COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2012

Community Trust Bancorp, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. The interim financial statements are unaudited. CTBI is a Kentucky-based bank holding company operating banking and trust subsidiaries across Kentucky, southern West Virginia, and northeastern Tennessee.

Financial performance and condition

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Net interest income	$33.0 million	$33.1 million	$98.4 million	$98.5 million
Provision for loan losses	$2.9 million	$2.5 million	$6.5 million	$10.2 million
Noninterest income	$10.8 million	$10.9 million	$34.0 million	$32.3 million
Noninterest expense	$25.8 million	$25.8 million	$75.7 million	$79.5 million
Net income	$10.2 million	$10.7 million	$34.3 million	$28.9 million
Diluted EPS	$0.66	$0.70	$2.21	$1.89

Q3 net income declined 4.3% year over year, while nine-month net income increased 18.6%.
Q3 net interest margin was 3.96%, down 15 basis points year over year; the yield on average earning assets declined 33 basis points, partly offset by lower funding costs.
Management reported an annualized Q3 net charge-off ratio of 0.45%, compared with 0.41% in Q3 2011. Nine-month net charge-offs decreased to $6.5 million from $10.0 million.
Total assets were $3.64 billion at September 30, 2012, up $50.4 million from December 31, 2011. Loans were $2.55 billion, down $5.0 million from year-end.
Available-for-sale securities increased to $621.2 million from $527.4 million at year-end. Unrealized losses were considered temporary and not credit-related.
Total deposits were $2.91 billion; deposits including repurchase agreements were approximately $3.1 billion.
Shareholders’ equity was $396.1 million, compared with $366.9 million at year-end. Tangible common equity to tangible assets was 9.22%.

Cash flow, liquidity, debt, and capital

Nine-month operating cash flow was $57.2 million, compared with $72.2 million in the prior-year period.
Investing activities used $92.8 million, primarily reflecting purchases of available-for-sale securities and net loan funding. Financing activities used $0.3 million.
Cash and cash equivalents declined to $202.5 million from $238.5 million at December 31, 2011.
Liquidity included $202.5 million of cash and cash equivalents, $621.2 million of available-for-sale securities, $293.1 million of available Federal Home Loan Bank borrowing capacity, and $47 million of correspondent-bank lines.
Federal Home Loan Bank advances declined to $1.5 million from $21.6 million at year-end. Long-term debt remained $61.3 million; repurchase agreements were $218.5 million.
Regulatory capital ratios were 10.51% Tier 1 leverage, 14.86% Tier 1 risk-based, and 16.12% total risk-based, exceeding “well-capitalized” thresholds.
Cash dividends declared were $0.315 per share for the quarter and $0.935 per share for the first nine months.

Material changes versus comparable periods

Year-to-date results benefited from higher noninterest income, lower loan-loss provision, and lower noninterest expense. Gains on loan sales, trust income, loan-related fees, and a $0.8 million second-quarter securities gain contributed to the increase.
Q3 earnings were pressured by higher loan-loss provision, lower net interest margin, and lower noninterest income. Q3 noninterest expense was essentially flat year over year.
Nonperforming loans declined to $34.0 million from $37.3 million at December 31, 2011 and $35.3 million at June 30, 2012. Nonperforming assets were $89.6 million.
The allowance for loan losses was $33.2 million, or 1.30% of total loans, with coverage of nonperforming loans at 97.5%, versus 89.0% at year-end.
Other real estate owned was $56.1 million, including $55.6 million of foreclosed properties. Management expects foreclosed properties to remain elevated while market conditions are worked through.
Consumer indirect loans declined 12.3% from year-end as management reduced investment in long-term fixed-rate auto loans at prevailing market rates.
The coupon rate on $61.3 million of junior subordinated debentures reset from 6.52% to a floating rate of 2.01% by September 1, 2012, benefiting net interest margin.

Guidance, outlook, risks, and unusual items

Management described the operating environment as challenging for the remainder of 2012 and 2013 because of slow economic activity, high unemployment, and slowing business investment.
Local economic conditions in CTBI’s markets materially affect loan demand, repayment performance, and collateral values. Key risks include credit deterioration, interest-rate changes, competition, regulatory changes, technology dependence, legal matters, and acquisition execution.
Management increased several qualitative allowance factors for delinquency, loss, economic, and regulatory conditions; the cumulative effect increased the calculated “most likely” loss scenario by $3.2 million at September 30, 2012.
The credit portion of purchase accounting discounts on acquired loans was exhausted during Q3, resulting in $0.6 million of additional provision expense during the quarter.
Interest-rate sensitivity modeling estimated that a 200-basis-point yield-curve increase would reduce net interest income by 1.71% over one year and 4.66% over two years. A 25-basis-point decrease would reduce it by 0.14% over one year and 0.12% over two years.
Management expected to satisfy potential Basel III requirements given its strong capital position, but noted possible effects on lending, profitability, operating costs, capital needs, and dividends.
No legal proceedings or material changes in risk factors were reported. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.

Investor verification checklist

Verify whether the decline in net interest margin persists as securities replace loans and low-rate funding conditions continue.
Review trends in nonperforming loans, impaired loans, troubled debt restructurings, charge-offs, and the allowance methodology, including the $3.2 million qualitative adjustment.
Assess the scale, aging, geographic concentration, valuation sensitivity, and sales pipeline of other real estate owned.
Monitor liquidity sources, pledged securities, repurchase agreements, Federal Home Loan Bank capacity, and the maturity profile of debt.
Evaluate the effect of the proposed Basel III framework and future regulatory capital requirements on dividends, growth, and shareholder dilution.
Confirm that the interim results are not necessarily indicative of full-year performance and review the 2011 Form 10-K for omitted annual disclosures.