Community Bankers Trust Corporation
Q1 2019 Earnings Call Transcript

Published: 26 Apr 2019

[Operator:]

Good day, and welcome to the Community Bankers Trust Corporation First Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now 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 first quarter of 2019 for Community Bankers Trust Corporation, which is the holding company for Essex Bank. Let me start with a 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 these documents through our website at www.cbtrustcorp.com. From a pure growth perspective, the company had a typical start to the year. We were actually well ahead of our projections for gross loan production but had several large payoffs in our commercial real estate portfolio in March that lowered net production significantly. The payoffs were customer's cashing out of projects and not refinances from competitors. Loans excluding the purchase, credit, and payer portfolio grew $4.2 million for the quarter. For the 12 months ended March 31, 2019, loans grew a total of $33.7 million or 3.5%. We continue to diversify our loan types and the growth was also geographically spread among our major markets. Our focus continues to be on credit quality and appropriate pricing; this strategy led to a significant increase in the yield on loans from 4.68% in the first quarter of 2018 to 5.04% in the first quarter of 2019. While competition remains strong in our markets, we will not take undue risk in credit, loan structure or pricing just to get larger growth numbers. Since net interest margin is one of the main drivers of our earnings growth, we are also focused on low cost deposit expansion. Non-interest bearing deposit growth was $15.7 million or 10.4% year-over-year. There was also positive news in the non-interest expense area; salaries and benefit costs were down year-over-year leading a total decrease of $526,000 or 5.6% for total non-interest expenses, this reduction included spending more in software and equipment upgrades to continue to enhance our digital access including web and mobile banking. We continue to see increased usage of our digital banking channel and it will be a major focus for us for the remainder of 2019. These positive metrics led to an increase in earnings for both, quarter-over-quarter and year-over-year. Net income for the quarter was $3.5 million compared to $3.4 million for the fourth quarter of 2018, and net income of $2.6 million for the same period in 2018. This led to an increase in fully diluted earnings per share for the quarter of $0.04 per share, up from $0.12 per share in 2018 to $0.16 per share for the first quarter of this year. Lastly, we capped off a very positive quarter by paying our first dividend in over nine years. Now, I'd like to turn the call over to Bruce Thomas to discuss the details of the financial results for the first quarter.

[Bruce Thomas:]

Thank you, Rex, and I would like to thank all of you for joining us on this morning's call. Net income of $3,503,000 for the first quarter of 2019 resulted in earnings per common share of $0.16, this is a $0.04 per share increase over the first quarter of 2018, and $0.01 per share over the $0.15 in the fourth quarter of 2018. The return-on-average assets or ROA for the first quarter of 2019 was 1.01%, and the return-on-average equity or ROE was 10.02%. Rather than rehashing what is in the press release or giving the same data that Rex just gave, I thought that this quarter I should talk about the trends that fortify the direction of the company and where that points us for the future. I looked at a number of items and trends since we exited the shared loss agreements with the FDIC and wrote-off the indemnification asset in 2015. That transaction was hard work and put a dent in our equity. However, it also put us on the path we are on today. It was a sound business decision that positioned us to achieve better results for our shareholders. So this was a 14 quarter look back to the fourth quarter of 2015. Since December 31, 2015 when our loans were $748.7 million, the total has grown $249.3 million or 33.3%. At the end of the first quarter of 2019, total loans are 12.9% above the average balance of the loan portfolio over this timeframe. At December 31, 2015 purchase credit impaired or PCI loans were 7.3% of total loans. At March 31, 2019 PCI loans were 3.6% or half the percentage of total loans from 14 quarters again. This is important to look at because this portfolio has averaged a yield of approximately 12% over this timeframe but has become an ever-decreasing percentage of total loans. Therefore, it begs the question, what has happened to the net interest margin as a result of a vanishing high yielding portfolio? Net interest margin was 3.70% in the fourth quarter of 2015 and has averaged 3.77% since then. The first quarter of 2019 shows that at a net interest margin of 3.81% we are above the average over this timeframe. How is this possible? One reason is that the banks associates have worked very hard to increase non-interest bearing deposits. At December 31, 2015 non-interest bearing deposits of $92.2 million were 10.2% of total deposits. At March 31, 2019 non-interest bearing deposits of $165.7 million were 14.2% of total deposits, and it's 20.3% above the average balance since the end of 2015. We want this total of 14.2% to go to 20% of total deposits. Non-interest expense control has also been a big focus over this timeframe. The bank has added branches and invested in technology, but at the same time, it has worked on branch realization and closed branches or moved deposits to better locations. As a result, over the 14 quarters since the third quarter of 2015, non-interest expenses have averaged $8,493,000 per quarter. In the first quarter of 2019 non-interest expenses were $8,840,000, and were only 4.1% above the average over this timeframe. As a company, we will continue to focus on our efficiency ratio and we want to drive it lower than it is today. The purpose of this look-back is to point out that we are on a path to deliver superior results. The goals this company has have not been fully realized but the course is the correct one. As a company, the focus will continue to be on increasing EPS on a consistent basis, no matter what the yield curve or the economy presents us with. That will be in a variety of forms, primarily through quality loan growth, non-interest bearing deposit growth, margin preservation, and expense control. With that, I will turn it back over to Rex.

