Community Trust Bancorp, Inc. — 2012 Q2 Form 10-Q Summary
Business context and reporting period
Community Trust Bancorp, Inc. is a Kentucky-based bank holding company operating through a commercial bank and trust company. It had 80 banking locations and trust offices across Kentucky, southern West Virginia, and northeastern Tennessee. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, with comparisons to the corresponding 2011 periods and December 31, 2011 balance-sheet data.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Net interest income | $32.3 million | $32.9 million | $65.3 million | $65.5 million |
| Net interest margin | 3.93% | 4.17% | Not separately stated | Not separately stated |
| Noninterest income | $12.0 million | $10.6 million | $23.2 million | $21.3 million |
| Noninterest expense | $24.1 million | $27.1 million | $49.9 million | $53.7 million |
| Provision for loan losses | $2.4 million | $3.3 million | $3.6 million | $7.7 million |
| Net income | $12.2 million | $9.0 million | $24.1 million | $18.3 million |
| Basic diluted earnings per share | $0.79 / $0.79 | $0.59 / $0.58 | $1.56 / $1.56 | $1.19 / $1.19 |
- Total assets were $3.64 billion at June 30, 2012, up $44.5 million, or 1.2%, from year-end 2011.
- Total loans were $2.55 billion, down 0.4% from year-end; net loans were $2.51 billion after a $33.1 million allowance for loan losses.
- Deposits were $2.94 billion. Deposits plus repurchase agreements totaled approximately $3.14 billion.
- Cash and cash equivalents were $188.4 million, and available-for-sale securities were $629.2 million.
- Shareholders’ equity was $387.3 million, up 5.6% from December 31, 2011. The tangible common equity-to-tangible assets ratio was 8.99%.
- Net cash provided by operating activities was $31.7 million for the first six months. Investing activities used $96.6 million, primarily for purchases of available-for-sale securities; financing activities provided $14.9 million. Cash and cash equivalents declined $50.0 million to $188.4 million.
- Long-term debt was $61.3 million. Federal Home Loan Bank advances declined to $1.5 million from $21.6 million at year-end; repurchase agreements were $201.9 million.
Material changes versus comparable periods
- Second-quarter net income increased 36.4% year over year, while six-month net income increased 32.0%.
- Net interest income declined 1.7% in the quarter and 0.2% year to date as the net interest margin compressed. Average earning assets increased 4.8% year over year, but asset yields declined more than funding costs.
- Noninterest income increased 13.2% in the quarter and 8.6% year to date, supported by loan-sale gains, trust revenue, loan-related fees, and an $819,000 net securities gain in the first six months.
- Noninterest expense declined 11.0% in the quarter and 7.1% year to date, reflecting lower FDIC insurance, legal and professional expenses, other real estate owned expenses, and repossession costs.
- The provision for loan losses declined 27.0% in the quarter and 53.5% year to date. Year-to-date net charge-offs were $3.6 million, compared with $7.4 million in 2011.
- Nonperforming loans were $35.3 million, down from $37.3 million at year-end but up from $34.6 million at March 31, 2012. Impaired loans increased to $64.4 million from $47.4 million at year-end, primarily due to one coal-industry credit relationship.
- Other real estate owned was $56.4 million, compared with $57.0 million at year-end and $46.8 million at June 30, 2011. Management expects foreclosed properties to remain elevated while current market conditions are worked through.
Guidance, outlook, risks, contingencies, and unusual items
- Management described the 2012 operating environment as challenging, citing soft and highly competitive loan demand, limited-yield investment opportunities, regional economic conditions, and financial-market volatility.
- The University of Kentucky national championship increased the cost of the company’s Hoops CD product and reduced second-quarter net interest margin by approximately seven basis points. Management expected a similar impact in the third quarter and a two-basis-point impact in the fourth quarter, with an estimated four-basis-point full-year effect.
- The coupon rate on $61.3 million of junior subordinated debentures reset on June 1, 2012 from 6.52% fixed to a quarterly adjustable rate of 2.06% for the September 4 distribution.
- Management changed the “best case” historical loss-rate methodology. The change had no effect on the reported provision but increased the provision requirement under that scenario by $3.9 million.
- The allowance for loan losses was 1.30% of total loans and covered 93.8% of nonperforming loans. Credit exposure is concentrated in the regional markets served and in commercial real estate and other commercial lending.
- At June 30, 2012, 21 loans totaling $4.0 million were modified in troubled debt restructurings during the first six months; 10 restructured loans totaling $470,000 subsequently defaulted.
- Three standby letters of credit totaling $0.9 million were outstanding. No material legal proceedings or additional risk factors were reported in Part II.
- Regulatory capital ratios exceeded well-capitalized thresholds: Tier 1 leverage 10.32%, Tier 1 risk-based 14.54%, and total risk-based 15.82%. Management expected to be able to satisfy proposed Basel III requirements, but noted potential effects on lending, profitability, compliance costs, capital needs, and dividends.
- The quarterly dividend was increased from $0.31 to $0.315 per share for payment October 1, 2012.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in impaired loans, particularly the coal-industry credit relationship, produces additional charge-offs, provisions, or collateral losses.
- Trends in net interest margin, loan demand, deposit pricing, and the temporary Hoops CD funding-cost effect.
- The sustainability of improved earnings given the quarter’s securities gain, lower credit provision, and reduced operating expenses.
- Progress in reducing other real estate owned and the adequacy of related appraisals and valuation adjustments.
- Regional commercial real estate exposure, nonperforming loans, troubled debt restructurings, and allowance coverage.
- Final Basel III requirements and their effect on capital, lending capacity, profitability, and dividend policy.
- Liquidity availability, including $286.1 million of Federal Home Loan Bank borrowing capacity and $72 million of correspondent-bank lines of credit.