Community Bankers Trust Corporation
Q2 2018 Earnings Call Transcript

Published: 28 Jul 2018

[Operator:]

Good day and welcome to the Community Bankers Trust Corporation Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Mr. Rex Smith. Please go ahead, sir.

[Rex Smith:]

Good morning and thank you for joining us today as we review the results of the Second Quarter and the First Six Months of 2018 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 Web site at www.cbtrustcorp.com. On today's call, I'll give a quick overview of the quarter, and Bruce Thomas, our Chief Financial Officer will cover details selected financial highlights. And then I will share our thoughts on the rest of the year. I am pleased to report that the company has posted a significant increase in earnings year-over-year. Earnings for the first 6 months of 2018 were $6.4 million or $0.29 per share. This is an increase of $949,000 or 17.5% over the same period of 2017. The increase is attributable to numerous positive factors in the cooperating metrics for the company. While slower than expected in the first half of 2018, loan growth excluding PCI loans, increased just over $103 million or 12% year-over-year. For the first 6 months, loans increased $25.3 million or approximately 2.7%. There were both economic and competitive reasons for the lower-than-expected growth, but we're focused on building long-term value rather than taking credit or pricing risk for the sake of growth. The pipeline heading into the third quarter looks strong. And I am confident, our annual growth rate will settle into a range between 7% and 9% for 2018. The bank also continued its growth in demand deposits for the first half of 2018. Non-interest bearing deposits grew $13.5 million or 9.7% year-over-year and now comprise 13.5% of total deposits. NOW and Money Market accounts also increased allowing us to decrease broker deposits by over $26 million or 73.6%. This helps to hold down our cost of funds as the betas [ph] on these deposits are extremely high and have moved rapidly with the increases in short-term rates. The tax equivalent net interest margin was 3.75% for the first 6 months, which was slightly lower than it was for the same time period in 2017. While loan yields increased, deposit cost also rose from the interest rate increases. I expect deposit betas to flatten out in the coming quarters, as we continue to grow our non-interest bearing core deposits and pay down the broker deposits further. Despite the higher funding costs, net interest income increased $1.3 million or 5.8% year-over-year. Noninterest income continue to improve with a 9.9% increase on a linked quarter basis as a result of increases in service charges on deposit accounts, increases in mortgage loan income and increases in financial services fees. Now I would like to turn the call over to our Chief Financial Officer, Bruce Thomas, to discuss the details for the 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 was $3.8 million for the second quarter of 2018 compared with net income of $2.6 million in the first quarter of 2018. Earnings per common share basic and fully diluted were $0.17 per share and $0.12 per share for the 3 months ended June 30, 2018 and March 31, 2018, respectively. The increase of $1.2 million or 45.8% in net income for the second quarter of 2018 compared with the first quarter of 2018 was primarily the result of a $1.2 million decrease in total noninterest expense driven by a decline of $830,000 in salaries and employee benefit. Net interest income after provision for loan losses increased $180,000 and noninterest income increased $102,000. Offsetting these increases was an increase of $273,000 in income tax expense. Interest income on a linked quarter basis increased $431,000 or 3.1% to $14.5 million for the second quarter of 2018. Interest income with respect to loans excluding PCI loans increased $477,000 or 4.4% during the second quarter when compared with the first quarter of 2018. This increase was partially attributed to continued loan growth excluding PCI lines, coupled with higher rates. The yield on loans increased from 4.68% in the first quarter of 2018 to 4.75% in the second quarter of 2018. The average balance of loans excluding PCI loans increased $15.6 million or 1.6% on a linked quarter basis. Also improving in the second quarter was a tax equivalent yield on the securities portfolio, which was 3.11% in the second quarter of 2018 compared with a tax equivalent yield of 2.98% in the first quarter of 2018. Tax equivalent securities income was $2 million for the second quarter. Interest expense of $2.9 million in the second quarter of 2018 was an increase of $251,000 or 9.6% on a linked quarter basis. Interest on deposits increased $212,000 or 9.9%. The cost of deposits increased from 92 basis points in the first quarter of 2018 to 99 basis points in the second quarter 2018, resulting in a 9.9% increase in interest expense. The increased rates paid on interest-bearing deposits and wholesale funding, resulted in an increase in the cost of interest-bearing liabilities from 1% in the first quarter of 2018 to 1.08% in the second quarter of 2018. With the changes in interest income noted above, the tax equivalent net interest margin declined from 3.76% in the first quarter of 2018 to 3.73% in the second quarter of 2018. Noninterest income was $1.1 million for the second quarter of 2018, an increase of $102,000 compared with the $1 million for the first quarter of 2018. The linked quarter change was primarily attributable to an increase of $74,000 in commission income and an increase of $9,000 in dividend income. There was a $53,000 gain on sale of loans within the bank's USDA portfolio in the second quarter of 2018 versus zero in the first quarter of 2018. Noninterest expenses totaled $8.2 million for the second quarter of 2018 as compared with $9.4 million for the first quarter of 2018, a decrease of $1.2 million or 12.6%. Salaries and employee benefits decreased $830,000 or 14.9% on a linked quarter basis. The vast majority of this decrease was related to lower group benefit cost, which decreased by $683,000. Salaries and employee benefits in the second quarter of 2018 were $5 million compared with $5.8 million in the first quarter of 2018. Other operating expenses also declined $336,000 on a linked quarter basis from $1.6 million in the first quarter of 2018 to $1.3 million in the second quarter of 2018. The company converted a phone system in the first quarter of 2018. One-time cost absorbed in the first quarter to terminate the previous vendor relationship began providing a much lower expense beginning with the second quarter of 2018. This decrease on a linked quarter basis was $192,000. With regards to balance sheet changes, total loans, excluding PCI loans, were $967.4 million at June 30, 2018 increasing $25.3 million or 2.7% from year-end 2017 and $103.3 million or 12% from June 30, 2017. The year-over-year changes commercial mortgage loans growing by $35 million or 10.2% followed by growth of $32.8 million or 23.9% in commercial loans, $18.4 million or 18.3% in construction and land development loans, $8.6 million in consumer installment loans, $5.1 million or 2.4% in residential 1-4 family loans, and $3.8 million or 7.6% in multifamily loans. As a result, primarily of new account promotions at the three branches opened during 2017, money market deposit accounts grew $25.5 million or 21.3% from $119.6 million at June 30, 2017 to $145.1 million at June 30, 2018. Now accounts grew $20.1 million or 14.1% since June 30, 2017. These increases have allowed the bank to decrease balances with broker time deposits by $26.5 million over the last year and those balances were only $9.5 million at June 30, 2018. Asset quality remains stable and the bank has realized net recoveries through the first 6 months of 2018 and our allowance for loan losses remains appropriate given our level of nonperforming assets. With that, I will turn it back over to Rex.