[Rex Smith:]

Thank you, Bruce. Our main goal has always been and will continue to be to increase shareholder value. We're consistently focused on building a fortress balance sheet that will allow flexibility in an unpredictable interest rate environment. While this may slow our loan growth from quarter-to-quarter, we believe that it is prudent to focus on more selective asset growth and protect our net interest margin. We also remain focused on the funding side of the balance sheet as competition for interest bearing deposits is extremely competitive. At double-digit growth year-over-year and low costs and non-interest bearing deposits also protects our margin and gives us more flexibility on the top half of the balance sheet. We will not only employ this strategy for the remainder of 2019, but we will also focus on controlling non-interest expense and getting our efficiency ratio in line with their top performing peers. Progress was made in the first quarter and we will continue to focus on ways to reduce overhead and the cost of our delivery channels. We operate in three of the best markets in the mid-Atlantic which gives us the opportunity to grow earnings from a controlled growth strategies in a diverse geographic marketplace. We are committed to enhancing franchise value and to grow earnings per share at better than average levels without taking undue risk. Given our consistent growth in earnings, we remain excited about the future of the company. Despite the trends in bank stocks overall, we believe our strategy and focus will prevail in the long-term and produce solid market performance. We look forward to the rest of 2019. I thank all of you who participated in the call today, and for your ongoing support of the company. With that, we will now open the call for any questions.

[Operator:]

[Operator Instructions] Our first question comes from Casey Whitman of Sandler O’Neill. Please go ahead.

[Casey Whitman:]

Good morning. Rex, you've touched a little on the pay downs impact in the first quarter of loan growth. So what is your outlook over the remainder of the year for growth? Are you expecting it to pick up a bit?

[Rex Smith:]

Yes. We have been seeing a trend in the last couple of years Casey where we really pick up a lot in the fourth quarter, but I think it's showing the pipeline and what we're looking at, it's been a little more steady than it was last couple of years. I'm thinking we're going to be probably in the 6% range for the year by the time it's settles in.

[Casey Whitman:]

And then maybe just a little bit on the outlook for the margin. I think going into the quarter you had got it to maybe a flat margin and obviously, margin ended up better than that. So what is your outlook from here without the possibility of more rate hikes?

[Bruce Thomas:]

I think our margin is going to be relatively stable. Depending on growth if we meet or beat expectations in terms of loan growth, we could see a slight uptick in the margin. The beta is definitely higher on the liability side. I mean, we can feel that and you see it in the numbers, but once again, how to beat that and if you do look back year-over-year to the degree that we can increase non-interest bearing deposits higher than our projections or higher than the growth rate of the total bank then we'll see improvement on the liability side as well. For example, if you look at our margins three months last year versus three months this year, the spread declined 3 basis points but the margin went up 5 basis points, and it's a result of beating our projections, growing faster in non-interest bearing deposits than the growth rate of the total bank.

