Don’t Buy Community Trust Bank

Ideas for articles come from all over the place. We look at current events, topics like earnings that repeat every few months, but we love to hear from readers like you.
One such idea came from a reader via stock-focused microblogging site Stocktwits.com.
Stocktwits user kg1 asked a simple question: “$CTBI Any thoughts?”

kg1, I took a deeper look and here’s your answer: Don’t buy Community Trust Bank.

Background 
Community Trust Bank (Nasdaq: CTBI) is a regional bank based in Kentucky. The company has operations in Kentucky, West Virginia and Tennessee. The website lists 83 total branch offices. Six can be found in West Virginia and four can be found in Tennessee. The map below illustrates the footprint of this bank’s business and, as you can see, this is the true definition of a “regional bank.”

Source: http://www.CTBI.com
With no proprietary trading desk, dark pools or a department that creates complicated financial instruments, Community Trust Bank does banking the way banking should be done: by taking deposits and making loans. The company also does other basic services for its commercial and personal banking customers, including safe deposit boxes, money transfers and personal trusts.
It’s a tried and true business that has withstood the test of time. This year marks the company’s 111th anniversary.

The Business
The strength of Community Trust Bank appears at first glance to be a bit of a mixed bag. The chart below illustrates pretty clearly what I’m talking about.

Like many banks, Community Trust Bank took a hit during the financial crisis. Despite being better capitalized than major banks, the firm held a group of Freddie Mac and Fannie Mae securities. This led to a significant write-down in the third quarter of 2008. But earnings bounced back quickly.
This is not what concerns me.
As the company stated in its October 2008 earnings report, “CTBI has not been a participant in the types of lending and derivative investments which have been the focus of the current financial crisis.”
Community Trust Bank recovered from the financial crisis quickly and began increasing earnings.
That is, until the fourth quarter of 2014.

Federal Reserve Investigation
The company announced in the second half of 2013 that the Federal Reserve was investigating its practices for charging customers fees based on “unfair and deceptive practices.” In November 2013 the company announced that it estimated the result to be a hit of $6.2 million.
The company recognized this projected $6.2 loss in its fourth quarter 2013 earnings, resulting in the dip visible in the chart above. Without that $6.2 million, Community Trust Bank would’ve earned $0.95 per diluted share rather than $0.55 per diluted share.
In other words, without the expected loss resulting from the Federal Reserve’s investigation, Community Trust Bank would’ve had a record quarter.
The problem is this: if Community Trust Bank’s business was strong then earnings should’ve bounced back immediately this most recent quarter. Interestingly, they did not.

The Bottom Line
If the Federal Reserve’s investigation was a one-off event I wouldn’t be concerned. Banks occasionally run afoul of the regulations, pay a fine then move on. No big deal.
But it appears that Community Trust Bank’s profitability has been impacted.
The chart below shows the bank’s non-interest income for the past several quarters. The recent trend concerns me greatly and makes me question Community Trust Bank’s ability to grow revenues in its new environment that is free of predatory fees.

With assets of good quality, a simple business model and a safe dividend, I would say that the downside here is pretty limited. But until the company can demonstrate growing profitability without using predatory fees I’d say the upside is limited as well.
There are plenty of fish in the sea of regional banks. The safest play here is simple: Don’t buy Community Trust Bank.