Community Trust Bancorp Shares: Undervalued with Positive Lending Growth Outlook (CTBI)

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Community Trust Bancorp, Inc. (NASDAQ: CTBI) profits will likely decline next year after an extraordinary year with large loan loss reserve releases. Further write-backs are unlikely due to loan growth and the risk associated with exposure to hotels and motels. On the flip side, earnings are likely to benefit from growing lending and expanding margins. Overall, I expect Community Trust Bancorp to report earnings of $ 4.13 per share in 2022, down 17% year-over-year. Next year’s target price suggests a high rise from the current market price. Therefore, I am taking a bullish note on Community Trust Bancorp.

Loan portfolio likely to decline further in Q4 before normalizing

Community Trust Bancorp’s loan portfolio has shrunk for the past four consecutive quarters. The portfolio will most likely decline again in the fourth quarter of 2021 due to the upcoming cancellation of Paycheck Protection Program (“PPP”) loans. According to the details provided in the 10-Q file, PPP loans represented around 2.9% of total loans at the end of September 2021. I expect most of these outstanding PPP loans to be canceled before the end of the year. of the year.

Beyond the fourth quarter of 2021, the downward trend in lending will most likely reverse as most PPP discounts will then be terminated. Community Trust had already reduced its outstanding PPP loans to $ 99.1 million at the end of September 2021, from $ 252.7 million at the end of December 2020.

The economic recovery in Community Trust Bancorp markets is likely to further support loan growth. The company is primarily based in the state of Kentucky, which has recovered fairly well from the pandemic. the unemployment rate in the state was just 4.2% in October 2021, on par with the national average. Community Trust is also present in Tennessee and West Virginia, two countries also tied with the rest of the country in terms of economic recovery. The following graph shows the unemployment rates in these states.

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Data by YCharts

Community Trust Bancorp has experienced low single-digit loan growth in the past. I expect loan growth to return to normal in 2022, when the noise of P3s is over. In addition, I expect deposits to increase as loans increase. The following table shows my balance sheet estimates.

Description of the automatically generated table

Margin expansion to further support income

Based on details in the November issue presentation to investors, variable rate loans represented around 66% of total loans at end-September 2021. As a result, a majority of the loan portfolio will revalue immediately after an interest rate hike. The Federal Reserve projects an interest rate hike of 25 basis points in 2022. In addition, Treasury yields have already risen sharply in the fourth quarter of 2021, which will support returns on investment securities and cash equivalents. Considering these factors, I expect the net interest margin to increase by four basis points in 2022.

Provision expenditure for upward trend towards a more normal level

Community Trust Bancorp has released some of its loan loss reserves in each of the first three quarters of 2021. I do not expect further large allowance reversals for two main reasons.

  1. Growth in loans. Community Trust’s loan portfolio shrank in the first nine months of 2021; therefore, a reversal of provisions this year was not surprising. As the loan portfolio will most likely increase next year, the provisioning for expected credit losses will also increase.
  2. Exposure to hotels and motels. According to the details given in the presentation, loans to hotels and motels represented around 8.7% of total loans at end-September 2021. As the risk associated with Omicron is still moderately high, I do not expect more. reversals of major provisions. In addition, there is always the risk that another variant of COVID-19 will emerge.

Nonetheless, provisioning is likely to remain below the pre-pandemic average as current provisions easily cover the portfolio’s current credit risk. Provisions were 1.21% of total loans, while non-performing loans were around 0.55% of total loans at the end of the last quarter, as mentioned in the investor presentation.

The average provision charge was 0.21% of total loans from 2016 to 2019. For 2022, I expect provision charges to be around 0.18% of total loans.

Expected earnings of $ 4.13 per share in 2022

Community Trust Bancorp’s profits are likely to decline next year as provisioning expenses rise to a more normal level after an extraordinary year. Additionally, non-interest income will likely be lower next year compared to 2021, as gains on mortgage sales are likely to decline. Community Trust’s non-interest income is very diverse and includes a variety of income sources including wealth management, brokerage and life insurance. Therefore, the decline in mortgage banking income will have a limited impact on total non-interest income.

On the other hand, the anticipated normalization of loan growth and expanding margins will likely limit the decline in profits. Overall, I expect the company to report earnings of $ 4.13 per share in 2022. For the last quarter of 2021, I expect the company to report earnings of 1.11 $ per share, which will bring annual earnings to $ 4.97 per share. . The following table shows my income statement estimates.

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Actual profits may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic and the timing of an interest rate hike.

High expected total return warrants a bullish rating

Community Trust Bancorp offers a dividend yield of 3.8% at the current quarterly dividend rate of $ 0.40 per share. The company has a long history of increasing its dividend each year and this trend is unlikely to be interrupted next year. Therefore, I expect the quarterly dividend to increase to $ 0.42 per share in the third quarter of 2022. My earnings and dividend estimates suggest a payout ratio of 40% for 2022, which is close to the five-year average of 44%.

I use the historical price / earnings (“P / TB”) and price / earnings (“P / E”) multiples to evaluate Community Trust Bancorp. The stock has traded at an average P / TB ratio of 1.46 in the past, as shown below.

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Multiplying the average P / TB multiple by the tangible book value per forecast share of $ 38.4 yields a target price of $ 55.8 for the end of 2022. This price target implies a 29.3% increase. compared to the closing price on December 8. The following table shows the sensitivity of the target price to the P / TB ratio.

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The stock has traded at an average P / E ratio of around 13.0x in the past, as shown below.

Description of the automatically generated table

Multiplying the average P / E multiple by the expected earnings per share of $ 4.13 yields a target price of $ 53.7 for the end of 2022. This price target implies a 24.5% increase over at the closing price on December 8. The following table shows the sensitivity of the target price to the P / E ratio.

Description of the automatically generated table

The equal weighting of the target prices of the two valuation methods results in a combined target price of $ 54.8, which implies an increase of 26.9% from the current market price. Adding the term dividend yield gives an expected total yield of 30.5%. Therefore, I am taking a bullish note on Community Trust Bancorp. Company profits are expected to decline next year as provisioning approaches a more normal level. The large gap between the current market price and the target price for the coming year shows that the market has overreacted to the prospect of declining profits.


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