Community Trust Bancorp, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The interim financial statements are unaudited and include normal recurring adjustments. CTBI is a bank holding company headquartered in Pikeville, Kentucky, operating through Community Trust Bank and Community Trust and Investment Company across Kentucky, southern West Virginia, and northeastern Tennessee.
Business Context and Financial Position
- Total assets were $4.03 billion, up $102.0 million, or 10.5% annualized, from December 31, 2016 and up 4.0% from March 31, 2016.
- Total loans were $2.97 billion, up $31.5 million during the quarter and $80.6 million year over year. Growth was concentrated in commercial loans and indirect consumer loans.
- Deposits plus repurchase agreements were approximately $3.42 billion, up $84.9 million during the quarter and $124.0 million year over year.
- Shareholders’ equity was $507.5 million, compared with $500.6 million at year-end 2016 and $485.6 million at March 31, 2016. Tangible common equity to tangible assets was 11.14%.
- Trust assets under management, excluded from consolidated assets, were $2.1 billion.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net interest income | $33.1 million | $33.3 million | Down 0.7% |
| Provision for loan losses | $1.2 million | $1.8 million | Down 30.4% |
| Noninterest income | $11.6 million | $11.0 million | Up 5.5% |
| Noninterest expense | $27.6 million | $26.2 million | Up 5.3% |
| Income before taxes | $15.8 million | $16.3 million | Down 3.0% |
| Net income | $11.3 million | $11.6 million | Down 2.8% |
| Basic and diluted EPS | $0.64 | $0.66 | Down $0.02 |
| Dividends declared per share | $0.32 | $0.31 | Up $0.01 |
- Net interest margin was 3.68%, down 8 basis points year over year. Average earning assets increased 2.3%, but the yield on average earning assets declined 4 basis points to 4.08% while the cost of interest-bearing funds increased 7 basis points to 0.56%.
- Net interest income after provision for loan losses was $31.9 million, compared with $31.6 million in Q1 2016.
- Noninterest income benefited from higher trust and wealth management income and loan-related fees, partly offset by lower gains on loan sales and securities losses.
- Noninterest expense increased primarily due to personnel costs, other real estate owned expense, and data processing expense.
Cash Flow, Liquidity, Debt, and Capital
- Net cash provided by operating activities was $14.6 million, compared with $11.5 million in Q1 2016.
- Investing activities used $42.4 million, primarily due to net loan growth and purchases of available-for-sale securities.
- Financing activities provided $86.1 million, including a $78.5 million increase in deposits and a $13.0 million increase in repurchase agreements, federal funds purchased, and other short-term borrowings.
- Cash and cash equivalents increased to $203.0 million from $144.7 million at December 31, 2016.
- Available-for-sale securities were $605.7 million. Management determined that the $6.0 million of unrealized losses were temporary and driven by interest rates rather than credit deterioration.
- Long-term debt was $61.3 million; Federal Home Loan Bank advances were $0.9 million. Repurchase agreements were $257.5 million and federal funds purchased were $11.4 million.
- Available Federal Home Loan Bank borrowing capacity was approximately $303.7 million, and correspondent-bank lines of credit totaled $57 million.
- Regulatory capital ratios exceeded well-capitalized requirements: common equity Tier 1 capital 15.21%, Tier 1 capital 17.25%, total capital 18.49%, and Tier 1 leverage 12.85%.
Material Changes and Credit Quality
- Nonperforming loans declined to $25.1 million, from $27.5 million at December 31, 2016 and $27.0 million at March 31, 2016.
- Nonperforming assets were $60.8 million, down $2.6 million from year-end 2016 and $5.3 million year over year.
- Nonaccrual loans were $16.5 million, and impaired loans totaled $50.3 million, down from $52.2 million at December 31, 2016 and $59.5 million at March 31, 2016.
- Net loan charge-offs were $1.4 million, or 0.20% of average loans annualized, compared with $1.5 million, or 0.21%, in Q1 2016. Indirect auto loans accounted for approximately $0.8 million of charge-offs.
- The allowance for loan and lease losses was $35.7 million, or 1.20% of total loans. Coverage of nonperforming loans was 142.4%, compared with 130.8% at year-end 2016.
- Other real estate owned was $35.8 million. CTBI recorded $0.5 million of fair-value write-downs in the quarter, and management expects foreclosed properties to remain elevated while current market conditions are addressed.
- Four troubled debt restructurings totaling $425 thousand occurred during the quarter; no charge-offs resulted from the presented modifications.
Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management expects continued loan growth but notes that results depend on economic conditions, credit performance, interest rates, competition, regulation, and market conditions in CTBI’s service areas.
- Interest-rate risk is material. Management estimates that a 200-basis-point increase in the yield curve would increase net interest income by 3.38% over one year and 6.37% over two years; a 25-basis-point decrease would reduce it by 0.22% over one year and 0.38% over two years.
- Key operating risks include elevated unemployment in certain markets, borrower bankruptcies, collateral values, commercial real estate exposure, changing interest rates, liquidity and funding conditions, regulatory requirements, information technology dependence, competition, and possible acquisition or integration issues.
- CTBI believes it may be cited for two alleged unfair or deceptive practices involving deposit add-on products. An accrual was established in 2014 for possible customer reimbursements. No final written notice or reimbursement amount had been received; management did not expect the matter to be material, although the ultimate amount could vary materially from its estimate.
- CTBI plans to early adopt ASU 2017-08 on January 1, 2018. Management expects a $150 thousand reduction in retained earnings and a quarterly amortization expense increase of approximately $24 thousand to $30 thousand.
- Upcoming accounting changes include lease accounting and the current expected credit loss standard. Management expects the lease standard to have a significant impact but had not finalized the amount; the impact of the credit-loss standard was still under evaluation.
- The company adopted share-based payment accounting changes effective January 1, 2017, with no material impact.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Items
- Verify whether loan growth, particularly commercial and indirect auto growth, is sustained without deterioration in delinquency, nonperforming loans, or charge-offs.
- Monitor net interest margin pressure from higher funding costs and changes in market interest rates.
- Assess the valuation and disposition pace of the $35.8 million OREO portfolio, including properties with extended holding periods and pending sales contracts.
- Review the adequacy of the $35.7 million allowance relative to commercial real estate exposure, impaired loans, local economic conditions, and the pending CECL implementation.
- Track unrealized losses in the securities portfolio and the potential effect of interest-rate movements on accumulated other comprehensive income and capital.
- Confirm the ultimate resolution and financial impact of the deposit add-on product matter.
- Evaluate liquidity reliance on deposits, repurchase agreements, federal funds purchased, and available Federal Home Loan Bank capacity.