Community Trust Bancorp, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
Community Trust Bancorp, Inc. (CTBI) is a Kentucky-based bank holding company operating Community Trust Bank and Community Trust and Investment Company. Its banking and trust operations serve eastern, northeastern, central and south-central Kentucky, southern West Virginia and northeastern Tennessee. The filing covers the fiscal year ended December 31, 2019, including fourth-quarter results. CTBI operated 79 banking locations and had approximately 1,000 full-time equivalent employees.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $4.366 billion | $4.202 billion | +3.9% |
| Loans | $3.249 billion | $3.209 billion | +1.2% |
| Deposits | $3.406 billion | $3.306 billion | +3.0% |
| Deposits plus repurchase agreements | $3.632 billion | Approximately $3.538 billion | +2.7% |
| Shareholders’ equity | $614.9 million | $564.2 million | +9.0% |
| Net interest income | $144.9 million | $142.2 million | +1.9% |
| Noninterest income | $50.2 million | $52.0 million | -3.4% |
| Net income | $64.5 million | $59.2 million | +9.0% |
| Diluted EPS | $3.64 | $3.35 | +8.7% |
| Return on average assets | 1.49% | 1.41% | +8 basis points |
| Return on average equity | 10.84% | 10.83% | Approximately flat |
| Net interest margin | 3.60% | 3.66% | -6 basis points |
Net cash provided by operating activities was $83.5 million, compared with $65.5 million in 2018. Investing activities used $34.5 million, primarily reflecting securities purchases and net loan growth, while financing activities provided $74.3 million, principally from deposit growth. Cash and cash equivalents increased to $264.7 million from $141.5 million.
Provision for loan losses declined to $4.8 million from $6.2 million. Net charge-offs were $5.6 million, or 0.18% of average loans, compared with $6.4 million, or 0.20%, in 2018. The allowance for loan and lease losses was $35.1 million, equal to 1.08% of loans and 104.4% of nonperforming loans.
Long-term debt was $57.8 million, consisting primarily of junior subordinated debentures due in 2037 and tied to LIBOR. Short-term borrowings included $226.9 million of repurchase agreements and $7.9 million of federal funds purchased. CTBI reported $391.9 million of available Federal Home Loan Bank borrowing capacity and $45 million of correspondent-bank lines of credit.
Material changes versus the prior comparable period
- Record net income increased $5.3 million, primarily because of lower income tax expense and higher net interest income.
- A $2.7 million net state tax benefit, or $0.15 per basic share, resulted from Kentucky tax legislation that permits combined reporting and changes the bank franchise-tax regime beginning in 2021.
- Average earning assets increased $130.4 million, and the yield on average earning assets increased 20 basis points, but the cost of interest-bearing funds increased 37 basis points, reducing the net interest margin by 6 basis points.
- Noninterest income declined $1.8 million, mainly because of lower trust revenue, insurance commissions, loan-related fees, other-real-estate-owned gains and bank-owned life insurance proceeds. These declines were partly offset by higher loan-sale gains, deposit service charges and securities gains.
- Noninterest expense rose $0.9 million, including higher personnel, data-processing and other-real-estate-owned expenses.
- Nonperforming loans increased 52.4% to $33.6 million, or 1.03% of total loans, from $22.1 million, or 0.69%. Nonperforming assets increased 7.5% to $53.1 million, although foreclosed properties declined to $19.5 million from $27.3 million.
- Shareholders’ equity benefited from retained earnings and a $10.9 million after-tax increase in accumulated other comprehensive income, primarily from unrealized gains on available-for-sale securities.
- CTBI adopted the new lease standard on January 1, 2019, recording approximately $16.1 million of lease liabilities and $15.5 million of right-of-use assets, with an approximately $0.5 million net reduction to retained earnings.
Guidance, outlook, risks and unusual items
Management’s 2020 target ranges, which are not forecasts or assurances, include basic EPS of $3.23–$3.29, net income of $57.5–$58.6 million, return on average assets of 1.29%–1.32%, return on average equity of 9.09%–9.28%, revenue of $197.8–$201.8 million, assets of $4.39–$4.66 billion, loans of $3.33–$3.47 billion, deposits including repurchase agreements of $3.69–$3.84 billion, and shareholders’ equity of $632.1–$657.9 million.
CTBI and Community Trust Bank were well capitalized. At year-end, CTBI reported a common equity Tier 1 ratio of 17.18%, Tier 1 capital ratio of 18.94%, total capital ratio of 20.05% and Tier 1 leverage ratio of 14.01%. CTBI had not decided whether to adopt the community bank leverage ratio framework effective in 2020.
Management identified credit quality, local economic conditions, interest rates, liquidity, regulatory changes, competition, technology and cybersecurity, acquisition execution, litigation and climate-related effects on coal-dependent markets as significant risks. The loan portfolio is concentrated in the company’s regional markets, with approximately 67% secured by real estate and commercial real estate representing approximately 39% of total loans. Three customers with approximately $11.2 million of loans were experiencing financial difficulties; management did not expect significant losses but anticipated that past-due loans could remain elevated for several quarters.
CTBI estimated that adoption of the current expected credit loss standard on January 1, 2020 would increase the allowance for credit losses by approximately $2.1–$3.9 million, or 6%–11%, with the after-tax effect recorded in retained earnings. The estimate was subject to changes in credit quality, economic forecasts and loan composition.
Approximately $28.3 million of variable-rate loans, $46.4 million of available-for-sale securities and $57.8 million of debentures were tied to LIBOR, substantially with maturities beyond 2021. The transition from LIBOR to an alternative reference rate could create operational, contractual and interest-rate risks.
CTBI disclosed $594.9 million of off-balance-sheet commitments, including $564.2 million of commitments to extend credit and $30.7 million of standby letters of credit. Pending legal proceedings arose in the ordinary course of business; management believed they were without merit or would not materially affect consolidated results.
Most important facts for investors to verify
- Whether the sharp increase in nonperforming loans persists and leads to higher provisions, charge-offs or reduced reserve coverage.
- The actual first-quarter 2020 impact of CECL adoption relative to the estimated $2.1–$3.9 million allowance increase.
- Whether 2020 earnings meet management’s lower EPS and profitability targets and whether margin pressure continues.
- The effect of Kentucky tax changes after the 2019 one-time tax benefit.
- CTBI’s LIBOR transition plan for loans, securities and the $57.8 million LIBOR-linked debentures.
- Liquidity and funding stability, including brokered deposits of $37.1 million, repurchase agreements and available borrowing capacity.
- Potential losses or carrying costs from other real estate owned, including properties held for extended periods and scheduled holding-period limits.
- Exposure to local commercial real estate, hotel/motel, small-business, consumer indirect and coal-related economic risks.