Q2 net charge-offs were $1.3 million, or 0.18% of average loans on an annualized basis, compared with $2.5 million, or 0.34%, in Q2 2016. Six-month net charge-offs were $2.8 million, or 0.19% of average loans.
- The allowance for loan and lease losses was $37.1 million, equal to 1.20% of total loans and 132.6% of nonperforming loans.
Balance Sheet, Liquidity, Debt, and Capital
| Balance-sheet item | June 30, 2017 | December 31, 2016 | Change |
|---|---|---|---|
| Total assets | $4.081 billion | $3.932 billion | +$148.9 million |
| Total loans | $3.087 billion | $2.938 billion | +$149.0 million |
| Net loans | $3.050 billion | $2.902 billion | +$147.8 million |
| Total deposits | $3.106 billion | $3.081 billion | +$24.3 million |
| Repurchase agreements | $257.2 million | $251.1 million | +$6.1 million |
| Cash and cash equivalents | $127.8 million | $144.7 million | -$16.9 million |
| FHLB advances | $100.9 million | $0.9 million | +$99.9 million |
| Long-term debt | $59.3 million | $61.3 million | -$2.0 million |
| Shareholders’ equity | $514.9 million | $500.6 million | +$14.3 million |
- Loan growth was strong, increasing 5.1% from year-end and 15.9% on an annualized sequential-quarter basis. Commercial loans increased 6.6% from year-end, and consumer loans increased 7.0%, led by indirect lending.
- Deposits including repurchase agreements increased $30.4 million from year-end but declined $54.5 million during the second quarter.
- Liquidity included $127.8 million of cash and cash equivalents and $610.4 million of available-for-sale securities. Available Federal Home Loan Bank borrowing capacity was approximately $217.4 million, and correspondent-bank lines of credit totaled $57 million.
- Operating cash flow was $29.1 million for the first six months. Investing activities used $166.7 million, primarily because net loan growth used $151.6 million. Financing activities provided $120.8 million, including $100 million of FHLB borrowings. Ending cash declined $16.9 million.
- CTBI reported Basel III common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios of 14.91%, 16.81%, 18.05%, and 12.72%, respectively, and stated that it remained well-capitalized.
Material Changes Versus Comparable Periods
- Loan growth increased net interest income but also contributed to a $0.9 million year-over-year increase in the Q2 provision for loan losses and a $1.5 million increase from the first quarter.
- Noninterest income benefited from a $0.6 million gain on the repurchase of $2.0 million of trust preferred securities. Trust and wealth management income and loan-related fees also increased, while gains on loan sales declined.
- Noninterest expense increased primarily because of other real estate owned expense. Q2 included approximately $1.4 million of OREO fair-value adjustments, including $1.3 million of write-downs on 20 properties.
- Nonperforming loans increased to $28.0 million from $27.5 million at year-end and $25.1 million at March 31, 2017. Nonperforming assets were $60.7 million, down from $63.4 million at year-end.
- Other real estate owned declined to $32.8 million from $35.9 million at year-end, but related six-month write-downs increased to $2.0 million from $0.2 million in the prior-year period.
- Accumulated other comprehensive loss improved to $0.5 million from $2.3 million at year-end, primarily reflecting changes in unrealized available-for-sale securities gains and losses.
Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects foreclosed properties to remain elevated while it works through current market conditions.
- Management identified economic conditions in its service areas, unemployment, interest-rate movements, credit performance, collateral values, competition, regulatory changes, technology dependence, acquisitions, legal matters, and financial-market volatility as material risks.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 2.76% over one year and 4.48% over two years. A 25-basis-point decrease was estimated to reduce net interest income by 0.16% over one year and 0.22% over two years.
- Available-for-sale securities had $4.7 million of gross unrealized losses at June 30, 2017. Management considered the declines temporary and interest-rate-driven rather than credit-related.
- CTB must reimburse customers related to two deposit add-on products. The filing states that the timing and amount remain undetermined and that the ultimate amount could materially vary from management’s estimate.
- CTBI plans to early adopt the accounting update for premium amortization on purchased callable debt securities on January 1, 2018. Management expects an approximately $150 thousand reduction in retained earnings and a quarterly amortization expense increase of $24 thousand to $30 thousand.
- Management expects the future leases standard to have a significant effect, but the filing does not provide a quantified estimate. The company is also evaluating the future expected-credit-loss standard.
- The board declared a quarterly dividend of $0.33 per share on July 25, 2017, payable October 1, 2017, representing a 3.1% increase from the prior quarterly dividend.
- The financial statements are unaudited and interim results are not necessarily indicative of full-year results. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether rapid loan growth remains sustainable without further increases in nonperforming loans, provisions, or charge-offs.
- The composition and performance of commercial real estate, indirect auto, and other higher-growth loan segments.
- The amount, timing, and final resolution of customer reimbursements related to the deposit add-on products.
- Future OREO valuations, sales activity, regulatory holding-period approvals, and potential additional write-downs.
- The effect of interest-rate changes on net interest margin, funding costs, deposit balances, and liquidity.
- Implementation impacts from the leases, expected-credit-loss, revenue-recognition, and callable-debt-security accounting standards.
- Whether reported capital ratios remain above well-capitalized thresholds as assets and borrowings continue to grow.