Community Trust Bancorp, Inc. — 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 a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited quarter and nine months ended September 30, 2015, compared primarily with the same periods in 2014 and with December 31, 2014 for balance-sheet data. CTBI reported 80 banking locations, four trust offices in Kentucky, and one trust office in northeastern Tennessee.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2015 | Three Months Ended September 30, 2014 | Nine Months Ended September 30, 2015 | Nine Months Ended September 30, 2014 |
|---|---|---|---|---|
| Total interest income | $35.9 million | $36.0 million | $107.7 million | $107.5 million |
| Net interest income | $33.0 million | $33.0 million | $99.1 million | $98.6 million |
| Provision for loan losses | $2.5 million | $3.3 million | $6.7 million | $5.4 million |
| Noninterest income | $12.0 million | $12.0 million | $35.0 million | $33.0 million |
| Noninterest expense | $27.5 million | $25.9 million | $79.7 million | $78.0 million |
| Net income | $11.2 million | $10.9 million | $34.6 million | $33.3 million |
| Basic earnings per share | $0.64 | $0.63 | $1.98 | $1.92 |
| Net interest margin | Not separately stated for the quarter; MD&A reports 3.84% year to date | Not separately stated for the quarter; MD&A reports 3.92% year to date | 3.84% | 3.92% |
At September 30, 2015, total assets were $3.81 billion, loans were $2.82 billion, net loans were $2.78 billion, deposits were $2.98 billion, repurchase agreements were $256.2 million, and shareholders’ equity was $470.6 million. Trust assets under management, excluded from consolidated assets, were $1.9 billion.
- Cash and cash equivalents were $163.2 million, compared with $105.5 million at December 31, 2014.
- Available-for-sale securities were $576.7 million, compared with $640.2 million at year-end 2014. Management identified the related unrealized losses as temporary and interest-rate driven rather than credit-related.
- The allowance for loan and lease losses was $35.5 million, or 1.26% of total loans. Reserve coverage of nonperforming loans was 108.6%.
- Long-term debt was $61.3 million. Federal Home Loan Bank advances declined to $1.1 million from $61.2 million at December 31, 2014.
- Federal Home Loan Bank borrowing capacity was approximately $323 million, and correspondent-bank lines of credit totaled $44 million.
- Year-to-date operating cash flow was $38.4 million, investing cash flow was negative $25.8 million, financing cash flow was $45.1 million, and cash increased by $57.7 million.
- Year-to-date cash dividends declared were $0.910 per share. The board declared an additional $0.31 per share dividend payable January 1, 2016.
Material Changes Versus Comparable Periods
- Third-quarter net income increased 2.7% to $11.2 million, while nine-month net income increased 3.9% to $34.6 million.
- Nine-month net interest income increased 0.5%, but the net interest margin declined to 3.84% from 3.92% as asset yields declined faster than funding costs.
- Nine-month provision expense increased 25.3% to $6.7 million, primarily reflecting loan growth. Third-quarter provision expense declined to $2.5 million from $3.3 million.
- Nine-month noninterest income increased 5.9%, supported by higher gains on loan sales, deposit service charges, trust revenue, loan-related fees, and securities results.
- Nine-month noninterest expense increased 2.2%. Management attributed the increase primarily to higher tax-credit investment amortization and personnel costs, partly offset by lower data-processing and other real-estate-owned expense.
- Loans increased $86.6 million, or 3.2%, from year-end 2014. Consumer indirect loans increased 19.7%, while commercial construction loans declined 12.4%.
- Deposits and repurchase agreements increased $121.9 million, or 3.9%, from year-end 2014. The investment portfolio declined $63.5 million as securities were used to support liquidity and loan growth.
- Nonperforming loans declined to $32.7 million from $39.0 million at year-end 2014, and nonperforming assets declined to $67.5 million from $75.8 million.
- Nonaccrual loans declined to $14.7 million from $21.0 million. Total impaired loans declined to $48.3 million from $59.1 million.
- Net loan charge-offs were $2.2 million in the third quarter, or 0.31% of average loans annualized, compared with $2.8 million, or 0.42%, in the prior-year quarter.
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 also noted that the regional coal-industry downturn could increase unemployment in CTBI’s markets and adversely affect borrower performance, collateral values, loan demand, and results.
- Quarterly earnings benefited from $1.2 million of tax credits from low-income housing and other community-related investments, compared with $0.3 million in the prior-year quarter. The related amortization expense increased to $1.0 million from $0.2 million.
- Other real estate owned totaled $34.7 million. Third-quarter valuation adjustments and carrying costs were $1.3 million, including $0.8 million of write-downs; year-to-date OREO expense was $2.5 million.
- CTBI recorded a $0.2 million gain on the sale of its Hazard Main Street Branch, according to MD&A.
- Interest-rate risk remains a significant market risk. Management’s simulation estimated that a 200-basis-point yield-curve increase would increase net interest income 2.62% over one year and 3.52% over two years; a 25-basis-point decrease would reduce it 0.22% over one year and 0.05% over two years.
- Credit risk is concentrated in the company’s regional service areas and includes commercial real estate, construction, residential real estate, and rapidly growing indirect consumer lending.
- Management reported Common Equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios of 14.49%, 16.63%, 17.88%, and 12.40%, respectively, all above the applicable “well-capitalized” thresholds.
- CTBI was under IRS examination for its 2013 corporate income tax return. Management did not expect a material financial impact, but the filing states that the IRS could challenge the company’s tax positions.
- The financial statements are unaudited and interim results are not necessarily indicative of full-year results. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether continued loan growth, particularly in indirect consumer lending, produces higher provisions, charge-offs, or nonperforming assets.
- The sustainability of the 3.84% net interest margin amid potential changes in interest rates, asset yields, deposit pricing, and securities balances.
- The valuation and liquidation progress of $34.7 million of other real estate owned, including properties held beyond five years.
- The recurring versus nonrecurring nature of tax credits, related amortization, branch-sale gains, securities gains, and mortgage-servicing-rights valuation changes.
- The adequacy of the $35.5 million allowance relative to impaired loans, delinquency trends, regional economic conditions, and collateral values.
- The outcome of the IRS examination and the effect of future Basel III capital-buffer requirements.
- The company’s liquidity position, including pledged securities, repurchase-agreement collateral, available borrowing capacity, and reliance on core deposits.