Community Bankers Trust Corporation
Q2 2020 Earnings Call Transcript

Published: 2 Aug 2020

[Operator:]

Good day and welcome to the Community Bankers Trust Corporation Second Quarter 2020 Earnings Conference Call. During today’s conference, all participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Rex Smith, President and Chief Executive Officer. Please go ahead.

[Rex Smith:]

Good morning, and thank you for joining us today as we review the results of the second quarter and the first half of 2020 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. The results for the second quarter of 2020 show some recovery from the effects of the COVID-19 pandemic that we experienced in the first quarter. While the State of Virginia has opened Phase III, Maryland remains partially closed. We continue to try and anticipate the final effect of the disruption, but much is still in question. The bank participated in the Paycheck Protection Program or PPP lending, originating over 740 loans amounting to $83.5 million for the quarter. These loans are expected to be fully forgiven by the United States Treasury after borrowers use the loans to keep employees on their payroll and cover operating expenses. They were a big help to many of our customers and to the communities in which we operate. We also continue to grant payment relief to specific customers in the second quarter although at a much reduced level from the previous quarter. Total relief granted was $170 million and represented a little over 14% of the total amount of net loans. This is slightly lower than the experience of our peers in the biz district. Of the $170 million, approximately $30 million were shorter term in nature and those loans have resumed normal payments at this time. We are still offering some relief as we work very closely with our customers to build strong and complete relationships, but it has not been a significant amount since quarter end. Overall loan growth without the PPP loans was 4.4% year-to-date annualized and 5.6% year-over-year, which is in line with our expectations. Credit quality remains strong and the provision expense was $900,000 for the quarter, down from the $3.3 million expense in the first quarter as delinquencies remained low and substandard classifications remain stable. The provision addition increased the allowances coverage to 1.13% of total loans, if you exclude the PPP loans. Our focus continues to be on credit quality and we are working through the portfolio by loan type and business segment to identify and manage any potential problem areas in concentrations or high-risk industries from the pandemic. Deposit growth was extremely positive as total deposits grew $200.2 million or 17.2% since year-end being led by a 56.1% increase in total non-interest-bearing deposits. Total non-interest-bearing deposits grew by over $90 million for the quarter and over $100 million since year-end. There was also positive news in both the non-interest income and non-interest expense areas. Non-interest income increased $281,000 or 21% on a linked-quarter basis. The main driver of the increase was from securities gains of $242,000 and mortgage loan income, which increased $152,000 over that period. Additionally, non-interest expenses decreased both quarter-over-quarter and year-over-year. A big component of the decrease was lower expense in salaries and employee benefits that came from the recognition of FASB 91 expense or internal costs that were associated with the PPP loans. There were also decreases in occupancy and data processing expenses. While we continue to invest in software and equipment upgrades to enhance our digital access, including web and mobile banking, we are looking for other ways to hold expenses as we gain more insight into customers' changing habits in this environment. The result was an increase in net income, which was $4.2 million for the quarter ended June 30 2020 compared with net income of $1.4 million in the first quarter of 2020 and net income of $3.5 million in the second quarter of 2019. Now, I would like to turn the call over to Bruce Thomas to discuss the financial results in more detail.

[Bruce Thomas:]

