Community Trust Bancorp, Inc. 2013 Form 10-K Summary
Business Context and Reporting Period
Community Trust Bancorp, Inc. is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. Its principal markets are eastern, northeastern, central, and south central Kentucky, southern West Virginia, and northeastern Tennessee. The company provides commercial and consumer banking, mortgage banking, trust, wealth management, brokerage, and related financial services through 81 banking locations and additional trust offices.
This filing covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. The filing also presents unaudited quarterly data, including the three months ended December 31, 2013.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net interest income | $134.7 million | $132.1 million | Up 1.9% |
| Provision for loan losses | $8.6 million | $9.5 million | Down 9.3% |
| Noninterest income | $49.3 million | $46.0 million | Up 7.3% |
| Noninterest expense | $110.3 million | $103.6 million | Up 6.5% |
| Income before taxes | $65.2 million | $65.1 million | Essentially unchanged |
| Net income | $45.2 million | $44.9 million | Up 0.7% |
| Basic EPS | $2.90 | $2.90 | Flat |
| Diluted EPS | $2.88 | $2.89 | Slightly lower |
| Net interest margin | 4.03% | 3.99% | Up 4 basis points |
| Return on average assets | 1.24% | 1.23% | Up 1 basis point |
| Return on average equity | 11.05% | 11.52% | Down 47 basis points |
Total revenue, defined by management as net interest income plus noninterest income, was approximately $184.0 million versus the 2013 goal of $185.6 million. Interest income declined to $148.1 million from $153.7 million, but interest expense fell more substantially to $13.4 million from $21.6 million, supporting higher net interest income and margin.
Loans outstanding increased 2.5% to $2.62 billion, while net loans were $2.58 billion after a $34.0 million allowance for loan and lease losses. Commercial loans represented 52.3% of total loans, residential loans 32.1%, and consumer loans 15.7%. Approximately 70% of the loan portfolio was secured by real estate.
Total assets were $3.58 billion, down 1.5% from 2012. Deposits were $2.86 billion, and deposits plus repurchase agreements were approximately $3.06 billion, down 1.6%. Shareholders’ equity increased 3.0% to $412.5 million. Long-term debt remained $61.3 million, consisting of junior subordinated debentures due in 2037. Short-term borrowings, primarily repurchase agreements and federal funds purchased, totaled $220.5 million.
Cash and cash equivalents declined to $106.6 million from $207.6 million. Securities available for sale were $609.4 million. Management reported $342.6 million of available Federal Home Loan Bank borrowing capacity and $44 million of correspondent-bank lines of credit. Net cash provided by operating activities was $90.7 million; investing activities used $122.0 million and financing activities used $69.6 million.
Net charge-offs declined to $7.8 million, or 0.30% of average loans, from $9.4 million, or 0.37%. The allowance remained 1.30% of loans, but allowance coverage of nonperforming loans declined to 78.1% from 92.3%.
Material Changes Versus the Prior Comparable Period
- Loan balances increased $64.8 million, led by an $54.8 million increase in commercial loans.
- Nonperforming loans increased 21.0% to $43.6 million from $36.0 million. Nonaccrual loans rose to $20.0 million, and loans 90 days or more past due and still accruing rose to $23.6 million.
- Total nonperforming assets were $82.7 million, modestly below $83.0 million in 2012. Foreclosed properties declined to $39.2 million from $47.0 million.
- Noninterest income benefited from higher loan-sale gains, deposit service charges, trust and wealth management revenue, loan-related fees, and bank-owned life insurance income. Securities gains declined to a $45 thousand loss from a $1.2 million gain.
- Noninterest expense increased primarily because of higher personnel and data-processing costs and a $6.2 million accrual related to a Federal Reserve investigation.
- Accumulated other comprehensive income changed from a $12.7 million gain to an $8.0 million loss, primarily because of unrealized losses on available-for-sale securities as interest rates increased.
- Cash dividends increased from $1.25 to $1.27 per share. The 2013 dividend payout ratio was 43.79%. No shares were repurchased during 2013 or 2012.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management established 2014 target ranges, not forecasts, of $2.90 to $3.06 diluted or basic EPS as presented in the filing, $45.5 million to $48.3 million of net income, 1.25% to 1.31% ROAA, 10.79% to 11.85% ROAE, $179.3 million to $189.3 million of revenue, $2.65 billion to $2.80 billion of loans, $3.10 billion to $3.20 billion of deposits including repurchase agreements, and $440 million to $446 million of shareholders’ equity.
The Federal Reserve identified errors in processing certain non-PIN point-of-sale overdraft transactions. CTBI expects to modify its processing and disclosures and provide restitution for affected accountholders charged fees from June 28, 2010 until the methodology is revised. Management estimated exposure at $5.8 million to $6.7 million and accrued $6.2 million. The matter may impede merger and acquisition activity for an unspecified period, and deposit-related fees are expected to decline by approximately $0.9 million in 2014.
Management stated that capital ratios were expected to remain above Basel III well-capitalized requirements. At December 31, 2013, CTBI’s Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 11.51%, 16.15%, and 17.40%, respectively. Community Trust Bank’s corresponding ratios were 11.03%, 15.45%, and 16.70%.
Key risks include deterioration in local economies, particularly coal-related markets; commercial real estate and construction credit losses; rising nonperforming loans and foreclosed properties; interest-rate and liquidity risk; deposit competition; regulatory and compliance costs under Dodd-Frank and Basel III; operational and cybersecurity disruptions; dependence on technology vendors; competition from larger banks and nonbank providers; acquisition and integration risk; and potential legal or regulatory proceedings.
The company reported no material foreign exposure, no material trading or derivative activity, no unresolved SEC staff comments, and no material impact from adopted new accounting standards. The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Most Important Facts an Investor Should Verify
- Whether the Federal Reserve overdraft-processing investigation is ultimately resolved within the accrued $6.2 million and the timing and amount of customer restitution.
- Whether the 21% increase in nonperforming loans continues and whether reserve coverage remains adequate, particularly for commercial real estate, construction, and coal-related credits.
- Whether loan growth can be sustained while deposits declined and cash and cash equivalents fell by approximately $101 million.
- The effect of higher interest rates on available-for-sale securities, accumulated other comprehensive income, mortgage servicing rights, deposit costs, and net interest margin.
- Whether 2014 management targets are achieved and how the overdraft changes affect noninterest income.
- The effect of Basel III capital calculations, including the capital conservation buffer, on dividends, repurchases, compensation, and acquisition capacity.
- The company’s ability to maintain liquidity through core deposits, securities, Federal Home Loan Bank capacity, and correspondent-bank lines.