Community Bankers Trust Corporation
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good day, and welcome to the Community Bankers Trust Corporation First Quarter 2021 Earnings Conference Call. All participants will be in the listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Rex Smith, President and CEO. Please go ahead.

[Rex Smith:]

I want to thank you for joining us today as we review the results of the first quarter of 2021 for Community Bankers Trust Corporation, which is the holding company for Essex Bank. Let me start with our usual reminder, that during the course of our remarks today, we may make forward-looking statements within the meaning of applicable Securities Laws with respect to our operations, performance, future strategy and goals. I remind everyone that our actual results may differ materially from those included in the forward-looking statements due to a number of factors. These factors and additional risks and uncertainties are included in our earnings release, our most recent Form 10-K and other reports that Community Bankers Trust Corporation files with or furnishes to the Securities and Exchange Commission. You can access all of these documents through our website at www.cbtrustcorp.com.

[Bruce Thomas:]

Good morning. And thank you to all of you that have taken time to listen to the discussion regarding first quarter 2021 results. First quarter 2021 net income of $6.643 million, or $0.30 fully diluted earnings per share is an increase of $1.186 million over fourth quarter 2020 income of $5.457 million or $0.24 fully diluted earnings per share. Year-over-year the increase is $5.228 million and the first quarter 2020 net income was $1.415 million or $0.06 fully diluted earnings per share. To assist in analyzing the progress of the company, I will review the results on a pre-tax pre-provision basis. And after that analysis, the impact of PPP fees recognized in net income will be excluded. As a backdrop, provision for loan losses was negative $1.4 million in the first quarter of 2021, compared with none in the fourth quarter of 2020 and a provision of $3.3 million in the first quarter of 2020 at the onset of the COVID-19 pandemic. Pre-tax pre-provision income was $6.951 million for the first quarter of 2021 compared with $6.785 million in the fourth quarter of 2020. The increase on a linked quarter basis is $166,000 or 2.4%. PPP fee income was $609,000 in the first quarter of 2021 and $1.115 million in the fourth quarter of 2020. Income before taxes, provision and PPP fee income would have been $6.342 million in the first quarter of 2021, an increase of $672,000 or 11.9% over the previous quarter. Pre-tax pre-provision income increased $1.972 million or 39.6% year-over-year and excluding the impact of PPP fee income, the increase would have been $1.363 million or 27.4%. We are pleased with the direction of our core earnings as growth in noninterest bearing deposits, a shift away from certificates of deposit funding, and an increase in the level of earning assets over interest bearing liabilities are all aiding in a stable net interest margin.

[Rex Smith:]

Thank you, Bruce. During the pandemic, we stayed focused on our customers and ways to help them and our communities. We remained true to our core values and together weathered the brunt of the storm quite successfully. While we are not yet done with a pandemic, we believe that the strategic plan we have in place will continue to enhance value through 2021 and beyond.

[Operator:]

Our first question comes from Casey Whitman with Piper Sandler. Please go ahead.

[Casey Whitman:]

Hey, good morning, Rex and Bruce. How are you?

[Rex Smith:]

Good Casey. How are you doing?

[Bruce Thomas:]

Good morning.

[Casey Whitman:]

Good. Good morning. So some really nice core margin expansion this quarter and we just - you guys just discussed some of the opportunities to bring deposit costs down through there. So it seems like there's - there's more room to go there but we also saw some liquidity come on closer to quarter end. So just sort of wondering how you see the core margin ex-PPP, kind of trending in the second quarter, given all those puts and takes, up down kind of flat, what are your thoughts?

[Bruce Thomas:]

It would be very - well, it is unusual and we're experiencing - experiencing it now. For the spread to increase but the margin goes down. And that's because of that liquidity that you're speaking of. And the current rate structure as opposed to the season loans and securities on the book. So as a result of that, I think it's going to put some pressure on the asset side. That is being rebutted somewhat on the liability side by the shift out of CDs, the repricing of CDs, and the growth in demand deposits. So that's giving us a little relief there. But yes, that access to liquidity, it would also be very unusual for the level of earning assets in relation to interest bearing liabilities to increase such as we're experiencing, currently from 123% to 135% year-over-year, that typically would indicate margin expansion. But with the increase in spread that we've had, that is helped us keep the margin stable and on a link quarter basis, in fact, even grow. So there are a lot of dynamics. I guess, is what I'm pointing to, that are going on currently in our - in our net interest margin.