Thank you, Rex and good morning to everyone joining us today. This quarter given the rapidly changing landscape that includes a lower-for-longer and flat yield curve, I thought we should gain some insight in how our net interest margin maybe impacted over the next 12 months. Interest and dividend income decreased $195,000 or 1.2% on a linked-quarter basis to $15.8 million. Interest income declined due to a decrease in the yield on earning assets of 45 basis points. This decline was influenced by several factors. First, there was a full quarter's effect of the reduction in prime rate on March 16 from 4.25% to 3.25%. Additionally, there was the addition of PPP loans, net of fees of $83.5 million that were added during the quarter at a rate of 1%. Included in the PPP loan balance at June 30, 2020 was $2.6 million in deferred fees payable by the SBA. $304,000 in SBA fees, were recognized as income in the second quarter. These PPP loans will be short-term in nature and were primarily offset by a large influx of low-cost funding that has caused larger balance sheets in banks across the entire country. Other changes within the loan mix in the second quarter, was a decline of $19.1 million in commercial loans, excluding PPP loans. This decline was mitigated by an increase in commercial real estate loans of $33.5 million during the second quarter. New loan volume for all real estate loans booked during the second quarter, was a weighted average rate of 4.13%. New loan volume for all loans booked in the second quarter, excluding PPP was booked at a weighted average rate of 4.12%. The average loan yield for the second quarter was 4.55%. With that, you can get a sense of what affect new volume will have on loan yields. With regards to the loan mix $736 million or 69% of total loans are adjustable rate. 62% of adjustable rate loans have a floor with a weighted average floor rate of 4.48%. Of all adjustable rate loans, 49% are currently at the floor. So 78% of adjustable rate loans with a floor are already there. With regards to loan re-pricing the five-year constant maturity treasury is the largest repricing mechanism for 46% of our variable loans. Therefore, there is not an immediate impact on the largest category of loans, when prime rate changes and instead these loans reprice on their anniversary date. Prime-based loans are the next largest category and represent 29% of the adjustable total. One-month LIBOR is 15% of the adjustable loan total. These three loan re-pricing categories account for over 90% of our variable rate loans. In all, whether fixed or variable we estimate $560 million, or 52% of the loan book is rate-sensitive in the next 12 months. Interest expense decreased $317,000 on a linked-quarter basis a greater amount than the decline in interest and dividend income of $195,000. Interest on deposits declined by $237,000 or 6.9%. Interest on borrowed funds declined by $80,000 or 27.7%. The combination of yield and cost changes resulted in an increase in net interest income on a linked-quarter basis of $122,000 or 1%. Management has positioned the liability side of the balance sheet with short-term borrowings and short-term certificates of deposit, which are enabling recurring re-pricing opportunities. In the third quarter of 2020, $147 million in certificates will mature at an average rate of 1.81%. This represents 23% of all certificates at June 30, 2020. Over the next 12 months $480 million in CDs or 76% of total CD balances will re-price. The average rate of the roll off is 1.65%. We anticipate that these CDs on average will re-price at approximately 100 basis points lower. This should improve our cost of funds over the upcoming quarters. To summarize, $560 million in loans with a yield of 4.46% are rate-sensitive over the next 12 months, yet a sizable amount of that is insulated by interest rate floors. Additionally, $480 million in CDs at a cost of 1.65% will re-price. There are many dynamics in the net interest margin. But certainly, there will be continued downward pressure although as you can see, we have experienced a decline in interest rates that had a more immediate impact on the asset side. We have a fair amount of loans with floors that will insulate us to some degree against further declines in rates. On the liability side we will realize a fair level of deposit repricing. Our interest rate risk models have our balance sheet as fairly even from an interest rate risk perspective. As a result our margin will experience some pressure simply due to the low rate environment yet, we have some protective measures in place. We will continue to be very focused on the other contributors to net income as well with non-interest income, non-interest expenses loan quality and deposit mix being top of mind. In these areas we have been experiencing some very favorable trends. With that, I turn the call back over to Rex Smith.

[Rex Smith:]

Thank you, Bruce. The second quarter showed much progress than the first quarter as businesses begin to reopen and relief programs help keep people employed. We have learned a lot about the resiliency of our customers, our associates, and our communities. We are keeping a watchful eye on our credit trends and credit quality by business lines as we navigate forward. Our past decisions and investments in our associates our customers and also in technology has certainly paid off in the pandemic as our balance sheet remains very strong and flexible. We will continue to expand our ability to serve customers in multiple channels, while creating better cost efficiencies. Our growth rates in online account openings and in mobile banking usage are well exceeding our expectations. Our mobile banking product was recently ranked as one of the best among all small-cap banks when compared to those of larger banks receiving a 4.8 star rating out of five stars total. We are far from through with the effects of this pandemic, but our team remains ready to face any and all challenges ahead of us. We hope that you our shareholders remain safe and we thank each of you for your ongoing support of the company. I will now open the call for any questions.

