COMMUNITY TRUST BANCORP INC quarterly report, Q2 FY2014

Community Trust Bancorp, Inc. — 2014 Q2 Form 10-Q

Reporting period: Three and six months ended June 30, 2014. The interim financial statements are unaudited and include normal recurring adjustments. CTBI is a Kentucky-based bank holding company operating through a commercial bank and trust company, with 81 banking locations and trust offices across Kentucky, southern West Virginia, and northeastern Tennessee.

Financial performance and position

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net interest income	$32.8 million	$33.3 million	$65.6 million	$66.5 million
Provision for loan losses	$0.7 million	$3.7 million	$2.1 million	$5.2 million
Noninterest income	$11.0 million	$13.3 million	$21.0 million	$25.2 million
Noninterest expense	$25.3 million	$26.0 million	$52.1 million	$52.3 million
Net income	$12.2 million	$11.9 million	$22.3 million	$23.8 million
Diluted EPS	$0.70	$0.69	$1.28	$1.38

Net interest margin: 3.94% for the first six months, down from 4.01% in the prior-year period. Q2 margin declined seven basis points year over year and five basis points from Q1 2014.
Assets and loans: Total assets were $3.65 billion at June 30, 2014, up $70.9 million from year-end 2013. Loans were $2.63 billion, up $17.3 million from year-end and $47.1 million during Q2.
Deposits and funding: Total deposits were $2.89 billion. Deposits plus repurchase agreements were approximately $3.1 billion, up $42.0 million from year-end but down $36.7 million from Q1.
Cash flow: Six-month operating cash flow was $30.6 million, investing cash flow was negative $34.5 million, and financing cash flow was positive $35.2 million. Cash and cash equivalents increased to $138.0 million from $106.6 million at year-end 2013.
Liquidity: CTBI held $647.5 million of available-for-sale securities and reported approximately $377 million of available Federal Home Loan Bank borrowing capacity plus $44 million of correspondent-bank credit lines.
Debt: Long-term debt was $61.3 million; repurchase agreements were $218.0 million; federal funds purchased and other short-term borrowings were $15.2 million; and Federal Home Loan Bank advances were $1.2 million.
Capital: Shareholders’ equity was $433.9 million, and tangible common equity to tangible assets was 10.26%. Reported regulatory ratios of 11.83% Tier 1 leverage, 16.66% Tier 1 risk-based capital, and 17.91% total risk-based capital exceeded well-capitalized thresholds.

Material changes versus comparable periods

Q2 net income increased 2.1% year over year, primarily because the provision for loan losses and noninterest expense declined. Six-month net income decreased 6.0% because lower net interest income and noninterest income more than offset the lower provision and slightly lower expenses.
Noninterest income declined 17.3% in Q2 and 16.5% year to date. The decreases reflected lower loan-sale gains, deposit service charges, loan-related fees, mortgage servicing-rights valuation effects, and the absence of prior-year bank-owned life insurance death benefits.
Net charge-offs declined to $0.7 million in Q2, or 0.11% of average loans annualized, from $3.5 million, or 0.54%, in Q2 2013. Year-to-date net charge-offs declined to 0.19% of average loans from 0.38%.
The allowance for loan and lease losses decreased to $33.6 million, or 1.28% of loans, from $34.0 million at December 31, 2013. Coverage of nonperforming loans was 75.5%.
Nonperforming loans increased to $44.5 million from $43.6 million at year-end and $42.4 million at March 31, 2014. Management attributed much of the quarterly increase to one credit relationship considered well secured and in the process of collection.
Other real estate owned declined to $33.1 million from $39.2 million at year-end. Q2 sales of foreclosed properties totaled $5.1 million versus $2.2 million of new foreclosed assets.
Accumulated other comprehensive income improved to a $0.3 million gain from an $8.0 million loss at year-end, primarily because of higher fair values of available-for-sale securities.
CTBI distributed a 10% stock dividend on June 2, 2014; all share and per-share data were restated. The board declared a $0.30 quarterly cash dividend payable October 1, 2014.

Outlook, risks, contingencies, and unusual items

No formal earnings or revenue guidance is provided. Management expects foreclosed properties to remain elevated while it works through current market conditions.
Primary risks include credit deterioration, borrower bankruptcies, collateral-value changes, economic weakness in CTBI’s regional markets, elevated unemployment, coal-industry weakness, interest-rate movements, competition, regulatory changes, information-technology dependence, acquisition execution, and legal or regulatory matters.
The low-rate environment continued to pressure asset yields and net interest margin. Management estimates that a 200-basis-point yield-curve increase would increase one-year net interest income by 0.03% but decrease two-year net interest income by 2.39%; a 25-basis-point decrease would reduce one-year net interest income by 0.10%.
Available-for-sale securities had $7.3 million of gross unrealized losses at June 30, 2014. Management considered the impairments temporary, market-driven, and unrelated to credit quality.
Eight troubled debt restructurings were completed during the first six months with post-modification balances of $1.1 million. Three previously restructured loans with balances totaling $0.6 million subsequently defaulted; no charge-offs resulted from the presented modifications.
Basel III capital rules begin phasing in from 2015 through 2019. Management expects CTBI’s capital ratios to remain above well-capitalized requirements under the new rules.
The filing reports no legal proceedings, no material changes in internal control over financial reporting, and no identified material impact from the pending accounting standards discussed.

Investor verification items

Verify the trend in nonperforming loans, criticized commercial credits, troubled debt restructurings, and the 75.5% allowance coverage ratio.
Assess whether lower charge-offs and provisions are sustainable or primarily reflect temporary credit improvement.
Monitor net interest margin and asset yields as interest rates and deposit costs change.
Evaluate the sustainability of noninterest income following lower mortgage-sale gains, service charges, and bank-owned life insurance income.
Review the valuation and disposition pace of the $33.1 million OREO portfolio, including properties under contract to sell.
Confirm liquidity availability, securities duration and unrealized losses, pledged collateral, and compliance with Basel III capital requirements.
Consider the concentration of lending and credit exposure in CTBI’s Kentucky, West Virginia, and Tennessee markets, including sensitivity to coal-industry conditions.