[Rex Smith:]

Thank you, Bruce. I’m pleased with the consistent improvement in the core metrics of the company. We believe that our disciplined approach to growth and pricing helps us develop long-lasting full relationships that continue to grow franchise value. Central Virginia and Eastern Maryland are very competitive banking markets as we’ve seen new entrants trying by market share. While our approach to pricing and funding has slowed our growth rate, we continue to have sufficient growth necessary to enhance the franchise and therefore earnings. These competitive conditions are temporary as no institution can stay viable if they price irrationally for any length of time. We continue to focus on the most efficient and effective ways to gain profitable market share, which is through a professional and personal approach. The pipeline for loans is not only strong going into the third quarter, but also diverse between loan types and geographic locations. We continue to gain momentum in our newer branch offices and are working to maximize profits in our older ones. Our focus on responsibility level profitability and mix and customer level profitability has allowed us to lower our cost per account and help us grow earnings in a competitive marketplace. The balance sheet remains well-positioned for just about every possible rate scenario in the coming year. I believe this quarter's earnings show that our future is very strong. We continue to gain market share in three of the best growth markets in the mid-Atlantic. I hope that you, our investors, are as pleased as we have been with our results and we look forward to the rest of 2018. I thank all of you who participated in the call today and for your ongoing support of the company. We will now open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Catherine Mealor with KBW.

