COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2011

Community Trust Bancorp, Inc. — 2011 Third-Quarter Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2011. The filing is unaudited and covers CTBI, its commercial bank subsidiary, and trust company. CTBI operated 80 banking locations and four trust offices across Kentucky, southern West Virginia, and northeastern Tennessee.

Financial Performance and Position

Metric	Three months ended September 30	Nine months ended September 30
Net income	$10.7 million versus $8.5 million in 2010	$28.9 million versus $23.8 million in 2010
Basic EPS	$0.70 versus $0.55	$1.89 versus $1.56
Net interest income	$33.1 million versus $29.4 million	$98.5 million versus $88.0 million
Noninterest income	$10.9 million versus $10.6 million	$32.3 million versus $29.9 million
Noninterest expense	$25.8 million versus $24.0 million	$79.5 million versus $71.1 million
Provision for loan losses	$2.5 million versus $3.7 million	$10.2 million versus $12.5 million
Net interest margin	4.11% versus 3.95%	4.18% versus 4.05%

Third-quarter return on average assets was 1.20%, return on average equity was 11.75%, and the efficiency ratio was 58.10%.
Total assets were $3.56 billion at September 30, 2011, up $200.8 million from December 31, 2010. Shareholders’ equity was $361.3 million, up from $338.6 million.
Total loans were $2.57 billion, down $31.6 million from year-end. Net loans were $2.54 billion after a $35.0 million allowance for loan losses, equal to 1.36% of total loans.
Available-for-sale securities increased to $463.6 million from $338.7 million at year-end, reflecting deployment of excess liquidity as loan demand slowed.
Deposits were $2.81 billion; deposits including repurchase agreements were approximately $3.04 billion. Cash and cash equivalents were $250.4 million.
Short-term borrowings consisted primarily of $229.0 million of repurchase agreements and $16.3 million of federal funds purchased. Federal Home Loan Bank advances were $21.7 million, and long-term debt was $61.3 million.
Net cash provided by operating activities was $72.1 million. Investing activities used $118.3 million, primarily for purchases of available-for-sale securities. Financing activities provided $137.7 million, primarily from deposit and short-term borrowing growth.
Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 10.00%, 13.65%, and 14.92%, respectively; each exceeded the regulatory threshold for a well-capitalized institution.
Dividends declared were $0.310 per share in the third quarter and $0.920 per share for the first nine months.

Material Changes Versus Comparable Periods

Nine-month net income increased 21.6%, supported by higher net interest income and noninterest income and a lower loan-loss provision, partially offset by higher operating expenses.
Net interest income increased 12.0% for the first nine months. Funding costs declined as certificates of deposit repriced, although the quarterly margin decreased from 4.17% in the second quarter to 4.11%.
Noninterest income increased 8.0% year to date, primarily from higher deposit service charges and trust revenue. Mortgage banking income declined to $1.1 million from $1.3 million because mortgage servicing rights declined in value.
Noninterest expense increased 11.8% year to date, reflecting higher personnel and health-insurance costs, repossession expense, and other real estate owned expenses and valuation adjustments.
Nonperforming loans declined to $37.5 million from $62.0 million at December 31, 2010 and $59.6 million at June 30, 2011. Nonaccrual loans were $28.0 million, while loans 90 days or more past due and still accruing were $9.5 million.
Net charge-offs were $2.7 million in the third quarter, compared with $5.6 million in the third quarter of 2010 and $3.3 million in the second quarter of 2011.
Other real estate owned increased to $58.0 million from $42.9 million at year-end. New properties acquired through foreclosure totaled $25.6 million year to date, versus $7.8 million of sales, and year-to-date valuation adjustments were $2.8 million.
Total restructured loans increased to $26.9 million from $6.6 million at year-end. Impaired loans were $56.0 million, including $6.3 million of specific allowance.

Outlook, Risks, Contingencies, and Unusual Items

The filing provides no formal earnings or revenue guidance. Management expects foreclosed properties to remain elevated while current market conditions are worked through.
Management cited continuing economic weakness, real estate and collateral-value volatility, credit losses, interest-rate changes, liquidity and capital constraints, competition, regulatory changes, technology dependence, acquisition integration risk, and legal proceedings as material risks.
Management stated that available-for-sale securities with unrealized losses were considered temporarily impaired and market-driven rather than credit-related. The proportion of investments with unrealized losses declined to 4.2% from 18.9% at year-end.
Mortgage servicing rights declined to $2.4 million from $3.2 million at year-end. The valuation is sensitive to interest rates and mortgage prepayment speeds, and CTBI does not hedge its MSR portfolio.
At September 30, 2011, CTBI had $261.5 million of additional FHLB borrowing capacity and a fully available $12 million parent-company revolving credit line entered into on October 27, 2011.
A $61.3 million junior subordinated debt issue carried a fixed 6.52% rate through June 1, 2012, after which it converts to a floating rate based on three-month LIBOR plus 1.59%.
Interest-rate sensitivity modeling estimated that a 200-basis-point increase in rates would increase one-year net interest income by 0.83% but reduce two-year net interest income by 2.79%; a 25-basis-point decrease would reduce one-year and two-year net interest income by 0.21% and 0.52%, respectively.
The company adopted expanded troubled-debt-restructuring disclosures during the quarter. The filing states that applicable new accounting standards had no material impact on the financial statements.
No legal proceedings, defaults upon senior securities, or reportable changes in internal control were disclosed. Management concluded that disclosure controls were effective.

Investor Verification Checklist

Verify whether the decline in nonperforming loans is sustained and whether higher current delinquency in certain commercial portfolios leads to renewed credit costs.
Assess the adequacy of the $35.0 million allowance relative to impaired loans, restructured loans, charge-offs, and continued economic weakness.
Monitor the $58.0 million OREO balance, valuation adjustments, disposition pace, and potential additional losses.
Review the sustainability of net interest margin as excess liquidity shifts into securities and loan demand remains soft.
Evaluate the sensitivity of mortgage servicing rights and investment securities to interest rates, prepayments, and fair-value changes.
Confirm liquidity availability, reliance on repurchase agreements and deposits, and refinancing or repricing risk for the $61.3 million subordinated debt after June 2012.
Reconcile dividend growth and capital ratios with retained earnings, regulatory requirements, and future balance-sheet growth.