COMMUNITY TRUST BANCORP INC quarterly report, Q3 FY2017

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

Reporting period: Quarter and nine months ended September 30, 2017. The interim financial statements are unaudited and cover CTBI, Community Trust Bank, and Community Trust and Investment Company. CTBI is a Kentucky-based bank holding company serving Kentucky, southern West Virginia, and northeastern Tennessee through 80 banking locations and trust offices.

Financial performance and condition

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Net interest income	$35.0 million	$33.2 million	$102.3 million	$99.6 million
Provision for loan losses	$0.7 million	$2.2 million	$4.7 million	$5.8 million
Noninterest income	$12.2 million	$13.2 million	$36.1 million	$35.9 million
Noninterest expense	$26.9 million	$26.7 million	$82.1 million	$80.1 million
Net income	$13.8 million	$12.3 million	$36.6 million	$35.5 million
Basic EPS	$0.78	$0.70	$2.08	$2.02
Diluted EPS	$0.78	$0.70	$2.07	$2.02

Q3 net income increased 11.8% year over year; nine-month net income increased 3.1%.
Q3 net interest margin was 3.67%; the nine-month margin was 3.68%, compared with 3.71% in the prior-year period.
Average earning assets increased 3.7% year over year for the first nine months. The yield on average earning assets was 4.13%, while the cost of interest-bearing funds was 0.63%.
Total assets were $4.14 billion at September 30, 2017, up 5.2% from December 31, 2016. Loans were $3.11 billion, up 6.0%, and net loans were $3.08 billion.
Deposits were $3.20 billion; deposits plus repurchase agreements were approximately $3.46 billion. Shareholders’ equity was $522.9 million.
Cash and cash equivalents were $166.4 million and available-for-sale securities were $603.0 million. Federal Home Loan Bank advances were $50.9 million, compared with $0.9 million at year-end 2016. Long-term debt was $59.3 million.
Net cash provided by operating activities was $45.9 million. Investing activities used $187.9 million, primarily because loan growth used $181.3 million. Financing activities provided $163.7 million, including deposit growth and $150.0 million of FHLB advance proceeds. Cash increased $21.7 million during the first nine months.
Dividends declared were $0.33 per share in the third quarter and $0.97 per share for the first nine months.

Material changes versus comparable periods

Net interest income increased 5.2% in Q3, supported by higher average earning assets and improved asset yields, although funding costs increased.
The Q3 loan-loss provision declined $1.5 million from the prior year and $2.1 million from the second quarter. Management attributed the reduction to improving rolling 12-quarter core portfolio metrics.
The allowance for loan losses declined to 1.17% of total loans from 1.22% at September 30, 2016 and 1.20% at June 30, 2017. Reserve coverage of nonperforming loans was 121.2%.
Noninterest income declined 7.5% year over year in Q3, principally due to lower gains on loan sales, deposit service charges, loan-related fees, and securities gains. The prior-year quarter included higher securities gains.
Noninterest expense increased 0.9% year over year in Q3 and 2.5% for the first nine months, mainly reflecting higher other real estate owned expense and personnel costs.
Nonperforming loans increased to $30.0 million from $27.5 million at December 31, 2016. Nonperforming assets were $62.2 million, down $1.2 million from year-end.
Net charge-offs were $1.4 million in Q3, or 0.18% of average loans annualized, versus $2.1 million, or 0.28%, in Q3 2016. Nine-month net charge-offs declined to $4.2 million from $6.1 million.

Outlook, risks, contingencies, and unusual items

Management reported record Q3 earnings but provided no formal numerical earnings or revenue guidance.
Management expects foreclosed properties to remain elevated while it works through prevailing market conditions. Other real estate owned was $32.0 million at September 30, 2017, and Q3 fair-value adjustments were $0.9 million; year-to-date adjustments were $2.9 million.
Liquidity included $166.4 million of cash, $603.0 million of available-for-sale securities, $314.7 million of available FHLB borrowing capacity, and $57 million of correspondent-bank lines of credit. Wholesale brokered deposits were $82.3 million with a weighted average maturity of 1.97 years.
Interest-rate sensitivity modeling estimated that a 200-basis-point increase in the yield curve would increase net interest income by 2.96% over one year and 3.46% over two years. A 25-basis-point decrease was estimated to reduce net interest income by 0.17% over one year and 0.23% over two years.
CTBI’s reported regulatory capital ratios were well above well-capitalized thresholds: common equity Tier 1 of 15.01%, Tier 1 of 16.90%, total capital of 18.10%, and Tier 1 leverage of 12.77%.
CTB will be required to reimburse customers relating to two deposit add-on products. The timing and amount remain undetermined, and the ultimate amount could materially differ from management’s estimate.
Key risks include regional economic conditions, borrower credit performance, commercial real estate exposure, interest-rate changes, competition, regulatory changes, technology dependence, acquisition execution, legal matters, and potential volatility in collateral values.
Upcoming accounting changes include the expected adoption of lease, revenue, credit-loss, cash-flow, and other standards. Management had not finalized the effects of several standards. The company expects a $150,000 reduction in retained earnings and a quarterly amortization expense increase of $24,000 to $30,000 from early adoption of ASU 2017-08 effective January 1, 2018.

Investor verification priorities

Verify the trend and composition of the $30.0 million of nonperforming loans, including commercial real estate and residential mortgage exposures.
Assess whether the lower loan-loss provision and 1.17% allowance ratio remain appropriate as loans grow and criticized assets evolve.
Review the $32.0 million OREO balance, valuation assumptions, sale pipeline, and potential for further write-downs.
Monitor funding mix, including the increase in FHLB advances and $82.3 million of wholesale brokered deposits, as well as deposit pricing and net interest margin.
Quantify the potential customer reimbursements related to deposit add-on products once timing and exposure are determined.
Evaluate the impact of interest-rate movements, regulatory capital requirements, and implementation of the new accounting standards.
Confirm that reported liquidity and capital ratios remain adequate relative to loan growth and market conditions.