Community Trust Bancorp, Inc. — 2018 Form 10-K Summary
Business context and reporting period
CTBI is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. Its businesses include commercial and consumer banking, lending, mortgage banking, trust, wealth management, brokerage and insurance services across Kentucky, southern West Virginia and northeastern Tennessee. This filing covers the fiscal year ended December 31, 2018, with unaudited quarterly data for the fourth quarter included.
At year-end, CTBI had 79 banking locations, 978 full-time-equivalent employees, approximately $4.2 billion of assets, $3.5 billion of deposits including repurchase agreements, $564.2 million of shareholders’ equity and $2.0 billion of trust assets under management.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net income | $59.2 million | $51.5 million | 15.0% increase |
| Basic and diluted EPS | $3.35 | $2.92 | 14.7% increase |
| Net interest income | $142.2 million | $137.4 million | 3.5% increase |
| Noninterest income | $52.0 million | $48.5 million | 7.1% increase |
| Noninterest expense | $117.4 million | $109.9 million | 6.8% increase |
| Provision for loan losses | $6.2 million | $7.5 million | 18.0% decrease |
| Net interest margin | 3.66% | 3.67% | 1 basis point decrease |
| Return on average assets | 1.41% | 1.27% | Increase |
| Return on average equity | 10.83% | 9.93% | Increase |
| Total loans | $3.21 billion | $3.12 billion | 2.7% increase |
| Total assets | $4.20 billion | $4.14 billion | 1.6% increase |
| Shareholders’ equity | $564.2 million | $530.7 million | 6.3% increase |
| Cash and cash equivalents | $141.5 million | $175.3 million | Decrease |
Cash flow from operating activities was $65.5 million, compared with $62.4 million in 2017. Investing activities used $100.6 million, primarily reflecting securities purchases and loan growth. Financing activities provided $1.3 million. Cash and cash equivalents declined by $33.8 million during the year.
Interest-bearing funding costs increased materially as the cost of interest-bearing funds rose to 1.05% from 0.67%, partly offsetting a 25-basis-point increase in the yield on average earning assets. The efficiency ratio increased to 60.17% from 58.66%.
Long-term debt was $59.3 million at year-end, consisting primarily of junior subordinated debentures due in 2037. CTBI reported $232.7 million of repurchase agreements, $1.2 million of federal funds purchased and $0.4 million of FHLB advances. Liquidity included $593.7 million of available-for-sale securities, $312.2 million of unused FHLB borrowing capacity and $45 million of correspondent-bank credit lines.
Asset quality improved. Nonperforming loans declined to $22.1 million from $28.3 million, nonperforming assets declined to $49.4 million from $60.4 million, and net charge-offs declined to $6.4 million from $7.3 million. The allowance for loan and lease losses was $35.9 million, or 1.12% of loans, and covered 162.7% of nonperforming loans.
Material changes versus the prior comparable period
- Record net income increased $7.7 million, supported by higher net interest income, noninterest income, lower loan-loss provision and a lower effective tax rate.
- Loan growth was led by indirect consumer lending, which increased approximately $44.1 million, while commercial loans increased $25.5 million and residential loans increased $9.6 million.
- Noninterest income benefited from higher deposit service charges, trust revenue and bank-owned life insurance income.
- Noninterest expense included a $3.6 million customer reimbursement accrual related to a Federal Reserve consent order involving two deposit add-on products. Total noninterest expense increased $7.5 million.
- CTBI reduced wholesale brokered deposits to $42.3 million from $82.3 million, principally following a $40 million maturity.
- Other real estate owned declined to $27.3 million from $32.0 million, although carrying costs and fair-value adjustments remained material at $4.3 million.
- Accumulated other comprehensive loss increased to $6.6 million, primarily because of unrealized losses on available-for-sale securities caused by higher interest rates; management considered the losses temporary and not credit-related.
- CTBI recognized a $1.2 million gain after electing fair-value accounting for Visa Class B shares.
Guidance, outlook, commentary and risks
Management’s 2019 target ranges, expressly described as goals rather than a forecast, were basic EPS of $3.45–$3.52, net income of $61.3–$62.6 million, ROAA of 1.44%–1.47%, revenue of $189.0–$194.7 million, assets of $4.20–$4.46 billion, loans of $3.31–$3.45 billion, deposits including repurchase agreements of $3.56–$3.71 billion and shareholders’ equity of $584.0–$607.8 million.
CTBI and its bank subsidiary were well-capitalized. CTBI’s common equity Tier 1, Tier 1, total capital and Tier 1 leverage ratios were 16.27%, 18.12%, 19.29% and 13.51%, respectively. Management stated that capital ratios were expected to remain above well-capitalized and capital-conservation requirements.
Interest-rate risk remains significant. The company estimated that a gradual 400-basis-point rate increase would raise twelve-month net interest income by 10.26%, while a 200-basis-point decline would reduce it by 4.90%. These modeled results depend on assumptions and may differ from actual outcomes.
- Credit exposure is concentrated in the company’s regional markets, including commercial real estate, small and medium-sized businesses, consumer indirect loans and real estate-secured lending.
- Approximately 67% of loans were secured by real estate, and commercial real estate represented approximately 39% of total loans.
- Foreclosed properties remained above historical norms. Approximately $2.4 million had been held for at least nine years and was expected to be sold in 2019; proceeds could be below book value or properties could be relinquished.
- The Federal Reserve consent order may increase compliance costs, require customer restitution and restrict merger and acquisition activity for an unspecified period.
- Liquidity could be affected by deposit withdrawals, market disruption, increased funding costs or loss of access to brokered deposits and other funding sources.
- Other principal risks include local economic weakness, unemployment, interest-rate changes, competition, regulatory changes, technology and cybersecurity failures, climate-related effects on coal-linked markets, litigation and acquisition-integration risk.
- CTBI had $539.9 million of off-balance-sheet commitments, including $510.5 million of commitments to extend credit and $29.4 million of standby letters of credit.
- The company planned to implement the current expected credit loss standard and expected to begin parallel model operation in the third quarter of 2019. The filing does not provide a clear quantified estimate of the eventual capital or earnings impact.
Most important facts for an investor to verify
- Whether loan growth, particularly indirect consumer and commercial real estate growth, is accompanied by stable delinquency, charge-off and reserve trends.
- Progress and ultimate cost of the Federal Reserve consent order, including customer restitution and any effect on acquisitions or regulatory oversight.
- Whether the 2019 target ranges were achieved and how results were affected by funding-cost pressure and net interest margin changes.
- The realizable value and disposition timing of long-held foreclosed properties, including the $2.4 million held for at least nine years.
- The sensitivity of earnings and accumulated other comprehensive income to further interest-rate increases and securities-market declines.
- The effect of CECL adoption on the allowance, regulatory capital, provisions and earnings.
- Liquidity coverage, deposit stability, reliance on repurchase agreements and brokered deposits, and the availability of unused borrowing capacity.
- The filing’s audited financial statements and internal-control report, both of which received unqualified opinions from BKD, LLP.