Business context and reporting period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company operating Community Trust Bank and a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. Its activities include commercial and consumer banking, mortgage banking, trust, wealth management, brokerage, and insurance services. This Form 10-K covers the fiscal year ended December 31, 2020; fourth-quarter results are included in the annual filing.
At year-end, CTBI reported $5.14 billion of assets, $4.37 billion of deposits including repurchase agreements, $654.9 million of shareholders’ equity, $2.8 billion of trust assets under management, and 998 full-time-equivalent employees.
Financial performance and condition
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net interest income | $151.0 million | $144.9 million | Up 4.2% |
| Provision for credit losses | $16.0 million | $4.8 million | Up $11.2 million |
| Noninterest income | $54.6 million | $50.2 million | Up 8.7% |
| Noninterest expense | $119.2 million | $118.3 million | Up 0.8% |
| Net income | $59.5 million | $64.5 million | Down 7.8% |
| Basic and diluted EPS | $3.35 | $3.64 | Down 8.0% |
| Net interest margin, taxable equivalent | 3.33% | 3.60% | Down 27 basis points |
| Return on average assets | 1.23% | 1.49% | Down 26 basis points |
| Return on average equity | 9.36% | 10.84% | Down 148 basis points |
Loans increased 9.4% to $3.55 billion, including $252.7 million of outstanding PPP loans. Commercial loans represented 53.3% of the portfolio, residential loans 25.0%, and consumer loans 21.7%. The allowance for credit losses was $48.0 million, or 1.35% of loans, compared with $35.1 million, or 1.08%, at December 31, 2019.
Asset quality improved despite the pandemic. Nonperforming loans declined to $26.6 million from $33.6 million, nonperforming assets declined to $34.3 million from $53.1 million, and nonperforming assets represented 0.96% of loans and foreclosed properties versus 1.62% in 2019. Net charge-offs were $6.2 million, or 0.18% of average loans, compared with $5.6 million and 0.18% in 2019.
Cash provided by operating activities was $62.4 million, compared with $83.5 million in 2019. Investing activities used $693.5 million, principally reflecting $857.2 million of purchases of available-for-sale securities and $306.5 million of net loan growth. Financing activities provided $704.7 million, primarily from $610.5 million of deposit growth and $121.5 million of increased repurchase agreements and federal funds purchased. Cash and cash equivalents increased to $338.2 million from $264.7 million.
Liquidity resources included $338.2 million of cash and cash equivalents, $997.3 million of available-for-sale securities, $477.2 million of available Federal Home Loan Bank borrowing capacity, and $75 million of correspondent bank credit lines. Long-term debt was $57.8 million, consisting primarily of junior subordinated debentures linked to three-month LIBOR and maturing in 2037.
CTBI’s community bank leverage ratio was 12.70% at December 31, 2020, and Community Trust Bank’s ratio was 12.13%, both above the applicable 8.00% requirement. The annual cash dividend increased to $1.53 per share from $1.48, representing a 45.7% payout ratio.
Material changes versus the prior comparable period
- Net income decreased $5.0 million, primarily because the provision for credit losses increased $11.2 million and the net interest margin contracted.
- Average earning assets grew 12.8%, while the yield on average earning assets declined 72 basis points to 3.88%. Lower interest rates reduced asset yields, although the cost of interest-bearing funds declined 60 basis points to 0.82%.
- Deposits, including repurchase agreements, increased 20.4% to approximately $4.4 billion. Total assets increased 17.7% to $5.14 billion.
- Noninterest income increased $4.4 million, helped by higher mortgage loan-sale gains, securities gains, and loan-related fees. Deposit service-charge income declined $2.9 million.
- Mortgage banking expanded significantly: CTBI delivered 1,960 secondary-market mortgage loans totaling $341.7 million, compared with 580 loans totaling $80.5 million in 2019. The mortgage servicing portfolio increased to $639.8 million.
- CTBI adopted CECL on January 1, 2020. The adoption increased the allowance by $3.0 million and reduced shareholders’ equity by $2.4 million after tax and related effects.
- Foreclosed properties declined to $7.7 million from $19.5 million, while other real estate owned expense and valuation charges also decreased.
Guidance, outlook, commentary, risks, and unusual items
Management provided 2021 target ranges, not a forecast: basic EPS of $3.76-$3.92, net income of $67.1-$69.8 million, return on average assets of 1.30%-1.35%, return on average equity of 9.88%-10.28%, revenue of $209.6-$218.1 million, assets of $5.04-$5.35 billion, loans of $3.48-$3.63 billion, deposits including repurchase agreements of $4.30-$4.47 billion, and shareholders’ equity of $682.6-$710.5 million.
COVID-19 remained the principal uncertainty. CTBI processed 3,844 loan deferrals totaling $992 million; by year-end, 3,071 customers representing $540 million had resumed payments, while 410 customers had $130 million outstanding under active deferrals. Deferrals qualifying under the CARES Act were excluded from reported nonperforming loans.
CTBI closed 2,962 PPP loans totaling $277.0 million, of which $18.8 million had been forgiven by the SBA by year-end. PPP loans carried a 1% contractual rate, and management expected most to be forgiven. Risks include SBA forgiveness or guarantee disputes, PPP-related litigation, borrower eligibility issues, and potential reputational or financial exposure.
Management identified continuing risks from COVID-19-related credit deterioration, particularly in hotel and motel lending, commercial real estate, small and midsized businesses, and local economies. Other material risks include interest-rate compression, liquidity needs, competition, cybersecurity and third-party systems, regulatory changes, climate-related pressure on coal-linked markets, and the transition away from LIBOR. At year-end, approximately $27.8 million of variable-rate loans, $113.6 million of available-for-sale securities, and $57.8 million of debentures were linked to LIBOR.
Unusual items included a $2.4 million post-retirement benefit charge related to bank-owned life insurance, $1.5 million of foreclosed-property valuation charges, significant securities purchases funded by deposit growth, and a $9.3 million after-tax increase in accumulated other comprehensive income from available-for-sale securities.
Pending legal actions arose in the ordinary course of business; management stated that they were without merit or were not expected to materially affect consolidated financial position or results. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The allowance for credit losses was identified as the critical audit matter because of significant modeling, economic forecast, loan grading, and valuation judgments.
Most important facts for investors to verify
- Whether the 2021 targets are achieved, particularly the EPS and net income ranges, given the low-rate environment and pandemic uncertainty.
- Future performance of the $48.0 million CECL allowance, including whether active deferrals, PPP expiration, and commercial real estate or hotel exposure produce additional losses.
- The pace and quality of PPP forgiveness and any SBA-related guarantee disputes or litigation.
- Sustainability of the 2020 deposit growth, liquidity position, and reliance on repurchase agreements and other short-term funding.
- Impact of LIBOR replacement on the $57.8 million debentures and other linked assets and contracts.
- Trends in net interest margin, mortgage refinancing activity, mortgage servicing rights, and securities portfolio yields.
- Dividend capacity and regulatory capital as the CBLR requirement rises to 8.5% in 2021 and 9% in 2022.