Community Trust Bancorp Stock: Too Cheap To Ignore (NASDAQ: CTBI)

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Earnings of Community Trust Bancorp (NASDAQ: NASDAQ: CTBI) will likely dip this year because of a reduction in mortgage banking income and provision normalization. On the other hand, subdued loan growth and slight margin expansion will likely support the bottom line. I have reduced my earnings estimate for 2022 mostly because I have decreased my estimate for mortgage banking income now that the Federal Reserve is projecting a steeper rise in interest rates. I’m expecting Community Trust to report earnings of around $ 3.95 per share in 2022, down 20% year-over-year. The company is currently trading at a high discount to its year-end target price. Therefore, I’m adopting a buy rating on Community Trust Bancorp.

Subdued Loan Growth Likely in the Year Ahead

After four consecutive quarters of decline, the loan trend finally turned around in the last quarter of 2021. However, the growth was only 0.3%. Going forward, loan growth is likely to remain positive but subdued.

One of the reasons why I’m expecting loan growth to remain positive this year is because the bulk of the Paycheck Protection Program (“PPP”) forgiveness is now behind us. The PPP loan portfolio declined from $ 252.7 million at the end of December 2020 to $ 47.3 million at the end of December 2021. As the existing portfolio makes up only 1.4% of total loans, the remaining forgiveness will likely have a limited impact on the total loan portfolio size.

Further, economic recovery will likely buoy the loan portfolio. Community Trust operates in Kentucky, southern West Virginia, and northeastern Tennessee. Both West Virginia and Kentucky had worse unemployment rates than the rest of the country, as shown below. Moreover, West Virginia’s economy actually contracted in the third quarter of 2021, according to official sources.

Chart
Data by YCharts

Nevertheless, the economies of all three states have improved tremendously from the start of the pandemic. This improvement in economic activity is likely to keep loan growth positive in the year ahead.

Community Trust Bancorp’s loan growth has ranged from low to high-single-digits in the past. Considering the factors mentioned above, I’m expecting loan growth in 2022 to be at the lower end of the historical trend. I’m expecting loans to increase by 2% by the end of 2022 from the end of 2021. Meanwhile, I’m expecting other balance sheet items to grow mostly in line with loans. The following table shows my balance sheet estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Financial Position
Net Loans 3,087 3,173 3,214 3,506 3,367 3,435
Growth of Net Loans 6.4% 2.8% 1.3% 9.1% (4.0)% 2.0%
Other Earning Assets 725 679 810 1,307 1,726 1,761
Deposits 3,264 3,306 3,406 4,016 4,344 4,432
Borrowings and Sub-Debt 311 294 308 429 331 338
Common equity 531 564 615 655 698 739
Book Value Per Share ($) 30.1 31.9 34.7 36.9 39.2 41.5
Tangible BVPS ($) 26.4 28.2 31.0 33.2 35.5 37.8

Source: SEC Filings, Author’s Estimates

(In USD million unless otherwise specified)

The topline growth will likely get augmented by a rising interest-rate environment. The Federal Reserve has dramatically increased the number of rate hikes projected for this year. In December, the Fed had projected a total of 75 basis points increase in the federal funds rate this year. The Fed is now projecting a 175-basis point hike in 2022.

However, the impact from the rising interest rate environment will be subdued as the balance sheet is not very rate sensitive. According to management’s interest-rate sensitivity analysis given in the 10-K filing, a 100-basis points increase in interest rates can boost the net interest income by only 2.01%. Considering these factors, I’m expecting the margin to expand by twelve base points in 2022.

Revising Down the Non-Interest Income Estimate

Previously, I was expecting mortgage banking income to decline this year by more than 8% because of higher interest rates. I was expecting mortgage refinancing activity to normalize and mortgage purchasing activity to continue to grow. Given the Fed’s revised projections, I’m now expecting the high rates to also hurt purchasing activity this year. As a result, I have decided to further decrease my non-interest income estimate to $ 53 million in 2022, from the previous estimate of $ 55 million given in my last report on Community Trust Bancorp.