[Operator:]

[Operator Instructions] Today's first question comes from Catherine Mealor with KBW. Please proceed.

[Catherine Mealor:]

Hey, good morning.

[Rex Smith:]

Hey, Catherine.

[Bruce Thomas:]

Hey, Catherine.

[Catherine Mealor:]

I thought, I'd just start with the reserve. So you had a little bit of a less reserve build this quarter than we saw last. Just wanted to see if you could give us some color as to kind of the differences between the two quarters? And how you're thinking about the reserve build? And then how you think the reserve build should look in the back half of the year? Thanks.

[Rex Smith:]

I can kind of generally talk to it Catherine and Bruce can fill in the details. But first quarter, when we did payment release we pretty much put – if you ask for a deferral, we pretty much moved you into a special mention category. So we could keep it on a watch and make sure we were staying on top of those. And between the economic factors and what was going on with the risk rating changes that drove a pretty big provision. There weren't half – I mean, the number of deferrals in the second quarter were not nearly as significant and the metrics that the past dues were down and the economic factors were relatively stable. So we're not a CECL bank. So we sort of have the backwards looking. So we're looking at where we were in the delinquencies in the prior quarters and then where we are now. And so those numbers looked a lot better. Now as we go forward, we all said, that it's a lot -- we still don't know. And some of these deferrals I think I said in my talk about $30 million of those deferrals are back on payment and are making their payments, but the rest of those are going to start coming due in the later part of the third quarter beginning of fourth quarter. So how those folks are able to get back or whether they will be able to get back in the payment mode or whether we have to continue to restructure or look at it will drive where we are.

[Catherine Mealor:]

That makes sense. And so then maybe, as you see more risk weighting perhaps from special mention down to classified or criticize in the future, if that happens that would be more of a reason to build the reserve moving forward?

[Rex Smith:]

Correct. That will really drive the reserves at that point.

[Catherine Mealor:]

Yes. And it could last lateral -- I know you can't, it's harder given the qualitative factors.

[Rex Smith:]

Yes, delinquencies in general go up then that's going to drive it too. I don't know that the economic factors that are the softer factors are going to get any worse, but knock on wood who knows so.

[Catherine Mealor:]

Yes. That makes sense. Okay. That helps. And then on the deferrals, so I just want to make sure I got it right. So you said, it was 14% or $170 million kind of at its peak. And out of that $170 million, $30 million are already back to paying. So I guess, maybe taking a step back is kind of where are you today on number of deferrals? And where do you think is your gut that it goes after kind of your round one kind of...

[Rex Smith:]

Yes. So we've granted -- yes we've granted a few more deferrals, since quarter end, although not many. So it's relatively stable sitting in the, I'd say the $150 million to $160 million range, probably I would say by the mid-August or so is what we're guessing. And then a lot of that as I said begins to come due September, October, big chunks in November. And there's a fair amount of those that are in some places where we've got high risk, but it's a fairly granular group. I mean there's about -- there's $106 million loans in CRE, there are $106 million that's the biggest category. And after that, C&I has got $31 million -- or $34 million and it just sort of comes down. So you can tell by the number of loans versus the dollars. It's a pretty granular situation which has -- is good in terms of if things don't go the right way, but it's also -- it creates a tremendous amount of work. We've got loan officers that are spending a lot of time which we want them to do to stay with these customers and work through with them.

[Catherine Mealor:]

And would you say what was -- what's your typical modification? Is it a 90-day? Or were you doing more six months?

[Rex Smith:]

So we're -- yes Bruce has it.