[Casey Whitman:]

I guess I'd argue that your deposit beta has actually been pretty good throughout the last rate hike; so just curious towards your commentary around the liability pressure. Are you starting to see at least some of that ease later in the quarter or is that still there?

[Bruce Thomas:]

It's probably still there.

[Rex Smith:]

I would agree. I think for us, Casey, the folks -- it really is as Bruce touched on. It's the deposit mix and we still have some room to be able to -- I think our target of trying to get to 20% of total deposits in the non-interest bearing which would be typical.

[Casey Whitman:]

And maybe remind us what your plans are from here for additional branch expansions that you have set?

[Rex Smith:]

We've been looking very closely at all our branch offices. We have -- one of our offices is scheduled for closure at the end of May which is Fairfax, we just didn't get the traction we wanted there. But we may see one additional office come onboard this year where we're looking at up -- in a couple places in Lynchburg, and up in Maryland at two potential offices but it's going to be -- they're going to be offices that we really feel like we can get some good deposit growth in fairly rapidly.

[Operator:]

Our next question comes from Austin Nicholas of Stephens. Please go ahead.

[Austin Nicholas:]

Maybe just on expenses if you hadn't hit on that already, I apologize if you did. Can you maybe just give an outlook of where you see that number trending from kind of what was reported this quarter?

[Rex Smith:]

I think it's going to be relatively stable. I think our occupancy expenses -- we had the new leases from our Timonium, Maryland and Edgewater, Maryland offices were in there. We've been fairly diligent about trying to make sure that salary and benefits expenses hold. As always, benefit expense, we don't have a lot of control over that but so far we've been steady. And I think we're tracking that on budget and we've got a pretty strong focus, as Bruce said, on that efficiency ratio; trying to get that down to something a little more in line with peer [ph].

[Austin Nicholas:]

And then, I guess maybe just on the overall view on capital; with the dividend kind of in place now, I guess how do you view maybe your level of capital and kind of how maybe M&A would play into that view?

[Rex Smith:]

So we do have good capital strength and as we've said, that's part of the fortress balance sheet. M&A activity; we've been engaged in a couple of things we've looked at, it's -- it is very competitive. We obviously are looking for somebody that's got a good deposit side and deposits are premium right now, and we're also very disciplined in our approach. I think we've said this before, I've been around long enough to see that when you stretch on the M&A front it could just come back and be a never-ending tale of woe. So we're being selective, but I think there are a lot of banks out there in our marketplace that are smaller than us, that are really starting to feel the pinch, they just can't get the ROEs and we've been in a pretty good cycle for the last three years and I think they're realizing it's just -- at their scale it's hard to do. So, we continue to look at it but we're not going to do anything that doesn't make sense.

[Austin Nicholas:]

Understood. And then last one, maybe be just tax rate; any changes in the outlook for that number?

[Rex Smith:]

No. I think that the effective tax rate this quarter is -- there was nothing unusual in it, so that should be a good run rate.

[Operator:]

Our next question comes from Catherine Mealor of KBW. Please go ahead.

[Catherine Mealor:]

Most of my questions were answered [ph], maybe just one kind of big picture on profitability. Rex, you talked about a focus on driving better than peer EPS growth. As we think about that, how should we also think about your expectations for your ROA as it moves through the year? Do you see maybe it will go back to the -- over 1% ROA, which is great? Do you feel like there is upward momentum there and what do you think the drivers for that would be?

[Rex Smith:]

Our target is to try to hit like a 106 and I think a lot of that is going to be -- we do a pretty thorough strategic plan every year and this year we went around the table and said, "It kind of boils down to execution on two key items, one of which is deposit mix" because we feel like we're in good market places, we can get the loan growth we need, we're not going to push for double-digit growth there; so how we fuel the machine, it's going to be a key item for us. So, that non-interest bearing deposit growth is one of the primary drivers and we're going to focus hard on that. And then the second piece of that is the expense control, it's being smart about the way we do things, being smart about how we spend their money. I think the digital banking channel for us is going to be a cost-effective way to do a lot of things we want to do, and those are the two places where we're going to be laser-focused.