[Catherine Mealor:]

Thanks. Good morning.

[Rex Smith:]

Good morning.

[Bruce Thomas:]

Hi. Catherine.

[Catherine Mealor:]

Rex, I may have missed this, so I apologize if you said it, but I truly appreciate that the growth is slowing just given the pricing dynamics. Can you help us think about what an appropriate growth rate is for the back half of the year? Are we now in kind of mid single-digit and then once the pricing returns, you can maybe get back to the high single double-digit growth rate that you’ve enjoyed historically?

[Rex Smith:]

Yes. So I think when we look at the year, when we hit 12/31, you’re going to like a 7% to 9% total. growth rate range. So I think it will towards the back half of the year start to pick up some.

[Catherine Mealor:]

Okay. And then how do you -- you mentioned to the deposit data as you think will -- will be better in the back half of the year. And I appreciate some of that’s just from the mix on DDAs continuing to grow and the brokered coming down, but how -- I guess, one, does that assume further rate hikes. So if I get another rate hike in the back half of the year, would you think that that guidance will hold true? And then, secondly, how are you thinking about your outlook for your core margin under that assumption? Thanks.

[Rex Smith:]

Yes. I think you hit the nail on the head. The betas that I’m talking about -- the beta is flattening out. It is because we’re going to -- we’re continuing to push that non-interest bearing deposit growth in all of those branches and we’ve got, some of the new branches, the two in Lynchburg, we’re opening one over Midlothian at Stonehenge Village at the end of the month. And they’re getting a lot of good traction in DDA growth. And I think that change in mix and getting out of that brokered. I think we’ve done like $9 million in brokered NOW. It's going to help us flatten that out with the rate increase. And the margin, we are just about through all the floors on most of the loans. So when we get the increase, I think Bruce can speak a little more detail to, but I think it's going to be pretty close to where it is. We might see a little bit of change, but I don’t think it's going to be dramatic.

[Bruce Thomas:]

I do think that we’re going to see an increase in funding costs, whether prime changes or not in the third and fourth quarter. So with that being said, we would hope for rate increase in both September and December, because if we don't get that, we are going to see continued pinching on our margin and I would anticipate a couple of basis points just as in this quarter, if you do some comparisons year-over-year and 6 months -- versus 6 months and linked quarter, you definitely see that the beta is higher on the liability side than the asset side and that is with increases in all of those comparison periods in prime rate. So we hope for the increases in prime.

[Catherine Mealor:]

Got it. Okay. So you’re saying that even -- so you saw about 7 bps increase in your total interest-bearing deposit costs this quarter. So are you saying right -- you think that linked quarter change will improve as you move to the back half of the year?

[Bruce Thomas:]

That is our goal because it is all about the mix. So, Catherine, it's -- if we can accomplish the mix change, continued strong growth in DDAs, that’s going to keep that beta from going up as much.

[Rex Smith:]

And we have historically seen greater non-maturity deposit growth in the back half of the year.

[Catherine Mealor:]

Okay. That’s helpful. I would [indiscernible] actually within that [indiscernible] this quarter to begin with, so that’s -- we’re seeing some pretty high wins in other market are great. And then how about on the expense side. What’s your outlook for the expense growth in the back half? So you saw a nice reduction this quarter, of course, also the pre-elevated first quarter. But could you just kind of help us think about the expense guide for the rest of the year?

[Rex Smith:]

Yes, it should be relatively flat. As I said, we got a new branch opening at the end of the month, but personal expenses some of those were already in, a little bit of the second quarter and we’ve got the reduction in the phone call system, that’s going to be in there. So all things considered, it should be relatively flat, maybe a slight increase, but nothing dramatic in the future.

