COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2014

Community Trust Bancorp, Inc. — 2014 Q3 Form 10-Q Summary

Reporting period: Quarterly and nine-month periods ended September 30, 2014, compared primarily with the corresponding 2013 periods. The interim financial statements are unaudited and prepared using normal recurring adjustments.

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 had 81 banking locations, six trust offices, approximately $3.7 billion of assets, and $3.1 billion of deposits including repurchase agreements at September 30, 2014. Its markets include eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee.

Key Financial Metrics

Metric	Q3 2014	Q3 2013	9M 2014	9M 2013
Net interest income	$33.0 million	$34.2 million	$98.6 million	$100.7 million
Provision for loan losses	$3.3 million	$2.1 million	$5.4 million	$7.3 million
Noninterest income	$12.0 million	$12.1 million	$33.0 million	$37.3 million
Noninterest expense	$25.9 million	$25.6 million	$78.0 million	$77.9 million
Net income	$10.9 million	$12.7 million	$33.3 million	$36.4 million
Basic EPS	$0.63	$0.74	$1.92	$2.13
Diluted EPS	$0.63	$0.73	$1.91	$2.12

Profitability: Q3 net income declined 13.7% year over year; nine-month net income declined 8.7%. The approximate net margin based on reported net interest income plus noninterest income was 24.3% for Q3 and 25.3% for nine months, versus approximately 27.4% and 26.4%, respectively, in the comparable 2013 periods.
Net interest margin: Nine-month net interest margin was 3.92%, down from 4.03%. Management attributed pressure to the low-rate environment and lower yields on new and repricing loans.
Loans and asset growth: Total loans were $2.684 billion, up $68.6 million, or 2.6%, from December 31, 2013. Total assets were $3.670 billion, up $88.4 million.
Credit quality: Nonperforming loans were $48.6 million, up from $43.6 million at year-end 2013. Nonaccrual loans were $29.0 million versus $20.0 million at year-end. Net charge-offs were $2.8 million in Q3, or 0.42% of average loans annualized; year-to-date net charge-offs were 0.27% of average loans.
Allowance: The allowance for loan and lease losses was $34.1 million, equal to 1.27% of total loans and 70.2% of nonperforming loans, compared with 1.30% and 80.5%, respectively, at September 30, 2013.
Other real estate owned: OREO declined to $32.7 million from $39.2 million at December 31, 2013. Nine-month sales were $10.3 million compared with $5.3 million of new properties acquired.
Liquidity: Cash and cash equivalents were $118.5 million and available-for-sale securities were $633.6 million. Available Federal Home Loan Bank borrowing capacity was approximately $382 million, with an additional $44 million of correspondent-bank lines.
Debt and funding: Long-term debt was $61.3 million. Repurchase agreements were $220.1 million, while total deposits were $2.902 billion. No material liquidity deficiency was reported.
Capital: Shareholders’ equity was $438.2 million, compared with $412.5 million at December 31, 2013. Reported Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 11.97%, 16.57%, and 17.82%, respectively, exceeding the then-applicable well-capitalized thresholds.
Cash flow: Nine-month operating cash flow was $46.5 million, investing cash flow was negative $78.0 million, and financing cash flow was $43.3 million. Cash and cash equivalents increased $11.8 million to $118.5 million.

Material Changes Versus the Prior Comparable Period

Q3 net income decreased $1.7 million, primarily because the provision for loan losses increased to $3.3 million from $2.1 million.
Nine-month net income decreased $3.2 million. Lower net interest income and noninterest income more than offset the $2.0 million reduction in the loan-loss provision.
Nine-month noninterest income declined 11.3%, mainly because of lower gains on loan sales, deposit service charges, loan-related fees, and other income. The prior-year period included $0.9 million of bank-owned life insurance death benefits.
Loans grew across commercial, residential, indirect, and consumer portfolios, but management noted that new loan growth occurred at lower yields.
Nonperforming loans increased, including a $2.9 million hotel credit placed on nonaccrual during the quarter and a $7.4 million commercial real estate relationship placed on nonaccrual earlier in 2014.
Net unrealized gains in accumulated other comprehensive income improved year to date, producing $7.0 million of other comprehensive income versus a $16.2 million loss in the comparable 2013 period. Management classified investment-portfolio impairment as temporary and interest-rate driven.
Noninterest expense was broadly stable for the nine-month period, although Q3 expense increased 1.1% year over year. Management cited higher personnel and data-processing costs, partly offset by lower OREO and repossession expense and an $0.8 million reduction in a Federal Reserve-related accrual.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

No formal earnings or revenue guidance was provided.
Management expects continued margin pressure if funding costs plateau while loan yields continue to reprice lower.
Management expects foreclosed properties to remain elevated while it works through prevailing market conditions.
Key risks include economic conditions in the company’s regional markets, elevated unemployment, weakness in the coal industry, borrower credit performance, collateral values, interest-rate changes, competition, regulatory changes, technology dependence, acquisition execution, and legal proceedings.
The company’s investment portfolio had $8.5 million of gross unrealized losses on available-for-sale securities and $32 thousand on held-to-maturity securities at September 30, 2014. Management concluded these losses were temporary and not credit-related, but changes in rates or liquidity needs could affect future values.
Basel III capital rules were scheduled to phase in beginning in 2015. Management expected CTBI’s capital ratios to remain above well-capitalized requirements under the new framework.
The board declared a $0.30 quarterly dividend payable January 1, 2015. No shares had been repurchased since February 2008, although 288,519 shares remained authorized for repurchase.
ASU 2014-01 and ASU 2014-04 were not expected to have a material effect. The company expected to adopt ASU 2014-04 in the first quarter of 2015.
The filing reported no legal proceedings, risk-factor updates, defaults on senior securities, or material changes in internal control over financial reporting.

Important Facts for Investors to Verify

Whether the increase in nonperforming and nonaccrual loans persists and leads to higher provisions, charge-offs, or allowance requirements.
Whether loan growth can continue without further deterioration in credit quality or additional margin compression.
The sustainability of noninterest income following the decline in mortgage-loan sale gains and deposit service charges.
The adequacy of the $34.1 million allowance relative to $48.6 million of nonperforming loans and $66.9 million of impaired loans.
The sensitivity of net interest income to interest-rate movements; management estimated a 1.10% increase over one year and a 1.61% decrease over two years under a 200-basis-point rate increase.
The valuation and sale progress of the $32.7 million OREO portfolio, including properties held for sale and appraisal assumptions.
Future regulatory capital treatment under Basel III and any effects on dividends, repurchases, or capital deployment.
That the filing is unaudited and that interim results are not necessarily indicative of full-year performance.