COMMUNITY TRUST BANCORP INC quarterly report, Q2 FY2013

Community Trust Bancorp, Inc. 2013 Q2 Form 10-Q Summary

Business Context and Reporting Period

Community Trust Bancorp, Inc. is a Kentucky-based bank holding company operating a commercial bank and trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the unaudited quarter and six months ended June 30, 2013, compared primarily with the corresponding 2012 periods and December 31, 2012 balances. The company reported $3.6 billion of assets, $3.1 billion of deposits including repurchase agreements, and $400.3 million of shareholders’ equity at quarter-end.

Financial Performance and Condition

Metric	Three Months Ended June 30, 2013	Three Months Ended June 30, 2012	Six Months Ended June 30, 2013	Six Months Ended June 30, 2012
Net interest income	$33.3 million	$32.3 million	$66.5 million	$65.3 million
Provision for loan losses	$3.7 million	$2.4 million	$5.2 million	$3.6 million
Noninterest income	$13.3 million	$12.0 million	$25.2 million	$23.2 million
Noninterest expense	$26.0 million	$24.1 million	$52.3 million	$49.9 million
Net income	$11.9 million	$12.2 million	$23.8 million	$24.1 million
Diluted earnings per share	$0.76	$0.79	$1.52	$1.56

Net interest margin was 4.01% for the first six months, compared with 3.99% in the prior-year period. Second-quarter margin increased six basis points year over year but declined three basis points from the first quarter.
Second-quarter net income declined 2.4% year over year; first-half net income declined 1.4%. Management attributed pressure primarily to higher credit costs and operating expenses.
Net charge-offs were $3.5 million in the second quarter, or 0.54% of average loans annualized, versus $2.5 million, or 0.39%, in the prior-year quarter. First-half net charge-offs were $4.9 million, or 0.38% annualized.
The allowance for loan losses was $33.6 million, or 1.30% of total loans. Reserve coverage of nonperforming loans declined to 80.8% from 92.3% at December 31, 2012.
Total loans were $2.585 billion, up $34.2 million, or 1.3%, from year-end. Deposits were $2.922 billion, and repurchase agreements were $204.7 million.
Cash and cash equivalents were $107.8 million, down from $207.6 million at year-end. Available-for-sale securities were $687.4 million and represented a significant additional liquidity source.
Operating cash flow for the first six months was $53.5 million. Investing cash flow was negative $159.3 million, principally reflecting purchases of securities and loan growth. Financing cash flow was positive $6.1 million, and ending cash declined by $99.8 million.
Long-term debt was $61.3 million; total liabilities were $3.238 billion. Management reported a tangible common equity-to-tangible assets ratio of 9.35%.
Regulatory capital ratios were 11.01% Tier 1 leverage, 15.52% Tier 1 risk-based, and 16.77% total risk-based, exceeding the then-applicable well-capitalized thresholds.

Material Changes Versus Comparable Periods

Net interest income increased 3.2% in the second quarter and 1.9% for the first six months, supported by lower funding costs and modest earning-asset growth.
Noninterest income increased 10.7% in the quarter and 8.7% year to date. The increase included approximately $0.9 million of additional bank-owned life insurance income, primarily from death benefits, as well as higher trust income, loan-related fees, and loan-sale gains.
Noninterest expense rose 7.6% in the quarter and 4.8% year to date, driven mainly by personnel costs, other real estate owned expense, and repossession expense.
Nonperforming loans increased to $41.6 million from $36.0 million at December 31, 2012 and $33.9 million at March 31, 2013. One previously impaired, well-secured customer credit contributed approximately $7.7 million of the increase as it migrated to the 90-days-past-due category.
Nonperforming assets were $84.7 million, up $1.7 million from year-end. Foreclosed properties declined to $43.1 million from $47.0 million at year-end, but remained elevated.
Available-for-sale securities increased substantially from $603.3 million at year-end to $687.4 million. Market-rate changes caused a $13.9 million after-tax reduction in accumulated other comprehensive income during the quarter; the filing characterized investment impairments as temporary and market-driven rather than credit-related.
Shareholders’ equity was unchanged from year-end at $400.3 million despite the decline in accumulated other comprehensive income, primarily because retained earnings increased.

Guidance, Outlook, Risks, and Unusual Items

The filing does not provide formal earnings or revenue guidance. Management stated that economic conditions had improved in its markets but expected a challenging environment throughout 2013.
Management expects foreclosed properties to remain elevated while it works through current market conditions. Six-month OREO carrying costs and fair-value adjustments were $3.0 million, compared with $1.5 million in the prior-year period.
Credit risk is concentrated in the company’s regional markets and in commercial real estate and other commercial lending. Repayment depends on borrower cash flows, collateral values, employment, real estate conditions, and local economic performance.
There were $63.4 million of impaired loans at June 30, 2013. During the first six months, 49 loans totaling $10.7 million were modified in troubled debt restructurings; 12 restructured loans totaling $5.1 million subsequently defaulted. No charge-offs had resulted from the presented modifications.
Market-rate changes materially affected the securities portfolio and shareholders’ equity. The filing states that 61.4% of total investments had unrealized losses at June 30, 2013, compared with 14.8% at year-end, although management deemed the losses temporary.
Liquidity included $337.6 million of available Federal Home Loan Bank borrowing capacity and $44 million of correspondent-bank lines of credit. The company stated that it did not rely on any single liquidity source.
Interest-rate simulation indicated that a 200-basis-point yield-curve increase would reduce estimated net interest income by 0.07% over one year and 2.99% over two years; a 25-basis-point decrease would reduce it by 0.04% and 0.23%, respectively.
The Federal Reserve and FDIC approved Basel III-related capital rules after quarter-end. Management expected CTBI’s capital ratios to remain above well-capitalized requirements as the rules phase in from 2015 through 2019.
The Board approved an increase in the quarterly dividend to $0.32 per share for payment October 1, 2013. The company had not repurchased shares since February 2008.
The filing reports no legal proceedings, reportable internal-control changes, or separately disclosed risk-factor updates during the quarter.

Important Facts for Investors to Verify

Whether the rise in nonperforming loans, impaired loans, charge-offs, and troubled debt restructurings continues in subsequent quarters.
Whether the 80.8% allowance coverage ratio is adequate if commercial real estate values or local economic conditions deteriorate.
The realized versus unrealized effects of securities-market volatility on capital and accumulated other comprehensive income.
Whether elevated OREO balances, valuation adjustments, and carrying costs decline as properties are sold.
The sustainability of noninterest income, particularly bank-owned life insurance death benefits and loan-sale activity, which may not recur.
Future liquidity levels after the substantial first-half reduction in cash and cash equivalents and the continued growth in loans and securities.
The effect of Basel III implementation on capital ratios, dividends, and future capital allocation.