[Rex Smith:]

I think some of the case is going to be related to, are we going to be able to get the loan growth, we feel like we're going to get and if we do get it, depending on the mix of it too. I mean, the CRE stuff tends to be - we've been had very good pricing discipline in that some of the C&I things are more variable rate, which - but they come on at a lower rate at the time. But I think, if we can use up the liquidity on the loan side, we'll see the margin at least stable and I think that's what we're trying to get to.

[Casey Whitman:]

Got it. And where do you guys see deposit cost kind of bottoming from the 45 basis point level, just sort of ballpark with the combination of the CDs. We're rolling off and just how low can we really go?

[Bruce Thomas:]

Well…

[Rex Smith:]

We're still got some CDs that are repricing, but I think, Bruce, you correct me. But I think in June, the dramatic repricing sort of stops. And so the repricing of CDs is going to be more like 15 basis points to 20 basis points as opposed to 60 or 80 basis points. And then of course, you get the effect of it 30 days later and beyond. So, probably, maybe bottoming out and the July timeframe, I would think Bruce, you can correct me. He's more up a little bit.

[Bruce Thomas:]

I would say it will go down until the third quarter, and then it would bottom out and you're looking for a level. Well, linked quarter, we had a decrease of 18 basis points in cost the funds from 80 to 62. And I would say that that linked quarter decrease is going to be less in the second quarter and then less again, in the third quarter. So maybe a 12 basis point decline, I would think in the second quarter, followed by an 8 basis point - decline in the third quarter. And of course that depends on mix in maturity and what stays and what goes into non-maturity categories, but that's kind of my gut feel.

[Casey Whitman:]

Okay. Got it. Helpful. And maybe there's a clarification, Rex, I think you just gave 2.4 million in fees related to PPP. Is that for just the round two or around round three, what around you want to call it the latest round of 50 or does that include what you might have left from the 2020 originations?

[Rex Smith:]

No, that is Jeff. The round - the latest round cases, that's just that - that's that prefer to do those 500 someones that we've just done for the year.

[Casey Whitman:]

Okay. And do you have what is remaining from the original rounds on top of that?

[Rex Smith:]

Yes. It's - I think Bruce you want to touch it.

[Bruce Thomas:]

I anticipated that that question was coming. And I've started searching here. We've had so many numbers that are new and unusual. And here we go. My Controller to the rescue. She just e-mailed me $364,000. Thank you, Laureen.

[Casey Whitman:]

Great. Thank you for taking my questions.

[Rex Smith:]

All right Casey. Take care.

[Casey Whitman:]

You too.

[Operator:]

Our next question comes from Stuart Lotz with KBW. Please go ahead.

[Stuart Lotz:]

Hi, guys. Good morning.

[Rex Smith:]

Good morning, Stuart.

[Stuart Lotz:]

Well, first off, congrats on a great quarter. But if we can start just on your outlook for the reserves, and provision this year after last year's build. We were kind of surprised to see, the large release this quarter. Can we expect kind of a stable provision or kind of a zero provision next few quarters? Or do you anticipate further decreases in your ALL?

[Rex Smith:]

I think that credit quality is ended up a lot better than we really anticipate. It looks like based on what we're seeing in our local economies, that that credit quality will stay fairly stable. So I think what's going to drive the provision is just going to be, the growth or if there's any - there any particular industries still affected by COVID, that might leak into maybe, a few loans, it might leak into the substandard category. But I wouldn't invasion that, we probably - I don't see us taking a provision the next quarter, but depending on growth and where things go, maybe some small provisions in the third and fourth.

[Stuart Lotz:]

Got it. You mentioned the OREO property moving off the balance sheet in April. Can you remind us how large of the dollar basis of that and what you expect for the gain in second quarter from that sale?

