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Why These Fundamentals Make Community Trust Bancorp Inc’s (NASDAQ:CTBI) More Attractive

Gabriel Boyd

As a small-cap finance stock with a market capitalisation of US$808.25M, the risk and profitability of Community Trust Bancorp Inc (NASDAQ:CTBI) are largely tied to the underlying economic growth of the region it operates in US. Given that banks operate by reinvesting deposits in the form of loans, negative economic growth may lower the level of saving deposits and demand for loans, directly affecting those banks’ levels of cash flows. After the Financial Crisis in 2008, a set of reforms called Basel III was created with the purpose of strengthening regulation, risk management and supervision in the banking sector. The Basel III reforms are aimed at banking regulations to improve financial institutions’ ability to absorb shocks caused by economic stress which could expose banks like Community Trust Bancorp to vulnerabilities. Its financial position may weaken in an adverse macro event such as political instability which is why it is crucial to understand how well the bank manages its risks. High liquidity and low leverage could position Community Trust Bancorp favourably at the face of macro headwinds. A way to measure this risk is to look at three leverage and liquidity metrics which I will take you through today. See our latest analysis for Community Trust Bancorp

NasdaqGS:CTBI Historical Debt Mar 30th 18

Is CTBI’s Leverage Level Appropriate?

A low level of leverage subjects a bank to less risk and enhances its ability to pay back its debtors. Leverage can be thought of as the amount of assets a bank owns relative to its shareholders’ funds. Though banks are required to have a certain level of buffer to meet its capital requirements, Community Trust Bancorp’s leverage level of 8x is significantly below the appropriate ceiling of 20x. With assets 8 times equity, the banks has maintained a prudent level of its own fund relative to borrowed fund which places it in a strong position to pay back its debt in times of adverse events. Should the bank need to increase its debt levels to meet capital requirements, it will have abundant headroom to do so.

What Is CTBI’s Level of Liquidity?

Handing Money Transparent

As abovementioned, loans are quite illiquid so it is important to understand how much of these loans make up Community Trust Bancorp’s total assets. Usually, they should not be higher than 70% of total assets, but its current level of 74.63% means the bank has lent out 5% above the sensible upper limit. This level implies dependency on this particular asset class as a source of revenue which makes the bank more likely to be exposed to default compared to its competitors with less loans.

Does CTBI Have Liquidity Mismatch?

Banks profit by lending out its customers’ deposits as loans and charge an interest on the principle. These loans may be fixed term and often cannot be readily realized, yet customer deposits on the liability side must be paid on-demand and in short notice. The disparity between the immediacy of deposits compared to the illiquid nature of loans puts pressure on the bank’s financial position if an adverse event requires the bank to repay its depositors. Relative to the prudent industry loan to deposit level of 90%, Community Trust Bancorp’s ratio of over 94.58% is higher, which positions the bank in a risky spot given the potential to cross into negative liquidity disparity between loan and deposit levels. Essentially, for $1 of deposits with the bank, it lends out more than $ 0.9 which is risky.

Next Steps:

We’ve only touched on operational risks for CTBI in this article. But as a stock investment, there are other fundamentals you need to understand. There are three important factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for CTBI’s future growth? Take a look at our free research report of analyst consensus for CTBI’s outlook.
  2. Valuation: What is CTBI worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether CTBI is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.