COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2019

Community Trust Bancorp, Inc. 10-Q Summary

Reporting period: Three and nine months ended September 30, 2019. The interim financial statements are unaudited and include normal recurring adjustments. CTBI is a Kentucky-based bank holding company operating through Community Trust Bank and Community Trust and Investment Company, with 79 banking locations and trust offices across Kentucky, southern West Virginia, and northeastern Tennessee.

Financial performance and condition

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Net interest income	$36.5 million	$36.1 million	$108.5 million	$105.9 million
Provision for loan losses	$1.3 million	$1.5 million	$3.0 million	$4.4 million
Noninterest income	$12.4 million	$12.7 million	$36.8 million	$39.7 million
Noninterest expense	$29.9 million	$28.1 million	$89.0 million	$89.2 million
Net income	$15.3 million	$16.1 million	$48.5 million	$43.5 million
Basic and diluted EPS	$0.86	$0.91	$2.74	$2.46

Margins: Q3 net interest margin was 3.59%, down 9 basis points year over year but up 2 basis points sequentially. The nine-month tax-equivalent net interest margin was 3.62%, compared with 3.65% in 2018. Cost of interest-bearing funds increased to 1.46% from 0.97% year over year.
Balance sheet: Total assets were $4.34 billion, up 4.3% annualized from December 31, 2018. Loans were $3.21 billion, up $6.1 million, or 0.2%, from year-end. Deposits were $3.39 billion and repurchase agreements were $228.8 million.
Capital: Shareholders’ equity was $605.5 million, compared with $564.2 million at December 31, 2018. Tangible common equity to tangible assets was 12.64%. CTBI reported common equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios of 17.03%, 18.82%, 19.93%, and 13.84%, respectively; management stated that the company and bank remained well capitalized.
Liquidity: Cash and cash equivalents were $221.8 million, compared with $141.5 million at year-end. Available-for-sale securities were $650.0 million. CTBI reported $438.1 million of available Federal Home Loan Bank borrowing capacity and $45 million of correspondent-bank lines of credit.
Cash flow: Nine-month cash provided by operating activities was $62.1 million; investing activities used $46.0 million; financing activities provided $64.2 million. Cash increased $80.4 million to $221.8 million. Dividends paid were $19.5 million, or $1.10 per share.

Material changes versus comparable periods

Q3 net income declined 5.2% from Q3 2018 and was $15.3 million, compared with $18.3 million in Q2 2019. The sequential comparison was affected by a $3.6 million deferred-tax valuation allowance reversal recorded in Q2 following Kentucky legislation.
Nine-month net income increased 11.5%, primarily because of higher net interest income, lower loan-loss provision expense, and lower income taxes. The nine-month tax benefit included the $3.6 million reversal of the deferred tax asset valuation allowance.
Nine-month net interest income increased 2.5%, while noninterest income declined 7.3%. The noninterest-income decline reflected lower loan-related fees, trust revenue, and other operating revenue, partially offset by higher securities gains and gains on loan sales.
Noninterest expense was broadly stable year to date but rose 6.3% year over year in Q3. The increase primarily reflected higher other real estate owned expense, including a $2.2 million Q3 write-down of foreclosed properties.
Asset quality weakened from year-end: nonperforming loans increased to $31.4 million, or 0.98% of loans, from $22.1 million, or 0.69%. Nonperforming assets were $51.3 million. Management noted that two relationships accounted for $7.3 million of the increase in accruing loans 90 days or more past due and that no loss was anticipated on those credits.
The allowance for loan losses declined to $34.8 million, or 1.08% of loans, from $35.9 million, or 1.13%, at year-end. Reserve coverage of nonperforming loans was 110.8%, down from 170.1% at September 30, 2018.
Other real estate owned declined to $19.8 million from $27.3 million at year-end, although Q3 carrying costs and fair-value adjustments increased materially. Management expects foreclosed properties to remain elevated while it works through market conditions.
CTBI adopted the new lease standard on January 1, 2019, recording approximately $16.1 million of lease liabilities, $15.5 million of right-of-use assets, and a $0.5 million cumulative-effect reduction to retained earnings.

Guidance, outlook, commentary, and risks

No formal earnings or revenue guidance was provided. Management stated that projected 2019 performance was expected to exceed the minimum threshold for an incentive payment but remain below the target.
Management expects to begin parallel modeling during the fourth quarter of 2019 for ASU 2016-13, the current expected credit loss standard, which becomes effective in 2020. The filing does not provide a quantified expected adoption impact.
Kentucky legislation will transition the bank from the bank franchise tax to corporate income tax beginning in 2021. Management expects to file a combined state return and use certain net operating losses.
Interest-rate risk is material. CTBI estimated that a 200-basis-point increase in the yield curve would increase net interest income by 5.77% over one year and 8.54% over two years, while a 200-basis-point decrease would reduce it by 4.98% and 8.80%, respectively.
LIBOR is scheduled to cease being published after 2021. CTBI identified approximately $28.6 million of variable-rate loans, $48.8 million of available-for-sale securities, and $57.8 million of debentures tied to LIBOR, substantially all with maturities beyond December 31, 2021.
Principal operating risks include deterioration in commercial real estate, consumer, or other loan portfolios; elevated unemployment in parts of CTBI’s markets; interest-rate and liquidity volatility; collateral-value declines; regulatory and tax changes; technology dependence; and execution of the LIBOR transition.
Management stated that all securities impairment at September 30, 2019 was temporary and driven by market interest rates rather than credit deterioration. No legal proceedings were reported, and management concluded that disclosure controls were effective.

Investor verification points

Verify the sustainability of earnings growth excluding the $3.6 million tax benefit recognized in Q2 2019.
Monitor nonperforming loans, 90-plus-day accruing loans, impaired loans, charge-offs, and reserve coverage, particularly within commercial real estate.
Assess whether OREO write-downs and carrying costs remain elevated and whether foreclosed-property sales reduce the portfolio as expected.
Review the margin impact of higher funding costs and the sensitivity of net interest income to future rate movements.
Confirm the expected first-year and ongoing impact of CECL adoption, including changes to credit-loss reserves and provision expense.
Track the replacement of LIBOR-linked terms in loans, securities, and $57.8 million of debentures before the 2021 transition deadline.
Reconcile reported liquidity sources, pledged securities, repurchase agreements, brokered deposits, and available borrowing capacity under stressed conditions.