CTBI - Community Trust Bancorp: Not Capitalizing On The Rising Rates

2023-09-04 12:24:12 ET

Summary

• Community Trust Bancorp Inc is struggling to raise its bottom line and capitalize on higher interest rates.
• The company's net income has been decreasing, shares outstanding have been increasing, and noninterest incomes have been declining.
• CTBI's ROA and valuation are not impressive, and there are risks associated with financial turmoil and a prolonged recession. Investors should consider holding off on investing in CTBI.

Introduction

Despite higher interest rates, it doesn't seem that Community Trust Bancorp, Inc. ( CTBI ) is quite able to raise the bottom line and properly capitalize on this. This has me slightly worried as the lack of EPS growth I think makes it more appealing to go with another regional bank play as opposed to CTBI.

The company is a part of the regional bank industry where it has a variety of services and financial products that it offers to customers and clients. For investing though you want to get a decent margin of safety to make the investment feasible, which for CTBI you aren’t quite getting right now in my opinion. On a YoY basis, the net income has been decreasing and for the last quarter, it reached $19 million. The shares outstanding have also slightly been increasing which is the opposite of what I would like to see right now. The dividend yield is the saving grace for the company not being a sell right now. It has a yield of over 5% and a strong history of growth and it hasn't passed a point where I would consider it having too high of a payout ratio. This all translates to me rating CTBI a hold right now for investors.

Company Structure

As we have discussed the company is included in the regional bank industry where it mostly focuses on providing financial services and products too. The company is servicing in Kentucky, Tennessee, and West Virginia where it mostly aims to help small to medium-sized businesses and communities.

Among the products and services are time and demand deposits, checking accounts, and savings accounts. But as a bank, the company also has loan offerings as well like term loans or credit loans. Efficiently benefiting from higher interest rates to grow the ROE of the business is crucial and right now I don’t think CTBI is doing a good enough job at this to warrant a buy yet. On a YoY basis for example the EPS decreased to $1.09 from $1.14 in Q2 FY2022.

The AUM for the company has been growing steadily over the last few years and right now is at $3.3 billion. Seeing an increase here from 2022 levels, however, is quite reassuring as the interest rates have been increasing so more momentum and activity is an indication in my opinion of further optimism from the market. Hopefully, CTBI will be able to translate this into stronger earnings and returns eventually. However, right now it still seems somewhat uncertain as the rising interest rates should have had this effect alone.

Diving deeper into the numbers it seems that since 2021 CTBI has been on a steady decline for noninterest incomes which is not very reassuring to see. The company is still within the goals that it has for the total revenues generated from here, which is between 24 - 26%.

On a peer comparison as well it seems that CTBI has done a decent job in achieving a good ROA, which for June 2023 is at 1.42%. This is still down every quarter and far off from where it was back in 2021. I think that we need to see a reversal beginning to shape up before the company could be considered a buy. Looking further at the valuation, the p/b of the company is also not where I would consider it a steal. In a lot of cases with financial companies or banks, you are looking for a p/b below 1 at least to help gauge some of the risks and get a decent margin of safety. Given the lack of growth that CTBI seems to have, a p/b of 0.93 is not looking that interesting to be fair. I would be more prone to perhaps increase my rating if it was in the range of 0.7 - 0.8 instead. This would seem more appropriate given the track record of the last few years of bottom-line growth and the size of the bank, which has a market cap under $700 million.

Risk Associated

Another noteworthy risk factor to consider is the potential scenario of a significant escalation in the ongoing financial turmoil. While it's not beyond reason to anticipate that several regional banks might encounter liquidity challenges, it's important to recognize that CTBI maintains an exceptional level of conservatism, exemplified by its market-leading capital ratios.

In a situation of heightened financial turmoil, numerous economic and market variables can interact to create a complex and uncertain environment. This can include factors such as global economic downturns, adverse geopolitical events, disruptions in credit markets, and shifts in investor sentiment. Such circumstances can lead to increased credit risk, reduced access to capital, and higher market volatility.

An additional significant risk factor to consider is the possibility of a prolonged recession. Should such a scenario materialize, CTBI could encounter challenges in sustaining its earnings growth over an extended period. A prolonged recession entails a sustained period of economic contraction, characterized by reduced consumer spending, declining business activity, rising unemployment, and overall economic uncertainty. During such times, businesses and individuals alike may experience financial strain, leading to decreased demand for loans and other banking services.

Investor Takeaway

It seems that CTBI is unable to properly raise its bottom line margins and take advantage of the rising interest rates. Other banks in the industry I think have done a better job than CTBI and this makes investing in it unappealing. What I said was the saving grace is the dividend yield which is above 5% right now at least. However, I think that investors should be worried and look for a reversal in the ROA and EPS before jumping in. As a result of this, I am right now rating CTBI as a hold instead of a buy.

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