Community Trust Bancorp, Inc. Reports Earnings for the Third Quarter 2014

Community Trust Bancorp, Inc. (NASDAQ:CTBI):

Community Trust Bancorp, Inc. (NASDAQ:CTBI) reports earnings for the third quarter 2014 of $10.9 million, or $0.63 per basic share, compared to $12.7 million, or $0.74 per basic share, earned during the third quarter 2013 and $12.2 million, or $0.70 per basic share, earned during the second quarter 2014. Net income for the quarter was adversely impacted by an increase in our loan loss provision. Year-to-date earnings for the nine months ended September 30, 2014 were $33.3 million, or $1.92 per basic share, compared to $36.4 million, or $2.13 per basic share earned during the first nine months of 2013. The variance from prior year is due to decreased net interest income and noninterest income, partially offset by a decrease in our provision for loan losses.

3^rd Quarter 2014 Highlights

• CTBI’s basic earnings per share for the quarter decreased $0.11 from prior year third quarter and $0.07 from second quarter 2014. Year-to-date basic earnings per share decreased $0.21 from prior year.
• Net interest income for the quarter decreased 3.4% from prior year third quarter but increased 0.5% from prior quarter as our net interest margin decreased 19 basis points and 4 basis points, respectively. Average earning assets increased 1.6% from third quarter 2013 and 0.4% from prior quarter while our yield on average earning assets decreased 24 basis points and 4 basis points, respectively. The cost of interest bearing funds decreased 5 basis points and 1 basis point, respectively, during these time periods. Net interest income for the nine months ended September 30, 2014 decreased 2.1% from prior year.
• Nonperforming loans at $48.6 million increased $6.3 million from September 30, 2013 and $4.0 million from June 30, 2014. Nonperforming assets at $81.3 million decreased $3.4 million from September 30, 2013 but increased $3.7 million from June 30, 2014.
• Net loan charge-offs for the quarter ended September 30, 2014 were $2.8 million, or 0.42% of average loans annualized, compared to $1.7 million, or 0.26%, experienced for the third quarter 2013 and $0.7 million, or 0.11%, for the second quarter 2014. Year-to-date net charge-offs declined from 0.34% of average loans to 0.27%.
• Our loan loss provision for the quarter increased $1.2 million from prior year third quarter and $2.6 million from prior quarter. Year-to-date provision decreased $2.0 million. The quarterly increase in our provision was due to an increase in net charge-offs and loan portfolio growth. Our year-to-date loan loss provision remains lower than prior year due to the year-to-date decline in net losses to average loans.

• Noninterest income decreased 0.5% for the quarter ended September 30, 2014 compared to the same period in 2013 but increased 9.4% from prior quarter. The increase from prior quarter was primarily due to increased deposit service charges, trust revenue, and loan related fees. Noninterest income for the first nine months of 2014 decreased 11.3% from prior year. The decrease from prior year was primarily attributable to decreases in gains on sales of loans, deposit service charges, loan related fees resulting from the fluctuation in the fair value of our mortgage servicing rights, and other noninterest income due to the prior year death benefits received in bank owned life insurance.
• Noninterest expense for the quarter ended September 30, 2014 increased 1.1% from prior year third quarter and 2.4% from prior quarter. Noninterest expense for the first nine months of 2014 increased 0.1% from prior year. Increases in personnel expense and data processing expense were partially offset by decreases in net other real estate owned expense and repossession expense, as well as adjustments totaling $0.8 million to reduce the accrual for the Federal Reserve determination which was previously disclosed in our annual report on Form 10-K for the year ended December 31, 2013.
• Our loan portfolio increased $67.5 million from September 30, 2013 and $51.3 million during the quarter.
• Our investment portfolio decreased $30.3 million from September 30, 2013 and $14.0 million during the quarter.
• Deposits, including repurchase agreements, increased $33.2 million from September 30, 2013 and $17.1 million during the quarter.
• Our tangible common equity/tangible assets ratio increased to 10.33%.