Expecting Earnings of $ 3.95 per Share

The lower non-interest income will likely counter the impact of topline growth this year. Further, the provision expense will likely trend higher towards a more normal level after a year of provision reversals. Loan additions will likely drive the provision normalization. Hence, I’m expecting the commission expense to make up around 0.17% of total loans in 2022, which is close to the average commission-expense-to-total-loan ratio from 2017 to 2019.

Overall, I’m expecting Community Trust Bancorp to report earnings of $ 3.95 per share in 2022, down 20% year-over-year. The following table shows my income statement estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Income Statement
Net interest income 137 142 145 151 163 169
Commission for loan losses 8 6 5 16 (6) 6
Non-interest income 49 52 50 55 60 53
Non-interest expense 110 117 118 119 119 128
Net income – Common Sh. 51 59 65 60 88 70
EPS – Diluted ($) 2.92 3.35 3.64 3.35 4.94 3.95

Source: SEC Filings, Earnings Releases, Author’s Estimates

(In USD million unless otherwise specified)

Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic and the timing and magnitude of interest rate hikes.

Revising Down the Earnings Estimate

Compared to the previous estimate given in my last report on Community Trust Bancorp, I’ve reduced my earnings estimate because of the change in the Fed projections, which has led me to revise downward the mortgage banking income estimate. Further, I’ve now increased my non-interest expense estimate because the multi-decade high inflation should affect salary expenses more than I previously anticipated.

CTBI Trading at a Large Discount to the Target Price

Community Trust is offering a dividend yield of 3.9% at the current quarterly dividend rate of $ 0.40 per share. The earnings and dividend estimates suggest a payout ratio of 42% for 2022, which is close to the five-year average of 41%. Therefore, I do not think the earnings outlook poses any threat to the dividend payout.

I’m using the historical price-to-tangible book (“P / TB”) and price-to-earnings (“P / E”) multiples to value Community Trust Bancorp. The stock has traded at an average P / TB ratio of 1.40 in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
T. Book Value per Share ($) 26.4 28.2 31.0 33.2 35.5
Average Market Price ($) 45.4 47.3 42.1 34.4 42.3
Historical P / TB 1.72x 1.68x 1.36x 1.04x 1.19x 1.40x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P / TB multiple with the forecast tangible book value per share of $ 37.8 gives a target price of $ 52.9 for the end of 2022. This price target implies a 24.8% upside from the March 16 closing price. The following table shows the sensitivity of the target price to the P / TB ratio.

P / TB Multiple 1.20x 1.30x 1.40x 1.50x 1.60x
TBVPS – Dec 2022 ($) 37.8 37.8 37.8 37.8 37.8
Target Price ($) 45.3 49.1 52.9 56.7 60.5
Market Price ($) 42.4 42.4 42.4 42.4 42.4
Upside / (Downside) 6.9% 15.9% 24.8% 33.7% 42.7%
Source: Author’s Estimates

The stock has traded at an average P / E ratio of around 12.0x in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
Earnings per Share ($) 2.92 3.35 3.64 3.35 4.94
Average Market Price ($) 45.4 47.3 42.1 34.4 42.3
Historical P / E 15.6x 14.1x 11.6x 10.3x 8.6x 12.0x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P / E multiple with the forecast earnings per share of $ 3.95 gives a target price of $ 47.5 for the end of 2022. This price target implies a 12.0% upside from the March 16 closing price. The following table shows the sensitivity of the target price to the P / E ratio.

P / E Multiple 10.0x 11.0x 12.0x 13.0x 14.0x
EPS 2022 ($) 3.95 3.95 3.95 3.95 3.95
Target Price ($) 39.6 43.5 47.5 51.4 55.4
Market Price ($) 42.4 42.4 42.4 42.4 42.4
Upside / (Downside) (6.6)% 2.7% 12.0% 21.4% 30.7%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $ 50.2, which implies an 18.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 22.1%.

The market appears to have overreacted to the prospects of an earnings decline. Taking the earnings outlook into account, Community Trust Bancorp’s market price appears unjustifiably discounted. Based on the high total expected return, I’m maintaining a buy rating on Community Trust Bancorp.



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