[Rex Smith:]

Yes. It was on the books at $3.8 million. And, again, it's going to be - it's - we'll have a decent gain on it. Nothing crazy, but we're still kind of pushing some numbers around. We've got a few legal bills still trickling in associated with getting that thing closed and done. So we'll have more clarity on that as we get down into the quarter. But it's - the main thing is, it's going to be a significant drop in that OREO balance, because that was the big one.

[Stuart Lotz:]

Right. I was just say, I think that's about the - almost the entirety of your total OREO?

[Rex Smith:]

That's right.

[Stuart Lotz:]

And maybe one more the buyback announcement back in March, million shares. And obviously with the Russell reconstitution coming up. How active you anticipate being on the buyback front and over the next quarter to if we do see some pressure around the shares from the Russell? And just given your capital levels?

[Rex Smith:]

Yes, we've held our powder a little bit looking towards, what was going to happen with the Russell and we're working on analysis right now. We've been in a closed window period, but we're working on our analysis for when the window opens on, where we're going to look at buying back some shares, and I think you'll probably see us get active, especially from that May 7th to June 7th timeframe when the Russell reworks itself.

[Stuart Lotz:]

Got it. Cool. And sorry, maybe just one more. If we - maybe the outlook for expenses this year, Bruce, and was there anything, any deferred costs related to PPP originations this quarter, and that came out of the run rate?

[Bruce Thomas:]

Yes. I detail those in my comments. It was 609,000, I believe. The amount between for internal costs in the first quarter of this year and the fourth quarter of last year, and the first quarter of 2020, we're all pretty stable. So I was actually contemplating doing an analysis without that, but given the stability of those, yes, 609,000, in PPP. That was total. That did not include the internal costs were 620 to 614 in the fourth quarter and 419 in the first quarter of 2020. So those were the internal costs. Now on the expense front, those aside. One of the things that's been A to net income, if you back out the industry noise created by PPP, our non-interest income grew $293,000 year-over-year, our expenses grew 161,000. So our non-interest income has paid for the increase in non-interest expenses with $132,000 leftover, which is pretty good when you can cover the increase in your non-interest expenses. That being said, we will see an uptick in our non-interest expenses in the third and fourth quarter. Basically, due to - primarily due to an increase in data processing costs. As we get into a new phase of contract, and, of course, a number of accounts that we have and so forth, that all increases it. But aside from DP costs, you will always see a little uptake, kick-in salaries and employee benefits. But we try to contain that reasonable single-digit range. Other than that, I don't look for a major expansion in our non-interest expense.

[Stuart Lotz:]

Okay. So you anticipate you'll kind of hold that $8.8 million run rate into the back half of the year.

[Bruce Thomas:]

That's correct.

[Stuart Lotz:]

And would you expect some higher - okay, some higher debts . Okay. Got it. Great. Thanks for taking my questions.

[Bruce Thomas:]

Sure.

[Rex Smith:]

Thank you.

[Operator:]

Our next question comes from John Rodis with Janney. Please go ahead.

[John Rodis:]

Good morning, guys.

[Bruce Thomas:]

Hi John.

[Rex Smith:]

Hi John. I got to tell you, if you ask me how I feel I was going to say I feel a lot better than neutral. How are you doing?

[John Rodis:]

I get it. No, I'm doing well. It's hard to believe it's almost me. It's - on the PPP piece, just to be clear, the remaining, I guess roughly 2.7 million, Bruce. Just - that's what - that's all going to flow through net interest income, correct? The $2.7 million from ?

[Bruce Thomas:]

That's correct.

[John Rodis:]

Okay. Okay. And then Rex, you mentioned loan growth 7% to 8% for the year. Does that include or exclude the PPP run off?

[Rex Smith:]

That's sans PPP. That was just going to be pegging where we were with loans at year-end sans PPP and going with the new loan.

[John Rodis:]

Okay. Okay. So just this core loans in essence PPP?

[Rex Smith:]

Yes. Correct.