Net Interest Income

Net interest income for the quarter decreased $1.2 million, or 3.4%, from prior year third quarter but increased $0.2 million, or 0.5% from prior quarter as our net interest margin decreased 19 basis points and 4 basis points, respectively, for those time periods. The current low rate environment continues to have a negative impact on our net interest margin. Average earning assets increased 1.6% from third quarter 2013 and 0.4% from prior quarter while our yield on average earning assets decreased 24 basis points and 4 basis points, respectively. Loans represented 77.5% of our average earning assets for the quarter ended September 30, 2014 compared to 77.0% for the quarter ended September 30, 2013 and 76.3% for the quarter ended June 30, 2014. At September 30, 2014, loans represented 78.7% of our earning assets, reflecting the change in earning asset mix resulting from the $51 million in loan growth during the quarter. While interest income increased slightly during the quarter, the new loan growth was at a lower yield than our previous average book yield. Consequently, the yield on the loan portfolio decreased as did the net interest margin. The cost of interest bearing funds decreased 5 basis points from prior year third quarter and 1 basis point from prior quarter. Net interest income for the nine months ended September 30, 2014 decreased $2.1 million, or 2.1%, from prior year. Assuming our cost of funds continues to plateau, pressure will be placed on our margin as our loan portfolio continues to reprice at lower rates.

Noninterest Income

Noninterest income decreased $0.1 million, or 0.5%, for the quarter ended September 30, 2014 compared to the same period in 2013 but increased $1.0 million, or 9.4%, from prior quarter. The increase from prior quarter was primarily due to increased deposit service charges, trust revenue, and loan related fees. Noninterest income for the first nine months of 2014 decreased 11.3% from prior year. The decrease from prior year was primarily attributable to decreases in gains on sales of loans, deposit service charges, loan related fees, and other noninterest income. The decrease in gains on sales of loans from prior year was reflective of the decline in secondary market residential real estate mortgage activity, and the decrease in deposit service charges from prior year was a result of the change in our processing of overdrafts. However, gains on sales of loans and deposit service charges have increased for the past two quarters. Deposit service charges increased $0.3 million from prior quarter with increases in overdraft revenue and Visa debit fee income. Loan related fees were impacted by the fluctuation in the fair value of our mortgage servicing rights. The decrease in other noninterest income was due to the prior year death benefits received in bank owned life insurance of $0.9 million.

Noninterest Expense

Noninterest expense for the quarter ended September 30, 2014 increased 1.1% from prior year third quarter and 2.4% from prior quarter. Noninterest expense for the first nine months of 2014 increased 0.1% from prior year. Increases in personnel expense and data processing expense were partially offset by decreases in net other real estate owned expense and repossession expense, as well as adjustments totaling $0.8 million to reduce the accrual for the Federal Reserve determination which was previously disclosed in our annual report on Form 10-K for the year ended December 31, 2013. The increase in personnel expense in the third quarter 2014 was the result of an increased loss experience in our health insurance plan partially offset by a decrease in the accrual for our annual performance based bonus.

Balance Sheet Review

CTBI’s total assets at $3.7 billion increased $26.2 million, or 0.7%, from September 30, 2013 and $17.5 million, or an annualized 1.9%, during the quarter. Loans outstanding at September 30, 2014 were $2.7 billion, increasing $67.5 million, or 2.6%, from September 30, 2013 and $51.3 million, or an annualized 7.7%, during the quarter. We experienced growth during the quarter in all loan portfolios. The commercial loan portfolio increased $26.5 million, the indirect loan portfolio increased $16.2 million, the residential loan portfolio increased $6.9 million, and the consumer direct loan portfolio increased $1.8 million. CTBI’s investment portfolio decreased $30.3 million, or 4.6%, from September 30, 2013 and $14.0 million, or an annualized 8.5%, during the quarter. Deposits, including repurchase agreements, at $3.1 billion increased $33.2 million, or 1.1%, from September 30, 2013 and $17.1 million, or an annualized 2.2%, from prior quarter.

Shareholders’ equity at September 30, 2014 was $438.2 million compared to $408.7 million at September 30, 2013 and $433.9 million at June 30, 2014. CTBI’s annualized dividend yield to shareholders as of September 30, 2014 was 3.57%.

Asset Quality

CTBI’s total nonperforming loans were $48.6 million at September 30, 2014, a 14.9% increase from the $42.3 million at September 30, 2013 and a 9.0% increase from the $44.5 million at June 30, 2014. Nonaccrual loans increased $3.2 million for the quarter and loans 90+ days past due increased $0.8 million. The increase in nonaccrual loans for the quarter included one hotel credit totaling $2.9 million which was previously identified as impaired. The year over year increase of $11.8 million also includes a $7.4 million income producing commercial real estate loan relationship that was put on nonaccrual in the first quarter 2014. The increase in loans 90+ days past due consists of an increase of $1.9 million in mortgage loans, partially offset by a decrease of $1.1 million in commercial loans. These credits, in addition to all loans in the 90+ days past due category, are reviewed by management and are considered to be well secured and in the process of collection; therefore, these loans require no specific reserves to the allowance for loan and lease losses. Loans 30-89 days past due at $20.9 million was a decrease of $2.4 million from September 30, 2013 and $0.6 million from June 30, 2014. Our loan portfolio management processes focus on the immediate identification, management, and resolution of problem loans to maximize recovery and minimize loss. Impaired loans, loans not expected to meet contractual principal and interest payments other than insignificant delays, at September 30, 2014 totaled $67.0 million, compared to $63.3 million at September 30, 2013 and $66.2 million at June 30, 2014.