[Bruce Thomas:]

I've got it. We really did -- it's fairly -- it's very spread out. We did $57.4 million for three months. This is a combination of interest-only and full payment relief. But $57.4 million for three months, $44.6 million for four months and $58.8 million for six months. And back to what Rex was talking about and I don't know what in that three month bucket has not yet hit the end of that three months, but this kind of gives you a feel for as those come due, how many do we re-extend, how many resume payments. So in that three month deferral of $57.4 million, $12.7 million have re-extended and $6.8 million have resumed payment. So it's kind of in that categories basically two for one re-extend.

[Catherine Mealor:]

Got it. Okay. That's very helpful. Great. Thank you so much. I'll jump off.

[Rex Smith:]

Thanks.

[Operator:]

Our next question comes from John Rodis with FIG Partners. Please proceed.

[John Rodis:]

Good morning, guys.

[Rex Smith:]

Hi, John.

[Bruce Thomas:]

Hi, John.

[John Rodis:]

How are you guys doing?

[Rex Smith:]

Doing pretty good.

[John Rodis:]

Maybe just Bruce, you gave a lot of detail on the margin. And I understand obviously lots of moving parts. I guess, if we look at net interest income dollars and if you exclude the impact of PPP, I think you said was roughly $300,000 in the quarter, maybe a little bit more with the 1% interest rate. Do you think net interest income dollars have bottomed? Or do you think there's still some more pressure there too?

[Bruce Thomas:]

I would hope that they have bottomed. We are doing all we can to deploy every dollar. Of course, we had a tremendous influx of cash that occurred on our balance sheet in the second quarter. And we've worked hard to get it all earning as quickly as we can. We are slightly asset sensitive. And when I say slightly, I mean, we're spot on inside of our policy tolerance from a net interest income perspective. But based on what I discussed earlier, 29% of our loans tied to prime. And then 15% I think it was that I mentioned is tied to one month LIBOR, which is I'm looking at it now 17 basis points. You figure that those two categories can't go much lower. Now those -- the largest category as I said is the five year cost maturity treasury. And that roll over time is going to cause some repricing pressure. But that is the category that has the largest amount of loan floors in it. So we are somewhat insulated, although we're not insulated from the borrower picking up the telephone and calling their lender and wanting a rate concession aside from the loan floor. So obviously, that presents some modeling challenges. But at the same time, on the other side of the balance sheet, we are higher in CDs than we would like to be, but this is a one-time and it's beneficial for you because the non-maturity deposits, by and large, with the exception of our money markets, are basically out of floor now. But we've got 100 basis points of lift coming in the next 12 months, should rates stay in the environment they're in on that liability side. So I would hope, based on the growth in our balance sheet that the net interest income dollars have bottomed out. Obviously, with the growth in the balance sheet, if the dollars remain flat then you're looking at a decreased margin and decreased return on assets. But, I think, I was trying to make that point in the comments that, yes, I hope that we'll see an uptick from here in net interest income. Sorry, for the long-winded answer.

[John Rodis:]

No, I understand, lots of moving parts. And just to be clear, Bruce, when you bottom in net interest income dollars excluding the PPP impact, correct?

[Bruce Thomas:]

Right.

[John Rodis:]

Okay. And then, just one more question for me, just on expenses. You obviously -- you highlighted the impact from FASB 91 in the quarter. If you sort of exclude that and I think you said you expected expenses to bounce back, move back up some going forward. If you exclude that would have expenses been more in line, sort of, with the first quarter and the end of last year around $8.5 million $8.6 million?

[Bruce Thomas:]

Well, we are seeing a little bit of relief in the occupancy and equipment expenses. But, by and large, if our salaries and benefits were to go back to that first quarter level, then, yes, I think we're going to be in the 8.5% to 8.6% range going forward.

[John Rodis:]

Okay. And then, maybe just one final one, just the tax rate. Bruce, it ticked up a little bit, but that was probably because of the lower provision. So is 19% sort of a good number to you still?

[Bruce Thomas:]

I would think so, John. Yes.

[John Rodis:]

Okay. Okay. Thanks, guys.

[Bruce Thomas:]

Thank you.

[Rex Smith:]

Thanks, John.

