AMTB - Community Trust Bancorp Doesn't Make The Cut

2024-01-16 04:40:59 ET

Summary

• Community Trust Bancorp is a solid regional bank with steady deposits even during the banking crisis of 2023.
• The bank has experienced growth in assets, loans, and deposits over the years.
• Shares are reasonably priced, but the bank's earnings and book value growth are not impressive, making it a decent prospect but not a standout investment.

When it comes to the banking sector, the options for investors are many. One such firm that fans of the space should at least be aware of is Community Trust Bancorp ( CTBI ). As far as regional or community banks are concerned, this particular prospect is not exactly large. But with a market capitalization of $765.9 million, it's not terribly small either. One of the things that fans of the institution will point out is that, even during the banking crisis of 2023, the firm held steady when it came to deposits. This shows a certain level of quality that many investors are likely to enjoy. At the same time, this quality does not come cheap. Shares are far from being expensive. But they do trade at a slight premium to book value and trade at the higher end of the range of what I prefer from a price to earnings perspective. For those who want a quality operator and who want to try and stay away as much as possible from instability, this makes for a fine prospect. But for value investors, I would argue that there are better prospects to be had at this time.

A solid bank

As far as banks go, Community Trust Bancorp is a particularly young player. It was originally founded back in 1980 and it is based out of Kentucky. This is the primary base of operations for it, though it does have operations throughout southern West Virginia and northeastern Tennessee. From the 79 locations that it has spread across 35 counties throughout the states in which it operates, not to mention the five trust offices that it has split between Kentucky and Tennessee, Community Trust Bancorp provides customers with a wide array of banking services. Examples of this include traditional deposit and account services, the origination of secured and unsecured corporate loans, the origination of various types of loans to individuals and other institutions, and more. The company also has a subsidiary that acts as a trustee of personal trusts, as executors of state, and in other similar capacities. The firm also provides certain wealth management activities for clients as well.

Over the years, the value of assets that the bank has increased nicely. The value of loans, for instance, grew from $3.55 billion in 2020 to $3.71 billion in 2022. Even during the difficult 2023 year, loan values continued to grow, climbing to just under $3.99 billion by the end of the third quarter . 67% of the value of its loans are variable in nature, with the remaining 33% being fixed. This is good in the sense that as interest rates rise, the amount of income the institution can capture should also expand. On the other hand, it does increase the risk of loans underperforming. The good news is that while net charge offs in the first nine months of 2023 quadrupled from 0.02% in 2022 to 0.08%, non-performing loans dropped from 0.41% to 0.33% over the same window of time. Sticking on the topic of loans, it's worth mentioning that 40% of loan values are in the form of commercial real estate. Another 26% falls under the real estate mortgage space, with 20% involving consumer indirect loans. I wish we had data on office properties specifically. But management has not revealed anything on that front. We do know that non-residential real estate rental properties, which might include non-owner-occupied office spaces, accounted for only 6.7% of the value of all loans as of the end of the most recent quarter.

Other assets have also grown in recent years. The value of securities on its books, for instance, expanded from $1.02 billion in 2020 to $1.26 billion in 2022. We have seen a decrease since then to $1.14 billion as of the end of the most recent quarter. Although the value of cash on hand declined from $338.2 million in 2020 to $128.7 million in 2022, cash deposits have expanded since then and currently totaled $218.3 million. All of the expansion that the institution experienced has only been made possible by a growth in deposits. Total deposits grew from $4.02 billion in 2020 to $4.43 billion in 2022. Even though there was a lot of concern in the banking sector early last year, deposits dipped only slightly, falling from $4.54 billion in the first quarter to $4.52 billion in the second. But by the third quarter, deposits had recovered and attained all-time highs of $4.63 billion. This is great to see during such a time of uncertainty.

