Community Trust Bancorp, Inc. — FY2017 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 a trust company across Kentucky, southern West Virginia, and northeastern Tennessee. The filing covers the fiscal year ended December 31, 2017; fourth-quarter results are included within the annual filing. CTBI operates 80 banking locations, had 990 full-time-equivalent employees, and provides commercial and consumer banking, mortgage, trust, wealth-management, brokerage, and insurance services.
| Year-end scale | December 31, 2017 |
|---|---|
| Total assets | $4.136 billion |
| Total deposits | $3.264 billion; $3.507 billion including repurchase agreements |
| Total loans | $3.123 billion |
| Shareholders’ equity | $530.7 million |
| Trust assets under management | $2.2 billion |
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $137.4 million | $133.0 million | +3.3% |
| Provision for loan losses | $7.5 million | $7.9 million | -4.5% |
| Noninterest income | $48.5 million | $48.4 million | +0.1% |
| Noninterest expense | $109.9 million | $107.1 million | +2.6% |
| Income before taxes | $68.5 million | $66.5 million | +3.1% |
| Net income | $51.5 million | $47.3 million | +8.8% |
| Basic and diluted EPS | $2.92 | $2.70 | +8.1% |
| Net interest margin, taxable equivalent | 3.67% | 3.70% | -3 basis points |
| Return on average assets | 1.27% | 1.21% | +6 basis points |
| Return on average equity | 9.93% | 9.58% | +35 basis points |
| Efficiency ratio | 58.66% | 58.54% | Higher by 12 basis points |
Operating cash flow was $62.4 million, compared with $61.4 million in 2016. Investing activities used $186.6 million, primarily reflecting $194.5 million of net loan growth and securities purchases. Financing activities provided $154.8 million, principally from a $182.6 million increase in deposits. Cash and cash equivalents ended at $175.3 million, versus $144.7 million at December 31, 2016.
Interest-bearing liabilities increased in cost as the cost of interest-bearing funds rose to 0.67% from 0.52%. Average earning assets grew 4.0%, while the yield on average earning assets increased to 4.15% from 4.07%, producing higher net interest income but a modestly lower margin.
Debt consisted primarily of $59.3 million of junior subordinated debentures due in 2037, plus $251.1 million of repurchase agreements and federal funds purchased and $0.8 million of Federal Home Loan Bank advances. CTBI repurchased $2.0 million principal amount of subordinated debentures for $1.4 million, recognizing a $0.6 million gain.
CTBI increased its annual dividend from $1.26 to $1.30 per share. The 2017 dividend payout ratio was 44.5%, and no shares were repurchased during 2017.
Material changes versus the prior comparable period
- Total assets increased $204.1 million, or 5.2%, to $4.136 billion.
- Loans increased $184.6 million, or 6.3%, led by commercial loans, indirect consumer loans, consumer direct loans, and residential loans.
- Deposits, including repurchase agreements, increased $175.3 million, or 5.3%. The increase included $82.3 million of wholesale brokered deposits added in the third quarter.
- Shareholders’ equity increased 6.0% to $530.7 million, primarily through retained earnings.
- Net charge-offs declined to $7.3 million, or 0.24% of average loans, from $8.0 million, or 0.28%.
- Nonperforming loans increased to $28.3 million from $27.5 million, but total nonperforming assets declined to $60.4 million from $63.4 million. Nonperforming assets were 1.92% of loans and foreclosed properties, compared with 2.13%.
- The allowance for loan and lease losses increased slightly to $36.2 million, but declined to 1.16% of loans from 1.22%; coverage of nonperforming loans declined to 127.8% from 130.8%.
- Noninterest expense increased primarily because personnel expense rose $1.8 million and other-real-estate-owned expense rose $1.6 million, partly offset by lower FDIC insurance expense.
Guidance, outlook, commentary, risks, and unusual items
Management’s stated 2018 target ranges were basic EPS of $3.32–$3.40, net income of $58.8–$60.2 million, return on average assets of 1.41%–1.44%, return on average equity of 10.72%–10.97%, assets of $4.15–$4.32 billion, loans of $3.15–$3.35 billion, deposits including repurchase agreements of $3.47–$3.61 billion, and shareholders’ equity of $552.6–$575.2 million. Management noted that approximately $8 million of the higher 2018 net-income target reflects expected tax savings from the Tax Cuts and Jobs Act.
The Tax Cuts and Jobs Act generated a $2.8 million 2017 tax benefit, increasing EPS by approximately $0.16. CTBI also accrued a $0.7 million after-tax employee bonus expense, reducing EPS by approximately $0.04. Management stated that these items increased reported 2017 EPS by a net $0.12.
Liquidity included $175.3 million of cash and cash equivalents, $585.8 million of available-for-sale securities, $295.5 million of unused Federal Home Loan Bank borrowing capacity, and $57 million of correspondent-bank lines. Brokered deposits totaled $82.3 million with a weighted average maturity of 1.97 years. The company stated that it did not rely on any single liquidity source.
CTBI and its bank subsidiary exceeded regulatory well-capitalized thresholds. CTBI’s Tier 1 leverage, common equity Tier 1, Tier 1, and total capital ratios were 12.89%, 15.33%, 17.22%, and 18.41%, respectively. Management expects capital ratios to remain above applicable requirements.
- Major risks include local economic weakness, elevated unemployment in certain markets, commercial real estate and small-business credit exposure, consumer and indirect-auto credit risk, interest-rate and liquidity risk, competition, cybersecurity and technology disruption, regulatory changes, and litigation.
- Commercial real estate represented approximately 38% of total loans, commercial loans approximately 11%, construction and development loans approximately 5%, and consumer loans approximately 20%. Approximately 69% of loans were secured by real estate.
- Foreclosed properties remained elevated at $32.0 million. CTBI recorded $3.0 million of valuation write-downs and $4.5 million of total carrying costs and fair-value adjustments during 2017. Forty-three percent of foreclosed properties by book value had been held for more than five years.
- CTBI disclosed required customer reimbursements related to two deposit add-on products. The timing and amount had not been determined, and management stated that the actual amount could materially vary from its estimate.
- Off-balance-sheet commitments totaled $546.0 million, including $516.7 million of commitments to extend credit and $29.3 million of standby letters of credit. These commitments may not result in equivalent cash funding because some expire unused.
- Management reported no material pending litigation exposure based on its assessment with legal counsel. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Reconcile reported 2017 EPS and net income for the $2.8 million tax benefit and $0.7 million employee bonus accrual; assess the sustainability of the 2018 guidance excluding these unusual effects.
- Review whether loan growth, particularly in commercial real estate and indirect consumer lending, is accompanied by deterioration in delinquencies, nonperforming loans, charge-offs, or allowance coverage.
- Monitor the decline in net interest margin and the effect of rising deposit and wholesale funding costs on future net interest income.
- Assess liquidity dependence on brokered deposits, repurchase agreements, and other wholesale funding as loan growth continues to exceed internally generated deposit growth.
- Evaluate the carrying value, aging, appraisal assumptions, and future expense exposure of the $32.0 million foreclosed-property portfolio.
- Determine the eventual cost and timing of customer reimbursements related to the two deposit add-on products.
- Review the effect of the future expected-credit-loss standard, lease accounting, tax changes, and other accounting updates on capital, earnings, and disclosures.