COMMUNITY TRUST BANCORP INC quarterly report, Q1 FY2016

Community Trust Bancorp, Inc. — Q1 2016 Form 10-Q Summary

Business context and reporting period

Community Trust Bancorp, Inc. is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. It provides commercial and personal banking, lending, trust, wealth management, brokerage, and related services across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the three months ended March 31, 2016, with comparisons to March 31, 2015 and December 31, 2015. The interim financial statements are unaudited and include normal recurring adjustments.

At March 31, 2016, CTBI had 80 banking locations, total assets of $3.9 billion, deposits including repurchase agreements of approximately $3.3 billion, shareholders’ equity of $485.6 million, and trust assets under management of $2.0 billion.

Financial performance and key metrics

Metric	Q1 2016	Comparable period	Change
Net interest income	$33.3 million	$32.9 million	Up 1.3% from Q1 2015
Provision for loan losses	$1.8 million	$1.9 million	Down 7.2%
Noninterest income	$11.0 million	$10.7 million	Up 2.2%
Noninterest expense	$26.2 million	$25.8 million	Up 1.6%
Income before taxes	$16.3 million	$15.9 million	Up 2.3%
Net income	$11.6 million	$10.9 million	Up 6.1%
Basic and diluted EPS	$0.66	$0.63	Up $0.03
Comprehensive income	$15.3 million	$14.4 million	Up 6.6%
Dividend declared per share	$0.310	$0.300	Up 3.3%

Net interest margin was 3.76%, down from 3.89% in Q1 2015. Average earning assets increased 4.0%, while their yield declined 10 basis points. The cost of interest-bearing funds increased 4 basis points to 0.49%.
Noninterest income growth was led by higher deposit service charges, trust and wealth management income, brokerage revenue, and other income. Loan-related fees declined.
Noninterest expense increased primarily because of higher salaries, bonuses and incentives, and employee insurance costs, partly offset by lower data processing expense.
Net cash provided by operating activities was $11.5 million, compared with $22.0 million in Q1 2015. Investing activities provided $5.4 million, while financing activities used $42.1 million, primarily because of $100.0 million of Federal Home Loan Bank advance repayments and $5.5 million of dividends paid.
Cash and cash equivalents declined to $162.4 million from $187.6 million at December 31, 2015, but exceeded the $141.0 million balance at March 31, 2015.

Balance sheet, credit quality, debt, and liquidity

Total assets were $3.880 billion, down $24.1 million from year-end 2015 and up $120.5 million, or 3.2%, from March 31, 2015.
Total loans were $2.889 billion, up $15.3 million, or 0.5%, from year-end and up $142.8 million, or 5.2%, year over year. Growth was concentrated in consumer indirect loans, which increased 4.8% from year-end.
The investment portfolio declined $14.0 million during the quarter and $45.4 million year over year to approximately $582.6 million, including $581.0 million of available-for-sale securities.
Total deposits increased to $3.034 billion from $2.981 billion at year-end. Repurchase agreements increased to $259.1 million from $251.2 million.
Federal Home Loan Bank advances declined sharply to $1.0 million from $101.1 million at year-end. Long-term debt remained $61.3 million, and federal funds purchased and other short-term borrowings were $5.9 million.
Nonperforming loans were $27.0 million, down 5.7% from December 31, 2015 and 23.1% from March 31, 2015. Nonperforming assets were $66.1 million, down $3.4 million from year-end and $7.9 million year over year.
Nonaccrual loans increased to $18.4 million from $16.6 million at year-end. Impaired loans increased to $59.5 million from $49.9 million, primarily because of troubled debt restructurings.
Net charge-offs were $1.5 million, or 0.21% of average loans annualized, compared with $1.7 million, or 0.26%, in Q1 2015. The allowance for loan and lease losses was $36.3 million, equal to 1.26% of total loans, and provided 134.7% coverage of nonperforming loans.
Other real estate owned declined to $39.0 million from $40.7 million at year-end. CTBI recorded $0.1 million of fair-value write-downs and sold $2.8 million of foreclosed properties during the quarter.
Liquidity included $162.4 million of cash and cash equivalents, $581.0 million of available-for-sale securities, $283.1 million of available Federal Home Loan Bank borrowing capacity, and $44 million of available correspondent-bank lines of credit.
At March 31, 2016, regulatory capital ratios exceeded well-capitalized standards: common equity Tier 1 of 14.84%, Tier 1 capital of 16.97%, total capital of 18.22%, and Tier 1 leverage of 12.44%.

Material changes versus prior comparable periods

Profitability improved, with net income up 6.1% and EPS up 4.8% year over year, despite a lower net interest margin.
Loan growth and deposit growth supported higher net interest income, while the investment portfolio continued to contract.
Credit trends generally improved: nonperforming loans, nonperforming assets, and net charge-offs declined year over year. However, impaired loans and nonaccrual loans increased from year-end, and past-due loans of 30 to 89 days increased during the quarter.
Federal Home Loan Bank borrowings were substantially reduced through repayment, while core deposits and repurchase agreements increased.
Accumulated other comprehensive income increased to $4.7 million from $1.0 million at year-end, primarily reflecting higher unrealized gains on available-for-sale securities. Management considered all securities impairment temporary and driven by market interest rates rather than credit deterioration.

Guidance, outlook, commentary, risks, and unusual items

The filing does not provide formal earnings or revenue guidance. Management expects foreclosed properties to remain elevated while it works through current market conditions.
Management identified economic conditions in its service area, including continued weakness in the coal industry and related employment risks, as potential pressures on borrowers, collateral values, loan demand, and credit quality.
Interest-rate risk is material. CTBI estimated that a 200-basis-point increase in the yield curve would increase net interest income by 1.82% over one year and 4.31% over two years; a 25-basis-point decrease would reduce net interest income by 0.12% over one year and 0.19% over two years.
Key risks include credit losses, commercial real estate and construction exposure, indirect consumer lending, interest-rate changes, securities valuations, regulatory changes, competition, technology dependence, acquisitions, legal matters, and broader economic conditions.
During Q1 2016, CTBI modified 25 loans in troubled debt restructurings with post-modification balances of $10.2 million. Two previously restructured loans totaling $0.9 million subsequently defaulted. No charge-offs resulted from the presented modifications.
CTBI adopted several accounting updates without material effect. Management was evaluating the impact of the new lease standard, while it did not expect the other disclosed forthcoming standards to have a material impact.
No legal proceedings or material risk-factor changes were reported in Part II of the filing. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.

Important facts for investors to verify

Whether the lower net interest margin persists as funding costs and market interest rates change.
Trends in impaired loans, nonaccrual loans, 30-to-89-day delinquencies, troubled debt restructurings, and commercial real estate exposure.
Whether the allowance coverage ratio remains adequate if regional economic conditions, particularly coal-related employment, deteriorate.
The pace of loan growth relative to deposits and the sustainability of reduced reliance on Federal Home Loan Bank advances.
Future losses, carrying costs, and liquidation timing for the $39.0 million of other real estate owned, including properties held more than five years.
The sensitivity of mortgage servicing rights, securities values, and earnings to prepayment speeds, interest rates, and market conditions.
Future regulatory capital requirements, including the phase-in of the Basel III capital conservation buffer.