[Operator:]

[Operator Instructions] Our next question comes from Brody Preston with Stephens Inc. Please proceed.

[Bruce Thomas:]

Brody?

[Brody Preston:]

Hey, can you guys hear me?

[Rex Smith:]

Yes.

[Bruce Thomas:]

Yes. How you’re doing?

[Brody Preston:]

I don't know what happened there. All right. So, I guess, Bruce, I wanted to go back to the CD book real quick. I appreciate the commentary around the -- I think, like, 76% of the CD book here repricing over the next 12 months. So it seems like you can pick up 100 basis points there. But when I look at the, I guess, average cost of CDs and the remaining portion of the book, I guess, you got another $150 million or so, that is not set to reprice over the next 12 months. It sort of implies, I guess, to get to that all-in cost it implies I guess a rate that's like in the 2.75% range. Does that sound right? And I guess when could we see those CDs reprice? Are those more, I guess, maybe 18 to 24 months from now?

[Bruce Thomas:]

Let's see. I think, I have that with me. Actually, what I have is a 12 months roll off. I would have to get that information out of my ALCO report and provide it to you.

[Brody Preston:]

Okay.

[Bruce Thomas:]

But 2.75%, certainly, that sounds like a whopper right now, right? But I think that that is reasonable. I do have the new loan volume for the quarter, but that's not what you're asking here. So I can get you that information and provide it to you.

[Brody Preston:]

Okay. That's great. I guess, I was just thinking about it longer term. It seems like beyond maybe 2020 or first half of 2021, thinking second half of 2021 into 2022, there's some definite repricing -- continued repricing opportunities on the CD book, just given that 25% of it still sort of supporting a higher rate at this point, just given the longer duration of it.

[Bruce Thomas:]

Right. Well, I do know that, for example, during the month of July, one of our -- and this is sizable. We had a brokered CD that we purchased the call provision -- paid up to get to call provision and return those funds. So I am looking at a report here that, with existing volume is showing the highest category in the 19 to 24-month category, as of June 30, $27.5 million at 2.31%. So within the next two years that would be the largest piece that would see a reprice opportunity. But we have very little beyond 24 months.

[Brody Preston:]

Okay, okay. Okay. Thank you for that. Rex just wanted to reconfirm what you told Catherine earlier. So between the roll on and then some new deferrals you're kind of in that $150 million to $160 million range, is that the number I heard on current deferrals?

[Bruce Thomas:]

Rex, are you on mute?

[Rex Smith:]

Yes, sorry. No, I was looking at it. Yes, I think, it's a fluid number. Obviously, it changes, it can change weekly, but I think that's about where we're going to land for going into August.

[Brody Preston:]

Okay. Bruce, do you happen to have the number for average PPP balances for 2Q?

[Bruce Thomas:]

I do not have that number.

[Rex Smith:]

It's pretty small. It was very granular.

[Brody Preston:]

Okay. So it's -- I guess, just looking at the total of like the $83 million you did or so, it's a small portion of that?

[Bruce Thomas:]

Yes. I may be able to get that for you during this call.

[Rex Smith:]

Is it fee income price is that what you're looking for?

[Brody Preston:]

No. Just the average balances of PPP that were within the average loan balances on the average balance sheet? Okay. Well, I guess I'll ask one more, while we wait for that. And if you can't get it Bruce, I can always just follow-up. Regulators have seemed to indicate in their guidance the loans modified before the end of the year, sort of, don't need to be booked as TDRs for life of the loan at least that's what the OCC seems to say. Just wanted to get your sense for if this is how you all have interpreted it? And, how, your conversations with regulators and your auditors have gone around that? And does this give you some added flexibility I guess to modify some of the weaker borrowers through 2021?