[Catherine Mealor:]

Great. Right. Thank you so much.

[Rex Smith:]

Thanks, Catherine.

[Operator:]

Our next question comes from John Rodis with FIG Partners.

[John Rodis:]

Good morning, guys.

[Rex Smith:]

Hey, John.

[Bruce Thomas:]

Hey, John.

[John Rodis:]

How are you guys doing?

[Rex Smith:]

Good.

[John Rodis:]

The -- Rex, your outlook for loan growth for the year of 7% to 9%, is that excluding the impact of PCI loans or is that with the impact?

[Rex Smith:]

That’s excluding PCI, John.

[John Rodis:]

Okay. Excluding, okay. And then, assuming loan growth does pick up in the second half of the year, should we be modeling some modest provision expense? Just because it was obviously zero this quarter.

[Rex Smith:]

Yes, I would. I guess, we’re thinking that.

[John Rodis:]

Okay. Okay. Bruce, I guess a question for you, does the securities portfolio was down slightly linked quarter? I guess, given the current yield curve sort of flat to down, is that sort of how we should think the level of securities?

[Bruce Thomas:]

I’m kind of monitoring that in terms of a percentage of total assets. And I'm going to try to keep the securities portfolio, it's 18.5% now and I'm going to follow total assets and try to keep it that range. I want to keep our liquidity ratio at a level that would make our regulators happy. And frankly the earnings off of that 3.11 tax equivalent yield for the second quarter is certainly palatable. We'd rather have loans, but trying to keep that balance and keep it in conjunction with total assets.

[John Rodis:]

Okay. And then, Rex, maybe just one other question for you on the mortgage business. Obviously, there's some challenges there for the industry, in general and you saw linked quarter declined. Do you think there's room for improvement or its probably the current trends expected to continue for you guys?

[Rex Smith:]

It's going to be fairly consistent. It might go up or down 10, 20 grant a quarter, but we have a pretty low-cost operation in mortgage. We don't have a back-office of processors and closers and we do a pass-through operation. So -- the expense base stayed pretty consistent with the profit base. So it will be fairly consistent, I think. Although mortgage business picks up in the fourth quarter little bit too as everybody is trying to get to things closed in that timeframe.

[John Rodis:]

Okay. Sounds good. Thanks, guys.

[Rex Smith:]

Yes, sir. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Blett -- sorry, Blair Brantley with Community Bank.

[Blair Brantley:]

Hey, guys.

[Rex Smith:]

Hey, Blair.

[Bruce Thomas:]

Hey, Blair.

[Blair Brantley:]

Can you ask a little more -- little bit more color about what you’re seeing in the loan growth environment, in the competition. I mean, where are you seeing the most pressure? Is that pricing structure, what types of credits, all that kind of hinter [ph] will be great.

[Rex Smith:]

A lot of its in commercial real estate. There is some pressure on the C&I side, although not quite as great in structure, but in real estate presumably we extend fixed rates. We are seeing them stay pretty cheap on 7, 10 year fixed rate. We’ve seen some people in the acquisition development side start to do 100% lot loans [indiscernible] that we are never going to jump into again. And as I said, some are really strong. Both sides of the balance sheet we’ve seen some people coming in with some pretty crazy money markets and CD offers. And we get our own risk report on our peer groups and we’re watching a couple of these peers where everybody else is getting cleaner and greener, they’re getting a little more -- a lot of risk, a lot of interest rate and structure risk that we just -- we’re not going to do it.

[Blair Brantley:]

Are they smaller competitors or they’re the kind of mid cap kind of guys or what’s …?

[Rex Smith:]

They’re -- most of them are the smaller guys. We may have one mid cap person, it's in there, but most of them are the smaller guys.

[Blair Brantley:]

Is that [indiscernible] Richmond or is that a mix between Maryland or I mean, geographically where is it?

[Rex Smith:]

It's mostly Central Virginia. