Community Trust Bancorp, Inc. 2019 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. Its 79 banking locations and trust offices serve Kentucky, southern West Virginia, and northeastern Tennessee. The unaudited filing covers the three months ended March 31, 2019, with comparisons to March 31, 2018 and December 31, 2018 where applicable.
At March 31, 2019, CTBI reported $4.3 billion of assets, $3.6 billion of deposits including repurchase agreements, $577.5 million of shareholders’ equity, and $2.1 billion of trust assets under management.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Comparable period | Change |
|---|---|---|---|
| Total interest income | $45.9 million | $40.6 million in Q1 2018 | +13.1% |
| Net interest income | $36.0 million | $34.6 million in Q1 2018 | +4.0% |
| Net interest margin, tax equivalent | 3.70% | 3.65% in Q1 2018 | +5 basis points |
| Provision for loan losses | $0.2 million | $0.9 million in Q1 2018 | Down $0.8 million |
| Noninterest income | $12.2 million | $13.3 million in Q1 2018 | -8.6% |
| Noninterest expense | $29.1 million | $28.7 million in Q1 2018 | +1.4% |
| Income before taxes | $18.9 million | $18.3 million in Q1 2018 | +3.3% |
| Net income | $14.9 million | $15.8 million in Q1 2018 | -5.5% |
| Basic and diluted EPS | $0.84 | $0.89 in Q1 2018 | -5 cents |
The filing does not provide a clearly labeled net income margin; based on reported net income and income before taxes, the effective tax rate was approximately 20.9% in Q1 2019 versus 13.5% in Q1 2018. The higher tax expense primarily reflected a one-time $1.0 million charge related to Kentucky’s transition from a bank franchise tax to corporate income tax.
- Loans totaled $3.19 billion, down $18.9 million, or 2.4% annualized, from December 31, 2018, but up $71.5 million, or 2.3%, from March 31, 2018.
- The allowance for loan and lease losses was $35.0 million, equal to 1.10% of total loans, compared with 1.12% at year-end 2018 and 1.13% at March 31, 2018.
- Net charge-offs were $1.1 million, or 0.14% of average loans on an annualized basis, compared with $1.9 million, or 0.25%, in Q1 2018.
- Nonperforming loans were $25.4 million, or 0.80% of total loans, compared with $22.1 million, or 0.69%, at December 31, 2018, and $25.9 million, or 0.83%, at March 31, 2018.
- Nonaccrual loans were $12.4 million, compared with $11.9 million at December 31, 2018.
- Impaired loans totaled $50.4 million, compared with $46.4 million at December 31, 2018 and $48.2 million at March 31, 2018.
- Other real estate owned declined to $25.0 million from $27.3 million at December 31, 2018 and $32.0 million at March 31, 2018.
- Cash and cash equivalents increased to $253.9 million from $141.5 million at December 31, 2018. Available-for-sale securities totaled $599.3 million.
- Total deposits were $3.38 billion, up $77.2 million during the quarter. Deposits including repurchase agreements increased $81.9 million, or 9.4% annualized, from year-end.
- Long-term debt was $59.3 million. Repurchase agreements totaled $237.5 million, while Federal Home Loan Bank advances were $0.4 million.
- Cash flow provided by operating activities was $12.1 million, investing activities provided $23.9 million, and financing activities provided $76.4 million. Cash and cash equivalents increased by $112.4 million during the quarter.
- Shareholders’ equity increased from $564.2 million at year-end 2018 to $577.5 million. The tangible common equity-to-tangible assets ratio was 12.05%.
- Regulatory capital ratios remained well above well-capitalized thresholds: common equity Tier 1 was 16.49%, Tier 1 capital was 18.34%, total capital was 19.47%, and Tier 1 leverage was 13.62%.
- CTBI declared a quarterly cash dividend of $0.36 per share, compared with $0.33 per share in Q1 2018.
Material Changes Versus Prior Comparable Period
- Net interest income increased because the yield on average earning assets rose to 4.71% from 4.28%, despite the cost of interest-bearing funds increasing to 1.43% from 0.87%.
- Net income and EPS declined despite higher net interest income, primarily because noninterest income decreased and income tax expense increased substantially.
- Noninterest income fell $1.1 million year over year, primarily because Q1 2018 included $1.2 million of bank-owned life insurance death benefits. Trust income and loan-related fees also declined.
- Noninterest expense increased $0.4 million, mainly because of higher personnel costs.
- Credit costs improved, with the loan-loss provision and net charge-offs both declining from Q1 2018. However, nonperforming loans increased from year-end 2018 and impaired loans increased sequentially.
- CTBI adopted the new lease accounting standard on January 1, 2019. Adoption added a $15.1 million right-of-use asset and a $15.7 million lease liability at March 31, 2019, and resulted in an approximately $0.5 million reduction to opening retained earnings, net of tax effects.
- Other comprehensive income was $4.8 million, compared with a $4.5 million loss in Q1 2018, primarily reflecting improved unrealized gains on available-for-sale securities.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that it expects foreclosed properties to remain elevated while it works through current market conditions. OREO carrying costs and fair-value adjustments were $0.8 million in Q1 2019.
- Management expects to record an estimated $3.0 million tax benefit in Q2 2019 from reversing a valuation allowance on deferred tax assets after Kentucky legislation permits combined tax filing and use of certain net operating losses.
- CTBI expects no significant further income impact from the Kentucky tax transition, although the related deferred tax liability may be adjusted periodically.
- Management plans to run the current loan-loss model in parallel with the expected-credit-loss model beginning in the third quarter of 2019. The filing does not provide a quantified estimate of the impact of adopting ASU 2016-13.
- Interest-rate risk remains a significant exposure. CTBI’s simulation estimated that a 200-basis-point increase in the yield curve would increase net interest income by 5.71% over one year and 9.04% over two years; a 200-basis-point decrease would reduce it by 5.52% and 8.98%, respectively.
- Available-for-sale securities had $6.0 million of gross unrealized losses at March 31, 2019. Management considered the losses temporary, market- and interest-rate-driven, and not credit-related.
- Forward-looking risks include economic conditions in CTBI’s regional markets, unemployment, interest-rate changes, credit performance, collateral values, competition, regulatory changes, technology dependence, acquisition execution, legal proceedings, and financial-market volatility.
- During Q1 2019, 13 loans totaling $3.2 million were modified as troubled debt restructurings. No charge-offs resulted from the presented modifications, and no recently modified troubled debt restructurings had subsequently defaulted as of March 31, 2019.
- The filing reports no material legal proceedings, risk-factor updates, defaults on senior securities, or changes in internal control over financial reporting. Management concluded that disclosure controls were effective.
Important Facts for Investors to Verify
- Verify the sustainability of net interest margin expansion as funding costs rise and interest-rate conditions change.
- Monitor nonperforming loans, impaired loans, accruing loans past due, charge-offs, OREO balances, and reserve coverage.
- Confirm the timing and approximately $3.0 million amount of the anticipated Q2 2019 tax benefit.
- Assess the eventual effect of adopting the expected-credit-loss standard, including model assumptions and data quality.
- Review the valuation and market sensitivity of available-for-sale securities, Visa Class B equity securities, mortgage servicing rights, impaired loans, and OREO, which rely in part on Level 3 or other unobservable inputs.
- Evaluate liquidity and funding concentration, including $237.5 million of repurchase agreements, $42.3 million of brokered deposits, and available Federal Home Loan Bank borrowing capacity of $329.3 million.
- Confirm that regulatory capital remains well above minimum and well-capitalized requirements while dividends and any future share repurchases are maintained.