We continued to experience improvement in other real estate owned. Our level of foreclosed properties at $32.7 million at September 30, 2014 was a decrease from $42.5 million at September 30, 2013 and $33.1 million at June 30, 2014. Sales of foreclosed properties for the quarter ended September 30, 2014 totaled $1.9 million while new foreclosed properties totaled $1.8 million. At September 30, 2014, the book value of properties under contracts to sell was $3.2 million; however, the closings had not occurred at quarter-end.

Net loan charge-offs for the quarter ended September 30, 2014 were $2.8 million, or 0.42% of average loans annualized, compared to $1.7 million, or 0.26%, experienced for the third quarter 2013 and $0.7 million, or 0.11%, for the second quarter 2014. Significant increases in charge-offs quarter over quarter were recognized in both the commercial loan portfolio (41 basis points) and the consumer loan portfolio (44 basis points) while there was a modest increase in the residential loan portfolio (5 basis points). The commercial portfolio charge-offs were impacted by a $0.5 million charge-off of a commercial real estate loan and a $0.7 million charge-off of a commercial loan to a heavy duty equipment retailer. Management believes the increase in charge-offs in the consumer portfolio is more a reflection of the unusually low level of charge-offs in the second quarter of 2014 and not an indication of a significant change in asset quality in the consumer portfolio. Of the total net charge-offs for the quarter, $1.6 million were in commercial loans, $0.5 million were in indirect auto loans, and $0.3 million were in residential real estate mortgage loans. Year-to-date net charge-offs declined from 0.34% of average loans to 0.27%. Allocations to loan loss reserves were $3.3 million for the quarter ended September 30, 2014 compared to $2.1 million for the quarter ended September 30, 2013 and $0.7 million for the quarter ended June 30, 2014. Loan loss provision for the nine months ended September 30, 2014 decreased $2.0 million. The quarterly increase in our provision was due to increases in net charge-offs and to fund new loan growth. Our year-to-date loan loss provision remains lower than prior year, primarily due to the year-to-date decline in net losses to average loans. Our reserve coverage (allowance for loan and lease loss reserve to nonperforming loans) at September 30, 2014 was 70.2% compared to 80.5% at September 30, 2013 and 75.5% at June 30, 2014. Our loan loss reserve as a percentage of total loans outstanding decreased to 1.27% from the 1.30% at September 30, 2013 and 1.28% at June 30, 2014.

Forward-Looking Statements

Certain of the statements contained herein that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. CTBI’s actual results may differ materially from those included in the forward-looking statements. Forward-looking statements are typically identified by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may increase,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” and “could.” These forward-looking statements involve risks and uncertainties including, but not limited to, economic conditions, portfolio growth, the credit performance of the portfolios, including bankruptcies, and seasonal factors; changes in general economic conditions including the performance of financial markets, the performance of coal and coal related industries, prevailing inflation and interest rates, realized gains from sales of investments, gains from asset sales, and losses on commercial lending activities; results of various investment activities; the effects of competitors’ pricing policies, of changes in laws and regulations on competition and of demographic changes on target market populations’ savings and financial planning needs; industry changes in information technology systems on which we are highly dependent; failure of acquisitions to produce revenue enhancements or cost savings at levels or within the time frames originally anticipated or unforeseen integration difficulties; the adoption by CTBI of an FFIEC policy that provides guidance on the reporting of delinquent consumer loans and the timing of associated credit charge-offs for financial institution subsidiaries; and the resolution of legal proceedings and related matters. In addition, the banking industry in general is subject to various monetary and fiscal policies and regulations, which include those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and state regulators, whose policies and regulations could affect CTBI’s results. These statements are representative only on the date hereof, and CTBI undertakes no obligation to update any forward-looking statements made.

Community Trust Bancorp, Inc., with assets of $3.7 billion, is headquartered in Pikeville, Kentucky and has 71 banking locations across eastern, northeastern, central, and south central Kentucky, six banking locations in southern West Virginia, four banking locations in northeastern Tennessee, four trust offices across Kentucky, and one trust office in Tennessee.

Additional information follows.