[Catherine Mealor:]

Are there any investments you need to make on the digital banking side that could increase expenses more in the near-term?

[Rex Smith:]

Yes, we've pretty much pushed a lot of those expenses in as we speak right now. I think we might have one other software addition that would come on later in the year but it's not going to be a big driver.

[Operator:]

[Operator Instructions] Our next question comes from John Rodis of FIG Partners. Please go ahead.

[John Rodis:]

Most of my questions have been asked and answered, but you mentioned the 20% target on GDAs -- ideally, when do you think you could get to that level?

[Rex Smith:]

Well, for me, I would like to be there tomorrow. But I think it's probably -- something like that is going to be about an 18-month run. It could be a little bit longer but as I said, we're pushing pretty hard on that, we've got some very good products right now, we've got some things that are very interesting I think for people that are bringing it in, we've got a couple of branches that are still relatively new out there that are getting some legs under them and that's going to help us. So, as I said, it is one of the top priorities for us.

[John Rodis:]

Just one other question, Rex. The increase in NPAs, you said it was too commercial credits and one multi-family loan; can you provide any detail on that multi-family loan like where it is in LTB?

[Rex Smith:]

Yes, it's -- I think it's one we will have resolved in the next quarter and it's up in Lynchburg, and it's -- I think we've got a good handle on it and I don't foresee any issues on that one.

[John Rodis:]

So as far as loss potential it sounds like you think it's pretty low?

[Rex Smith:]

Yes. I wouldn't put much on that. It's in a good marketplace and it's been one of those things where I think if -- it was a little bit ahead of its time but the leases are catching up to it, and there were some construction on the road in front of it that slowed it down a little bit but I think we've got -- we're working very diligently with getting it resolved as I feel like it will be resolved before this quarter is over.

[John Rodis:]

And what about any progress on the other long-term non-accrual that you've had? I think it's like $3 million or $4 million. Any -- are we getting any closer to resolution on that?

[Rex Smith:]

So, we have a meeting scheduled with the county in which that resides and we've finally gotten some pretty good progress on the water and sewer that was the hold up there. And I think that meeting is in two weeks, Monday or Monday, a week from this Monday; and we've been told that the county has laid out a plan of how to get that sewer system run through the property and there has already been road progress made. So, that was the whole lap [ph] and if -- after that, I think they're going to ask all of the surrounding property owners of which we are one, about how are we going to get the zoning piece accomplished. For us, it's great because the county wants a lot of residential; of course, I think the higher values is going to be in the commercial pieces and where we sit, we're going to have two lighted intersections in our piece of property which scream for commercial zoning. So, when you get to the point where you're talking about actual zoning and the final layout of the secondary roads that go around the major road and sewer system, that's good progress, and that's where we're getting; so I'm encouraged.

[John Rodis:]

But it sounds like probably still a few quarters away or…

[Rex Smith:]

Yes. I mean, it's -- if we're lucky, fourth quarter, possibly.

[John Rodis:]

And then just to tie it all together, as far as provisioning, you had zero provision again this quarter and all last year. How should we sort of be thinking about provisioning going forward for the rest of the year?

[Rex Smith:]

Yes, I think we're going to see provisions for the next three quarters. We've done a good job I think of putting the right and appropriate specific reserves against some of your problems, but with just the growth we're experiencing and where we're going, I think you're going to see a quarterly provision going forward.

[Bruce Thomas:]

I would agree. If we had not gotten the payoffs that we got in the month of March, we probably would have had provision in the first quarter.

[John Rodis:]

Okay. And just -- and assuming a provision probably of what $100,000 or $200,000 may be you still think you can hit the profitability ROA above 1% even with that provision?

[Rex Smith:]

Yes. And we're looking -- I think our budget was $200,000 a quarter.

[Operator:]

This concludes our 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 for participating this morning and remind you that Bruce and I are here today; if you have any follow-up questions, we'd be pleased to speak with you and we're looking forward to the rest of 2019.

[Operator:]

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