Community Trust Bancorp, Inc. — 2011 Q2 Form 10-Q Summary
Business Context and Reporting Period
Community Trust Bancorp, Inc. (CTBI), headquartered in Pikeville, Kentucky, is a bank holding company operating a commercial bank and trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited quarter and six months ended June 30, 2011, compared primarily with the same periods in 2010 and December 31, 2010. CTBI reported 80 banking locations, four trust offices, $3.5 billion of assets, and $3.0 billion of deposits including repurchase agreements at quarter-end.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net income | $9.0 million, versus $8.6 million | $18.3 million, versus $15.3 million |
| Basic EPS | $0.59, versus $0.56 | $1.19, versus $1.01 |
| Net interest income | $32.9 million, versus $29.3 million | $65.5 million, versus $58.6 million |
| Provision for loan losses | $3.3 million, versus $3.1 million | $7.7 million, versus $8.8 million |
| Noninterest income | $10.6 million, versus $9.5 million | $21.3 million, versus $19.3 million |
| Noninterest expense | $27.1 million, versus $23.7 million | $53.7 million, versus $47.1 million |
| Net interest margin | 4.17%, versus 4.00% | 4.22%, versus 4.10% |
| Return on average assets | 1.03%, versus 1.06% | 1.07%, versus 0.98% |
| Return on average equity | 10.23%, versus 10.40% | 10.59%, versus 9.44% |
- Comprehensive income was $11.9 million for the quarter and $21.9 million year-to-date, including unrealized after-tax gains on available-for-sale securities.
- Efficiency ratio was 61.91% for the quarter and 61.34% year-to-date.
- Dividends declared were $0.305 per share for the quarter and $0.61 per share year-to-date. Book value per share was $22.87.
- Total assets were $3.485 billion, compared with $3.356 billion at December 31, 2010. Shareholders’ equity was $352.3 million, compared with $338.6 million at year-end.
- Loans were $2.580 billion, down $24.7 million from year-end. Net loans were $2.545 billion after a $35.2 million allowance for loan losses.
- Available-for-sale securities increased to $456.8 million from $338.7 million at year-end, reflecting deployment of excess liquidity into the investment portfolio.
- Cash and cash equivalents were $183.3 million, up from $159.0 million at year-end. Six-month operating cash flow was $35.8 million; investing activities used $106.1 million, primarily for securities purchases; financing activities provided $94.7 million.
- Total deposits were $2.781 billion, and repurchase agreements were $212.3 million. Long-term debt was $61.3 million, while Federal Home Loan Bank advances were $21.7 million.
- CTBI's Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.89%, 13.36%, and 14.62%, respectively, above regulatory well-capitalized thresholds.
Material Changes Versus Comparable Periods
- Six-month net income increased 19.1%, supported by higher net interest income and noninterest income and a lower loan-loss provision.
- Quarterly net interest income increased 12.3% year over year, although the net interest margin declined from 4.27% in the first quarter of 2011 to 4.17% in the second quarter.
- Management attributed margin pressure to a shift from loans toward securities as deposit growth exceeded loan growth. The cost of interest-bearing funds declined substantially because of repricing of certificates of deposit.
- Quarterly noninterest income increased 11.0% year over year, driven primarily by deposit service charges, trust revenue, and improved mortgage servicing-rights valuation adjustments.
- Quarterly noninterest expense increased 14.8% year over year, reflecting higher personnel costs, repossession expense, other real estate owned costs, and certain investment-related expenses.
- Nonaccrual loans declined to $32.8 million from $45.0 million at December 31, 2010, but accruing loans 90 days or more past due increased to $26.8 million from $17.0 million. Total nonperforming loans were $59.6 million, down from $62.0 million at year-end but up from $57.4 million at March 31, 2011.
- Net quarterly charge-offs were $3.3 million, or 0.52% of average loans annualized, versus $1.8 million, or 0.30%, in the second quarter of 2010. The allowance-to-loans ratio was 1.36%, compared with 1.48% a year earlier.
- Other real estate owned increased to $46.8 million from $42.9 million at year-end. CTBI recorded $2.1 million of year-to-date fair-value adjustments on foreclosed properties, including $1.7 million in the second quarter.
- Available-for-sale securities had $11.6 million of excess market value over amortized cost at June 30, 2011, and management considered identified impairments temporary, market-driven, and not credit-related.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- No formal earnings or revenue guidance was provided.
- Management expects foreclosed properties to remain elevated while current market conditions are addressed. Nonperforming loans and foreclosed properties remain concentrated primarily in the Central Kentucky region.
- Management identified ongoing risks from economic weakness, real estate and collateral-value volatility, credit performance, interest-rate movements, liquidity and capital conditions, competition, regulation, technology dependence, acquisitions, and legal matters.
- Interest-rate sensitivity modeling indicated that a 200-basis-point increase in the yield curve would reduce estimated net interest income by 0.13% over one year and 2.25% over two years. A 25-basis-point decrease was estimated to reduce one-year net interest income by 0.04% and increase two-year net interest income by 0.30%.
- CTBI had $265.4 million of remaining FHLB borrowing capacity, a $12 million corporate credit line fully available, and up to $20 million of unsecured correspondent-bank federal funds availability.
- The $61.3 million junior subordinated debt carries a fixed 6.52% rate until June 1, 2012, after which it converts to a floating rate based on three-month LIBOR plus 1.59%.
- CTBI announced an increase in the quarterly dividend to $0.31 per share, payable October 1, 2011, to shareholders of record September 15, 2011.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting. The filing reported no legal proceedings, risk-factor updates, defaults, or unregistered securities sales.
- Adoption of several new accounting standards was disclosed; management did not expect the identified pending standards to have a material effect on financial position or results of operations.
Most Important Facts for Investors to Verify
- Confirm the trend in nonperforming loans, 90-plus-day accruing loans, impaired loans, troubled debt restructurings, and other real estate owned.
- Assess whether the $35.2 million allowance remains adequate relative to commercial real estate exposure, charge-offs, collateral values, and the $65.1 million of impaired loans.
- Monitor the effect of continued securities growth and slower loan growth on net interest margin, interest-rate risk, and earnings quality.
- Review the sustainability of higher noninterest expense, including personnel, repossession, and foreclosed-property valuation costs.
- Evaluate liquidity availability, deposit stability, repurchase-agreement exposure, FHLB capacity, and the June 2012 repricing or refinancing implications of subordinated debt.
- Verify the sensitivity of mortgage servicing rights and available-for-sale securities to interest rates, prepayment speeds, market liquidity, and fair-value assumptions.
- Reconcile dividend increases with retained earnings, regulatory capital ratios, and the subsidiary bank’s capacity to upstream dividends without prior regulatory approval.