Community Trust Bancorp, Inc. — 2016 Q2 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 consumer banking, lending, trust, wealth management, brokerage, and insurance services through 80 banking locations and five trust offices in Kentucky, southern West Virginia, and northeastern Tennessee.
This unaudited Form 10-Q covers the three and six months ended June 30, 2016, with comparisons to the three and six months ended June 30, 2015 and balance-sheet comparisons to December 31, 2015. CTBI reported 17,565,680 common shares outstanding at July 31, 2016.
Financial performance and condition
| Metric | Three months ended June 30, 2016 | Year-over-year change | Six months ended June 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net interest income | $33.1 million | Down 0.4% | $66.4 million | Up 0.4% |
| Provision for loan losses | $1.9 million | Down from $2.3 million | $3.6 million | Down 13.8% |
| Noninterest income | $11.8 million | Down 3.8% | $22.7 million | Down 1.0% |
| Noninterest expense | $27.2 million | Up 3.3% | $53.4 million | Up 2.5% |
| Net income | $11.6 million | Down 6.7% | $23.2 million | Down 0.7% |
| Basic and diluted EPS | $0.66 | Down from $0.71 | $1.32 | Down from $1.34 |
- Six-month net interest margin was 3.74%, down from 3.87%; management attributed the decline primarily to the extended low-rate environment. The yield on average earning assets fell to 4.10% from 4.20%, while the cost of interest-bearing funds increased to 0.50% from 0.45%.
- Total assets were $3.895 billion at June 30, 2016, broadly unchanged from $3.904 billion at year-end 2015. Loans increased 2.0% to $2.931 billion, while net loans were $2.896 billion after a $35.7 million allowance.
- Deposit balances increased to $3.042 billion from $2.981 billion. Including repurchase agreements, deposits and related funding totaled approximately $3.3 billion.
- Shareholders’ equity increased to $493.6 million from $475.6 million. The tangible common equity-to-tangible assets ratio was 11.17%.
- Cash and cash equivalents were $138.7 million, compared with $187.6 million at December 31, 2015. Available-for-sale securities were $579.1 million and represented a principal source of continuing liquidity.
- Long-term debt was $61.3 million. Federal Home Loan Bank advances declined to $1.0 million from $101.1 million at year-end. Repurchase agreements increased to $261.3 million from $251.2 million.
Cash flow and liquidity
| Six months ended June 30 | 2016 | 2015 |
|---|---|---|
| Cash provided by operating activities | $24.8 million | $17.8 million |
| Cash used in investing activities | $(34.9) million | $(4.5) million |
| Cash provided by (used in) financing activities | $(38.9) million | $26.3 million |
| Net change in cash and cash equivalents | $(49.0) million | $39.5 million |
| Ending cash and cash equivalents | $138.7 million | $145.0 million |
Investing cash use primarily reflected $62.5 million of net loan growth and net securities purchases. Financing cash use included $100.1 million of Federal Home Loan Bank repayment and $10.9 million of dividends paid, partly offset by $61.2 million of deposit growth. CTBI reported $280.8 million of available Federal Home Loan Bank borrowing capacity and $44 million of correspondent-bank lines of credit at June 30, 2016.
Material changes versus prior comparable periods
- Net income declined despite modest net interest income growth because noninterest expense increased and noninterest income declined. Personnel expense, including group medical and life insurance costs, was a major expense driver.
- Loan growth was concentrated in commercial loans and consumer indirect loans. Consumer indirect loans increased 8.4% from year-end, while commercial loans increased 1.6%.
- Nonperforming loans declined to $24.7 million from $28.6 million at December 31, 2015 and $27.0 million at March 31, 2016. Nonperforming assets declined to $62.6 million from $69.5 million at year-end.
- Nonaccrual loans were $16.4 million, generally unchanged from $16.6 million at year-end. Total past-due loans increased modestly to $41.9 million from $40.3 million.
- Net loan charge-offs were $2.5 million in the second quarter and $4.0 million for the first six months, compared with $1.7 million and $3.5 million, respectively, in the prior-year periods. The six-month annualized net charge-off ratio was 0.28%.
- The allowance-to-loans ratio was 1.22%, down from 1.26% at June 30, 2015. Allowance coverage of nonperforming loans improved to 144.6%.
- Other real estate owned declined to $37.7 million from $40.7 million at year-end. CTBI recorded $0.1 million of second-quarter property write-downs and stated that foreclosed properties are expected to remain elevated while current market conditions are addressed.
- Accumulated other comprehensive income increased to $6.3 million from $1.0 million at year-end, primarily reflecting unrealized gains on available-for-sale securities.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects loan growth to continue to support earnings but identifies the prolonged low-rate environment as a pressure on net interest margin. The Board declared a quarterly dividend of $0.32 per share on July 26, 2016, payable October 1, 2016, a 3.2% increase from the prior quarterly dividend.
- Key risks include economic conditions, unemployment, credit performance, collateral values, interest rates, competition, regulatory changes, technology dependence, acquisition execution, legal matters, and changes in customer and market demographics.
- CTBI has meaningful geographic exposure to eastern and central Appalachian markets, including areas affected by weakness in the coal industry. Management cautions that elevated unemployment or renewed economic deterioration could affect borrower repayment capacity, loan demand, and collateral values.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 2.38% over one year and 6.97% over two years. A 25-basis-point decrease would reduce net interest income by 0.17% over one year and 0.23% over two years.
- Available-for-sale securities had $0.6 million of gross unrealized losses at June 30, 2016. Management considered all investment impairment temporary and driven by market interest rates rather than credit deterioration.
- Forty-three loans totaling $12.9 million were modified in troubled debt restructurings during the first six months. Two previously restructured loans totaling $0.9 million subsequently defaulted. No charge-offs resulted from the presented modifications.
- Management stated that CTBI and its bank subsidiary exceeded applicable Basel III well-capitalized standards. CTBI’s common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios were 14.79%, 16.88%, 18.13%, and 12.57%, respectively.
- The company was evaluating the future impact of new lease accounting and the current expected credit loss standard. Management did not expect most other newly issued standards discussed in the filing to have a material impact.
- No legal proceedings, risk-factor updates, defaults, or material control changes were reported in Part II of the filing. Management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether continued low interest rates or future rate changes further compress net interest margin and deposit funding costs.
- The sustainability and credit quality of commercial and indirect consumer loan growth, including trends in delinquency, charge-offs, impaired loans, and troubled debt restructurings.
- The adequacy of the $35.7 million allowance under changing economic conditions and the future adoption impact of the expected credit loss standard.
- The pace of reduction and ultimate loss exposure from the $37.7 million OREO portfolio, including properties held more than five years.
- Liquidity after the $49.0 million first-half decline in cash and the company’s reliance on deposits, repurchase agreements, securities, and borrowing capacity.
- The effect of securities fair-value changes, mortgage servicing-rights valuations, and interest-rate assumptions on earnings and equity.
- Future dividend capacity, capital ratios, and the company’s stated expectation that it will remain above well-capitalized regulatory thresholds.