COMMUNITY TRUST BANCORP INC annual report, FY2011

Community Trust Bancorp, Inc. — 2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011; filed March 15, 2012. CTBI is a Kentucky bank holding company operating Community Trust Bank and Community Trust and Investment Company across Kentucky, southern West Virginia, and northeastern Tennessee. The company operated 80 banking locations and had 1,015 full-time-equivalent employees at year-end.

Business Context and Financial Position

CTBI provides commercial, residential, consumer, trust, wealth-management, brokerage, deposit, cash-management, and related banking services.
Total assets were $3.591 billion, total deposits were $2.878 billion, and deposits including repurchase agreements were approximately $3.1 billion.
Loans were $2.557 billion, down 1.9% from 2010. Commercial loans represented 51.0% of the portfolio, residential loans 30.8%, and consumer loans 18.2%.
Shareholders’ equity was $366.9 million, with equity-to-assets of 10.22% and tangible common equity-to-tangible assets of 8.52%.
The acquisition of LaFollette First National Corporation completed in November 2010 was integrated into Community Trust Bank on January 21, 2011.

Key Financial Metrics

Metric	2011	2010	Change
Revenue, as defined by management	$175.3 million	Not clearly provided in the same presentation	Not clearly provided
Net interest income	$131.5 million	$119.3 million	+10.2%
Provision for loan losses	$13.3 million	$16.5 million	-19.5%
Noninterest income	$43.8 million	$40.9 million	+7.1%
Noninterest expense	$106.4 million	$96.1 million	+10.8%
Net income	$38.8 million	$33.0 million	+17.5%
Basic earnings per share	$2.54	$2.17	+17.1%
Return on average assets	1.11%	1.03%	+8 basis points
Return on average equity	10.91%	9.90%	+101 basis points
Net interest margin	4.13%	4.07%	+6 basis points
Net cash provided by operating activities	$64.3 million	$61.3 million	+$3.0 million
Net cash used in investing activities	$172.3 million	$111.8 million	Higher use of cash
Net cash provided by financing activities	$187.5 million	$67.4 million	Higher source of cash
Cash and cash equivalents, year-end	$238.5 million	$159.0 million	+$79.5 million

Margins, Credit Quality, Debt, and Liquidity

The net interest margin improved despite a 29-basis-point decline in the yield on average earning assets, primarily because the cost of interest-bearing funds declined 45 basis points as certificates of deposit repriced lower.
Net charge-offs were $14.9 million, or 0.58% of average loans, compared with $14.3 million and 0.58% in 2010.
The allowance for loan and lease losses was $33.2 million, or 1.30% of loans, versus 1.34% in 2010. Allowance coverage of nonperforming loans was 89.0% at year-end.
Nonperforming loans declined to $37.3 million from $62.0 million; nonperforming assets declined to $93.9 million from $105.1 million. However, foreclosed properties increased to $56.5 million from $42.9 million.
Total debt included $230.3 million of repurchase agreements and other short-term borrowings, $21.6 million of Federal Home Loan Bank advances, and $61.3 million of long-term debt. The long-term debt carries a 6.52% rate through June 1, 2012 and then converts to three-month LIBOR plus 1.59% through 2037.
Liquidity included $238.5 million of cash and cash equivalents, $527.4 million of available-for-sale securities, $259.3 million of available FHLB borrowing capacity, and a fully available $12 million revolving corporate credit line.
Regulatory capital remained strong. CTBI reported Tier 1 leverage of 9.89%, Tier 1 risk-based capital of 13.88%, and total risk-based capital of 15.14%, exceeding well-capitalized thresholds.

Material Changes Versus 2010

Net income increased $5.8 million, supported by higher net interest income and noninterest income and a lower loan-loss provision.
Average earning assets increased 8.8%, while the investment portfolio grew $188.7 million, or 55.5%, as weaker loan demand led management to invest excess liquidity in securities.
Deposits including repurchase agreements increased $201.1 million, or 6.9%.
Loan balances decreased $48.6 million, with declines in commercial and consumer loans partially offset by residential loan growth.
Noninterest expense increased $10.3 million, reflecting higher personnel, repossession, and other-real-estate-owned expenses, as well as costs associated with the LaFollette acquisition.
Mortgage servicing rights declined to $2.3 million from $3.2 million, primarily because of valuation changes, loan payoffs, and time decay.
Accumulated other comprehensive income increased to $10.2 million from $3.9 million, primarily due to higher unrealized gains on available-for-sale securities.

Guidance, Outlook, Commentary, and Unusual Items

Management’s 2012 target ranges were EPS of $2.55–$2.71, net income of $39.5–$42.0 million, ROAA of 1.08%–1.15%, ROAE of 10.50%–11.00%, revenue of $176–$186 million, assets of $3.65–$3.85 billion, loans of $2.6–$2.8 billion, deposits including repurchase agreements of $3.1–$3.3 billion, and shareholders’ equity of $380–$400 million. These were targets, not forecasts or guarantees.
Management expected 2012 to remain challenging because of economic weakness in its regional markets, unemployment, depressed real estate values, and continued credit and regulatory pressures.
Deposit service-charge revenue was expected to be negatively affected by changes in overdraft-item processing, with an estimated 2012 impact of $3 million to $5 million.
A $3.2 million charge reduced the carrying value of two groups of foreclosed properties that had been vandalized. CTBI filed insurance claims, but no recovery was recorded because the amount and timing of any recovery remained uncertain.
Other real estate owned expense totaled $8.6 million, including $6.4 million of fair-value adjustments. Management expected foreclosed-property levels to remain elevated while it worked through market conditions.
Legal actions arose in the ordinary course of business; management believed pending matters were without merit or would not materially affect consolidated results. The filing text does not identify a material unresolved legal contingency.
Key risks include regional economic weakness, commercial real estate and construction exposure, interest-rate and liquidity risk, competition, regulatory changes including Dodd-Frank, acquisition and integration risk, technology and cybersecurity risk, environmental liabilities, and valuation uncertainty for loans, foreclosed properties, securities, mortgage servicing rights, and goodwill.

Most Important Facts for Investors to Verify

Whether the improvement in nonperforming loans is sustainable while foreclosed properties remain elevated and troubled debt restructurings increased to $27.1 million from $6.6 million.
The adequacy of the 1.30% allowance-to-loans ratio and 89.0% allowance coverage of nonperforming loans under changing regional real estate and employment conditions.
The effect of the anticipated $3 million–$5 million decline in deposit service-charge revenue and the company’s ability to offset it through loan growth, pricing, or expense control.
Interest-rate sensitivity, including the long-term debt repricing after June 1, 2012 and the reported potential 3.32% increase in annual net interest income under a gradual 400-basis-point rate increase.
The realizability and timing of insurance recoveries related to vandalized foreclosed properties; no recovery was recognized at December 31, 2011.
Liquidity and funding concentration, including reliance on demand and savings deposits, repurchase agreements, FHLB capacity, and the availability of the $12 million revolving line.
Whether the 2012 target ranges are achieved without deterioration in credit quality, capital ratios, or dividend capacity. The annual cash dividend was $1.23 per share, representing 48.43% of net income.
The audited financial statements received an unqualified opinion, and management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2011.