[John Rodis:]

Okay. Okay. Just sort of any thoughts, there's been some acquisition activity in your market. Just any thoughts on potential new hires, how you guys can benefit from the market disruption and so forth?

[Rex Smith:]

Yes. We have our feelers out and obviously, some of the good publicity we've gotten as a community bank during the COVID crisis has helped us. We've gotten - we got two folks from the truest merger, and we keep years out is we're picking up a really good banker in the second quarter up in Maryland, out of a larger - large organization. So, it's - it has been beneficial. And I think it'll keep going that way.

[John Rodis:]

Okay. Sounds good. Thank you, guys.

[Rex Smith:]

Thanks, John.

[Bruce Thomas:]

Thank you.

[Operator:]

Our next question comes from Eric Girdwood a Private Investor. Please go ahead.

[Unidentified Analyst:]

Hi, good morning, Rex. Just wanted to follow-up on the buyback question earlier. So, if I'm not mistaken, your tangible capital ratio is around 10%. Where do you feel comfortable buying back your stock to a level of capital ratio or maybe as a percentage of earnings in a given year right now. Notwithstanding what may have happened with the Russell between now and then and pressure on the price? What's your thought on that?

[Rex Smith:]

Well, we were - we're working on some analysis going forward, because the last group we did, we were doing it based upon our first quarter budget, which obviously, we'd beat significantly. And we back then we were comfortable with spending about $8 million on a buyback. And that we're going to read look at that number as we go into the into the Russell reconstitution.

[Unidentified Analyst:]

Okay. So I mean, you're looking at a number that more based on what your earnings trajectory is or just take away, we've got too much too much capital, we can take it down at this level and keep it there?

[Rex Smith:]

It's obviously, what the Fed is concerned about is, where's your capital a day? And then what's going to go back into it, which is from the earnings screen. So we're trying to balance and we feel like we did have too much gap. And we feel like we got to do something with it to help the shareholders' value. And obviously, the dividend in the buyback are the two best places we can do it at the buyback, I think being the more significant one. So we're - we have a heightened sense of that right now. I can tell you.

[Unidentified Analyst:]

Okay. And then just more from a 50,000 foot view. Could you provide a little bit of color just on the general condition of sort of Greater Richmond, the real estate markets, both on the commercial and maybe the residential development side? What are the opportunities there? Is there any kind of concern in terms of valuations? You hear these stories about people going crazy buying houses in the suburbs, during the COVID pandemic? And just curious about your thoughts on a local market?

[Rex Smith:]

Yes, I mean, the local markets have been phenomenal in terms of pricing. I mean, we've seen significant price increases in the residential marketplace. And we do have a group of builders and we managed some builder lines, both in Maryland and Virginia, and the home builders are doing great. Even despite some of the supply costs, which have had significant increases also? They're still getting good margins on the homes, they're still getting good sales. We do mostly contract by the lines with these guys. They're still doing great. I do know, from a high level, we've talked about where trends may go post-COVID, as people based keep working from home. And there's more of that and more commuting, and flex space. We haven't done a lot of large shopping center type deals or anything, but I think, I'm concerned about that, too. We've seen some larger tenants and some of the big centers here in Richmond Nordstrom is closed, which accounted for about a quarter of the space and one of the large regional malls. So I think there's a lot of things and of course, I've been in this business since 1980, when the first housing bubble started blowing up with rates and back and forth. So I think when prices go that fast, that high that fast, you got worried about it being a bubble situation. So we're keeping our eyes on just keeping a good view of it. We've kept a list of what we think are COVID senses of tight industries that we're looking at and looking at our concentration exposure to and we're going to continue to do that. Because I do think COVID advanced some trends that we're going to happen anyway. But I think now they're going to happen a little bit faster.

[Unidentified Analyst:]

Okay, great. Thanks very much for your color on that. I appreciate it.

[Rex Smith:]

Yes.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.

[Rex Smith:]

I'd like to thank everybody who participated this morning and remind you that Bruce and I are available for any follow-up questions. We certainly appreciate your support and hope you all have future success and stay healthy.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may not disconnect.