Community Trust Bancorp, Inc. — 2013 Third-Quarter Form 10-Q
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 served eastern, northeastern, central, and south-central Kentucky, southern West Virginia, and northeastern Tennessee through 81 banking locations and trust offices. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balance-sheet data.
Key financial metrics
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 | Comparable period |
|---|---|---|---|
| Net interest income | $34.2 million | $100.7 million | $33.0 million / $98.4 million |
| Provision for loan losses | $2.1 million | $7.3 million | $2.9 million / $6.5 million |
| Noninterest income | $12.1 million | $37.3 million | $10.8 million / $34.0 million |
| Noninterest expense | $25.6 million | $77.9 million | $25.8 million / $75.7 million |
| Net income | $12.7 million | $36.4 million | $10.2 million / $34.3 million |
| Basic / diluted EPS | $0.81 / $0.81 | $2.34 / $2.33 | $0.66 / $0.66 and $2.22 / $2.21 |
| Net interest margin | Not separately stated in the income statement; management reported 11 basis-point year-over-year expansion | 4.03% | 3.98% for nine months ended September 30, 2012 |
For the nine months, average earning assets were $3.387 billion, the yield on average earning assets was 4.44%, and the cost of interest-bearing funds was 0.53%. Net income increased 6.1% year over year. Dividends declared were $0.320 per share for the quarter and $0.950 per share year to date.
Balance sheet, credit quality, debt, and liquidity
- Total assets were $3.644 billion, compared with $3.636 billion at December 31, 2012. Total loans were $2.616 billion, up $65.8 million, or 2.6%, from year-end; net loans were $2.582 billion after a $34.0 million allowance.
- Deposits were $2.874 billion, down from $2.904 billion at year-end. Deposits plus repurchase agreements were approximately $3.1 billion.
- Debt and other borrowings included $214.8 million of repurchase agreements, $13.9 million of federal funds purchased and other short-term borrowings, $31.3 million of Federal Home Loan Bank advances, and $61.3 million of long-term debt. The $30 million increase in FHLB advances at quarter-end was attributable to a short-term advance that matured and was repaid on October 2, 2013.
- Cash and cash equivalents were $109.0 million, compared with $207.6 million at year-end. Available-for-sale securities were $663.9 million and provided additional liquidity. CTBI reported $310.2 million of available FHLB borrowing capacity and $44 million of correspondent-bank lines of credit.
- Nonperforming loans were $42.3 million, up from $36.0 million at December 31, 2012 and $41.6 million at June 30, 2013. Nonperforming assets were $84.7 million. Nonaccrual loans were $17.1 million, and impaired loans totaled $63.3 million.
- Year-to-date net charge-offs were $6.6 million, or 0.34% of average loans, versus $6.5 million, or 0.34%, in the prior-year period. The allowance equaled 1.30% of total loans and covered 80.5% of nonperforming loans, compared with 92.3% at year-end.
- Foreclosed properties were $42.5 million, down from $47.0 million at year-end. CTBI recorded $3.9 million of year-to-date OREO provision and expense and $2.0 million of year-to-date OREO write-downs.
- Shareholders’ equity was $408.7 million. Reported regulatory capital ratios were 11.29% Tier 1 leverage, 15.71% Tier 1 risk-based, and 16.96% total risk-based, exceeding the stated well-capitalized thresholds. The tangible common equity-to-tangible assets ratio was 9.57%.
Cash flow and material changes
- Operating activities provided $78.4 million of cash for the first nine months, compared with $57.2 million in 2012.
- Investing activities used $171.1 million, principally from purchases of available-for-sale securities and net loan growth, versus $92.8 million used in 2012.
- Financing activities used $5.8 million, reflecting a $29.6 million decline in deposits, $14.7 million of dividends paid, and $30.0 million of FHLB borrowings.
- Cash and cash equivalents declined by $98.6 million to $109.0 million during the first nine months, compared with a $35.9 million decline in the prior-year period.
- Accumulated other comprehensive income shifted to a $3.5 million loss from $12.7 million of income at year-end, primarily reflecting unrealized losses on available-for-sale securities. Management considered the investment-portfolio impairment temporary and market-driven rather than credit-related.
Outlook, commentary, risks, and unusual items
- No formal earnings or revenue guidance was provided. Management stated that economic conditions had improved but expected a challenging environment through 2013 and anticipated foreclosed properties would remain elevated while current market conditions were addressed.
- Management identified exposure to local economic conditions, interest rates, credit performance, real estate values, competition, regulation, technology dependence, acquisitions, and legal or regulatory proceedings.
- On October 11, 2013, CTBI disclosed that the Federal Reserve was investigating Community Trust Bank’s overdraft-fee assessment methodology and that Federal Reserve staff recommended citing the bank for an unfair and deceptive practice. CTBI disagreed with the characterization but expected to accrue an amount against earnings; the amount could not yet be reasonably estimated. Management stated that any resulting consequences could be material to financial position or results of operations.
- Interest-rate simulation indicated that a 200-basis-point increase in the yield curve could increase one-year net interest income by 0.44% but decrease two-year net interest income by 3.61%; a 25-basis-point decrease could reduce one-year and two-year net interest income by 0.11% and 0.17%, respectively.
- The Board declared a quarterly dividend of $0.32 per share payable January 1, 2014. CTBI had not repurchased shares since February 2008 and had 288,519 shares remaining under its authorization.
- Management stated that Basel III capital rules were expected to be phased in beginning in 2015 and that CTBI anticipated remaining above well-capitalized requirements based on its current capital composition and levels.
Most important facts for investors to verify
- Resolution, required accrual, and potential financial impact of the Federal Reserve overdraft-fee investigation.
- Whether nonperforming loans, impaired loans, charge-offs, and OREO balances continue to rise, particularly in commercial real estate and the Central Kentucky region.
- Future allowance adequacy and reserve coverage as loan growth continues and credit conditions change.
- Liquidity after the substantial decline in cash and deposits, including reliance on securities, repurchase agreements, and FHLB capacity.
- Effects of interest-rate changes on net interest margin, securities’ accumulated other comprehensive income, and mortgage-servicing-rights valuations.
- Actual implementation effects of Basel III on capital ratios, dividends, and share repurchases.