[Rex Smith:]

Yeah. It's a bit of a grey area. And I think, the way we're looking at it and talking and we're having good conversations with our state and federal regulators about it, that as long as it is as they were current pre-COVID 12/31/2019 and it still appears to be COVID related you can make those deferrals and things up until year-end. But we've also said internally, we have some stop gaps that we've -- at some point you got to look at it and understand, are they going to be able to go forward or they not? I mean -- and how much of it is, where they're going to be, in the beginning of 2021 as far as whether or not, it's going to be a TDR. But I think, you're correct in that is the way the regulators are going to look at it and they're going -- and there have been multiple conversations about their flexibility during exams about looking at these going forward. And if it was COVID-related deferrals, they're not -- there's going to be flexibility.

[Brody Preston:]

Okay. All right, I guess just two more quick ones for me. Rex, is there any update on the one big loan that you have in the OREO portfolio? Or is that kind of delayed as a result of COVID?

[Rex Smith:]

There's good news and bad news. Bad news is that, a lot of people that would be interested are kind of sitting on the sideline. The good news is the, County Chesterfield is not. So they've already done the engineer work. And they've already done the road engineering work. And they're allowing some flexibility among the zoning of the different parcels which is before they wanted it under a master plan. So now, we've got some flexibility. We do know that the main roadway is going to go, along our property line and we're going to have some major intersections. And we have some of the best zoning there now, of the project, as we've got commercial zoning with multifamily in the back of it. And they're starting to put in the sewer plant. So -- and it's in a very popular area Chesterfield right now. So now the county has committed some resources to get things moving. That's good news for us. It's just -- it's certainly not going down in value at this point.

[Brody Preston:]

Okay. Great, and then, just one last one, could you provide any color around what criticized and classified loan balances sort of look like at quarter end?

[Rex Smith:]

Yeah. I mean, we're not seeing anything unusual in criticized and classified right now. I mean things have been fairly flat. We've been working them pretty hard. I think, it's -- I think we're in a good position right now. The balance sheet, the credit quality going into this is -- was strong. And it remains strong. We haven't seen a lot of leakage over yet. We've seen some that we've gotten fixed. So it's fairly low. And it's fairly stable.

[Brody Preston:]

Okay. Great, I appreciate that color. Thanks guys.

[Bruce Thomas:]

Thanks Brody?

[Brody Preston:]

Yeah, Bruce. Thank you.

[Bruce Thomas:]

I'm happy that I can give you answers. And the rest of the world can hear them too. So that's always more favorable. The PPP average for the second quarter was $62 million and the six months average of course $31 million. And then, I was looking right at it, but it would be helpful, let me give you the CD categories beyond -- it's beyond 19 -- so in between 19 and 24 months, I'm going to give you, under $250,000 and over $250,000. $94.8 million at an average rate of 2.13% is in the 19- to 24-month bucket. And then, over $250,000 is $27.5 million at an average rate of 2.31%. Notice here that, these rates I give you as we extend out aren't going to go up. 25 to 36 months, its $31.1 million at 2%; 25 to 36 months over $250,000, $6 million at 2.27% and then last, 37 to 60 months $41.2 million at 2.01% over $250,000, $3.8 million at 2.20%.

[Brody Preston:]

Okay. And thank you very much guys. I appreciate it.

[Bruce Thomas:]

No problem.

[Rex Smith:]

And Brody, if we just looked at those PPPS just the total balance in the number of loans its $113,000 average loan. I mean if you just take the $83.5 million divided, by the 741 loans whatever. So, that's about the average size.

[Brody Preston:]

Okay. Great, Thank you both, I appreciate for taking my questions.

[Rex Smith:]

Thank you.

[Operator:]

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

[Rex Smith:]

I'd like to thank everybody for participating this morning. I hope you're all staying safe and doing well. We would be around. For any further questions you'd like to have, I would suggest that you would contact us via e-mail. My e-mail is [e-mail] or [e-mail]. So that we can set up a call together since, we're kind of working remotely. That's probably the best way to do that. But we're welcome to have any follow-up with anybody that would request it. So thank you very much. And we appreciate your support.

[Operator:]

The conference has now concluded. Thank you, for attending today's presentation. You may now disconnect.