Not all banks are COVID-19 friendly.

– Anthony T. Hicks

Community Trust Bancorp, Inc. (CTBI) is a bank holding company that owns the commercial bank, Community Trust Bank, Inc., and the trust company, Community Trust and Investment Community. Through its subsidiaries, CTBI serves clients across 79 branches in the regions of Kentucky, West Virginia, and Tennessee. I will now highlight some of the good and bad prospects of pursuing an investment in this stock. Let me first start with the good points.

Diversified loan book and current momentum in mortgage

I like CTBI’s diversity in catering to different business segments, which is quite unlike some of its regional peers that are largely exposed to retail clients, or conversely, largely exposed to institutions. The company has its foot in the door across different loan markets, which gives it the flexibility to lap onto the momentum in whichever market may be hot at a certain point in time. Currently, 54% of its loan book comes from commercial loans, 25% from residential loans, and 21% from consumer loans. The momentum in the mortgage and housing market over the last few months has been well-documented in The Lead-Lag Report. Record low mortgage rates in Q2 enabled CTBI to close and deliver almost 650 secondary market mortgage loans worth $116.4 million, significantly higher than what it delivered a year ago (122 secondary market mortgage loans worth $16 million).

Excellent capital ratios that will protect the bank during adversity

Source: CTBI

CTBI has an excellent set of capital adequacy ratios that are one of the highest amongst its regional peers and substantially higher than what regulation deems as “well-capitalized”. One could make an argument for CTBI using its excess capital to generate more business, but I believe these high capital levels will buttress the company’s business model during adverse times. Just to reiterate, as per regulation, for a bank to quality as “well-capitalized”, it needs to have (i) a common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8%; (iii) a total capital ratio of 10%; and (iv) a Tier 1 leverage ratio of 5%. CTBI’s capital levels are more than twice the regulatory requirements! As of June 30, 2020, it had (i) a common equity Tier 1 capital ratio of 17.21%, (ii) a Tier 1 capital ratio of 18.93%, (iii) a total capital ratio of 20.18%, and (iv) a Tier 1 leverage ratio of 12.92%.

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Reliable dividends

The company has a great track record of rewarding its shareholders via dividends, something that has grown for 39 straight years. At a time when a lot of companies are curtailing or stopping their dividends, CTBI has grown this by c.6% YoY in both Q1 and Q2. Historically, its dividend payout ratio has averaged anything between 40% and 50%. At the current share price, you’re getting a very attractive dividend yield of 4.5%. In a generally low-rate environment, this is quite a tidy sum.

Cheap valuations relative to its history

Over the last 5 years, CTBI’s Forward P/BV multiple has averaged 1.32x; the sell-off this year has seen the stock now trade at a multiple below 1x, a rather enticing discount of 30% to its historical average.

(Source: Yahoo Finance)

As can be seen from the chart above, over the last three months, it has underperformed its peers in the regional banking space by c.14%. Here are some of the potential reasons why investors may be wary of an investment in CTBI.

Ongoing weakness in the commercial landscape

Whilst the residential side of the loan market continues to be resilient, the commercial side faces some challenges. I mentioned previously that 54% of CTBI’s loan book is oriented towards commercial clients. Within its commercial portfolio, the largest share is towards commercial non-residential real estate, accounting for 40% of commercial loans. The retail segment makes up for a significant component of non-residential real estate. Hotels/Motels too account for a notable component of the book, making for c.14%. These are segments that have been badly affected by the lockdown, with footfall and occupancy going for a toss. Consequently, the delinquency rates on retail and hotel CMBS (commercial mortgage-backed securities) spiked in Q2 and are yet to see any meaningful decline.

It is believed that unless there is further stimulus directed towards this segment, the weakness will likely linger. Some now feel that the Fed’s Main Street Lending Programme needs to be expanded to include commercial real estate property, or, alternatively, there are also some suggestions for the Federal government to step in and take a preferred equity stake in some of these commercial property businesses.

NIM has been declining over time

Last month, I mentioned in The Lead-Lag Report that banks in general would find few takers in the current environment, as their net interest income would be severely curtailed. Well, in CTBI’s case, even in a more previously salutary rate environment, it was unable to arrest a decline in NIMs (Net Interest Margin), which have been declining every year since 2015. Investors will not take too well to this, as it is one of the most fundamental drivers of banking efficiency. I’ve been going through the company’s commentary over the years, and the broad takeaway is that the cost of funds has been growing at a more rapid pace than the yield on assets. For instance, last year, its cost of funds increased by 37bps, whilst the yield on assets only increased by 20bps. Few reasons for this – unlike some of its peers that have a predominant share of low-cost core deposits or non-interest-bearing deposits, CTBI is predominantly exposed to the pricey Certificate of Deposits & Time Deposits that account for c.33% of the deposit base. Secondly, the share of money market accounts – that get repriced very quickly to market forces – has been growing at a rapid pace (last year it grew by 30% YoY) and now accounts for the second-biggest share of total deposits.

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Price Action – Hanging by a thread

Whilst the market, in general, has made a strong comeback since the carnage witnessed in March, CTBI has not gone anywhere since. The broad sell-off in March saw the stock take support at the lower boundary of its multi-year wedge pattern, and it has since been chopping around the $28-36 range, with seemingly no inclination to trend either upwards or downwards. On a more intermediate basis too, we can see that it is currently on the edge of the broad descending channel pattern. On the daily charts, the stock is trading substantially below its 200-DMA, validating the weakness. All in all, CTBI is currently perched at rather precarious levels, and if there is a whiff of further bad news, we may see the stock fall from here to test the next support at $20.


CTBI has its foot in the door across different loan segments, and whilst the housing segment is on fire, the commercial side of the book is laced with risks. Its capital adequacy levels are best-in-class, but NIMs have been sliding for years now. The high dividend yield of 4.5% is a bonus, and this is something the company has been committed to growing for 39 years on the trot. On the charts, the stock has been perched at a precarious support position for months now, but forward P/BV valuations are c.30% cheaper than the historical average and currently work out to an attractive level of less than 1x book. I am broadly neutral.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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