Community Trust Bancorp: Lots To Like Despite Earnings Falling

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Community Trust Bancorp (NASDAQ:CTBI) is a regional bank stock that has been suffering the last few months, along with the broader market, and financials as a whole. This market is in bad shape with sentiment being so low. The Federal Reserve just did another 75 basis point hike in rates, while inflation has yet to subside. Investors are nervous, and the market has been moving lower and lower, with sporadic bear market rallies. That said, we are of the opinion that it is time to take advantage of this decline for long-term positioning. You will never catch the full bottom, but look for stocks with some yield going on sale. You can do that with banks. Yes, the next couple quarters will be tough for America, but the high rates are going to feed net interest income for years to come. When the economy, which remains still strong despite the stock market, will slow, but this is a temporary phenomenon. Position yourself ahead of a rally which we see as happening as soon as the Fed slows rate hikes and/or real disinflation begins.

You are already seeing the benefit of higher rates in performance. While everyone thinks the recession could be painful, it could very well be moderate. It is our opinion that Q2 reported earnings from Community Trust Bancorp would justify a buy in the stock from weeks ago, but the stock is unlikely to rally until we get some indication things are improving on inflation. Use weakness to start a position. While earnings may slip further in the near-term, we think you buy for the dividend and future earnings power. Let us discuss the key metrics here, as the bank is doing quite well.

Q2 headline earnings

On the back of solid loan growth, deposit strength, and margin power, the bank reported a Q2 that did not see much on the top line growth, but saw improvement in earnings. In Q2, the company reported a top line that was about in line with consensus estimates, and nearly flat from a year ago. With the present quarter’s revenues of $55.3 million, the company registered a 0.8% decrease in this metric year-over-year. The slight $0.6 million miss is a non-event. We expected to see a little bit more, but many of the metrics we follow have improved.

Now back in 2020 we saw sky high loan loss provisions, then in 2021, loan provisions normalized and even became credits often. As we move forward we expect an uptick in provisions for all banks. Most banks have seen an ramp up in loan loss provisions, as the banks prepared for some possible bad debt in a tough economy. Most customers are paying their loans with CTBI however. This past Q2 provisions were $0.1 million but this is in stark contrast to the $4.3 million in Q2 2021’s $4.3 million credit. We will also point out that the net interest margin is solid as well, and as such, the company saw some nice earnings. Community Trust Bancorp reported net income of $20.3 million, or $1.14 per share, which was a beat of $0.03 versus consensus, but is down from last year’s $1.34 as a result of the big swing in provisions. We would argue that earnings “would” have been lower a year ago had it not been for the pandemic rebound

Loans moving higher

Community-oriented banks rely on taking in deposits at a low interest rate and lending it at a higher rate, and profiting from the spread. Bread and butter banking. That said, growth in loans and deposits is key for any bank, small or large, but especially smaller regional banks. And we saw growth in both of these critical metrics.

The loan portfolio increased $42.9 million, an annualized 4.9% increase, during the quarter. Had you only relied on headline numbers you might think loans were falling. What is more, the newer loans are at better rates. And that means better margins, and eventually earnings. Winning. Net interest margin, was 3.20% which increased 2 basis points Q1 2022 and 9 basis points from Q2 2022.

As mentioned above, deposits also increased which is always good news. CTBI saw deposits jump $28.7 million from a year ago. Are there issues with the quality of assets?

Asset quality metrics are key

The bank has seen relative strength in asset quality metrics, though there are some customers that have had unique issues, including some troubled debt restructuring that saw nonperforming loans tick up to $13.8 million vs $13.7 million in the sequential quarter. But it is key to note that despite the pain in markets and to consumers that started in February, nonperforming loans were down massively from $21.1 million a year ago. For the most part, this is strong improvement from the worst of it in 2020. There were a couple loan chargeoffs of $0.042 million which was a nice decline from $0.6 million last year.

It is also important to point out that from the sequential Q1, we saw improvement on the return of average assets, improving a basis point to 1.49%, and a 98 basis point increase on the returns on average equity to 12.75%. Further, the efficient ratio remains extremely healthy at 53.77%. All things considered, the bank remains healthy.

Valuation is not stretched

Unlike the COVID crash, the stock is nowhere near trading at a discount-to-book. But the valuation is attractive. We do not see this market selloff taking the stock below book value. Just not happening in our opinion. It could take shares into the $30s and that is where we like a buy, and aggressively. With that disclaimer, the bank’s stock is pretty attractive at $42.00 relative to the book value per share of $35.32. We also like that the bank is a dividend raiser. The quarterly dividend is $0.44, and puts the yield at 4.2%.

Take home

We really believe this stock is a low beta name which can be bought for the yield now, and should be bought aggressively under $40 which would put the stock closer to book value and a higher yield. Loan quality has improved, and loan growth is evident. We believe shares will rally as interest rates start to improve the margin power and earnings. It is tough with the economy being put at stake to slow inflation, but the market will start bidding stocks higher once inflation slows and the Fed indicates the big rate hikes are over.

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