One thing that a lot of banks experienced that was negative, even if it was brief, was a surge in debt on the books. A lot of institutions drew down from various sources, including the Federal Reserve, in an attempt to bolster their cash on hand. Fortunately, Community Trust Bancorp never felt inclined to do that. Debt remained virtually unchanged from the end of 2022 to the end of the first quarter of 2023. At the end of the first quarter, it was $277.5 million. That's a nice decrease from the $416 million in debt on hand at the end of 2020. By the third quarter, debt increased only modestly to $301.2 million.

Perhaps the worst thing about Community Trust Bancorp is the fact that its book value per share has been a bit volatile. For instance, it peaked at $39.13 in 2021. That figure ended up declining to $35.05 in 2020. And in the first nine months of 2023, it has remained in a fairly narrow range, with a reading in the third quarter of $36.30. This does mean that the institution is trading at a 16.2% premium to its book value at this time. This is not bad, but it's not great either. I have seen multiple banks trade at discounts to their book value. This includes institutions that had perfectly healthy financials.

Thanks to an overall growth of the institution, as well as higher interest rates, net interest income for Community Trust Bancorp has grown from 2020 through 2022, climbing from $134.9 million to $164.2 million. As you can see in the chart above, this metric has continued to grow slightly into the 2023 fiscal year. However, non-interest income has been more or less range bound, not only in prior years, but last year as well. That has been instrumental in keeping net income more or less in a fairly narrow range also. Even in 2023, for the first nine months of the year, net profits totaled $59.3 million compared to $59.4 million one year earlier. Using data from 2022, the bank is trading at a price to earnings multiple of 9.4. This is toward the higher end of the range that I consider to be attractive. If we use analysts estimates for the fourth quarter of 2023, net profits for the year as a whole should come in at around $81.7 million. That would mean that the price to earnings multiple on a forward basis is virtually unchanged at 9.4 as well.

As part of my analysis, I also, in the chart above, compared the company on a price to earnings basis to five similar firms. What I found was that two of the five companies ended up being cheaper than it. In the chart below, meanwhile, I looked at the picture through the lens of the price to book ratio. In this case, three of the five businesses ended up being cheaper. What this demonstrates is that, relative to similar players, shares do look to be closer to fairly valued. However, some might argue that Community Trust Bancorp deserves to trade at a bit of a premium to these other players.

I say this because, in the first chart below, you can see the return on equity, not only for Community Trust Bancorp, but for the other competitors I compared it to as well. With a return on equity of 12.5%, it is above three of the five companies that I deemed to be its most comparable competitors. The picture looks even better when we look at the picture through the lens of the return on assets of each firm. With a reading of 1.45%, Community Trust Bancorp is substantially higher than any of the peers that I compared it to. And that is where some investors could make a very passionate argument that Community Trust Bancorp is worth paying more for.

It is worth noting that this picture could change in the near future. Although management has not yet stated exactly when earnings will come out, if we follow last year's pattern, we should be looking around January 18th to January 19th. At present though, I would argue that we are unlikely to see anything significantly positive develop. For instance, management is expected to announce revenue of around $58 million. That would be down slightly from the $58.5 million reported for the final quarter of 2022. Earnings per share, meanwhile, are expected to decline from $1.26 to $1.08. That would take net profits down from $22.4 million last year to $19.3 million for 2023. If this does come to fruition, it likely would be driven by a contraction in the company’s net interest income driven by persistently high interest rates. But seeing as how we have not seen that pose much of an issue for the company yet, I would be shocked if profits declined by much at all.

Takeaway

As far as banks go, Community Trust Bancorp is a fine institution. But it's not one that gets me all that excited. Shares are priced reasonably well, and the institution as a whole has grown nicely. However, I don't like the stubbornness of both earnings and book value when it comes to growth. Those factors make this a decent prospect, but not one that I think will outperform the market moving forward. Because of this, I've decided to rate CTBI stock a ‘hold’ for now. Even though the return on assets for the institution are elevated, this does not offset the fact that the pricing and return on equity figures for the business fall more in line with the midpoint of the range. As a value investor, my goal is to buy into companies trading at a meaningful discount to their intrinsic value. And I just don't see that here.

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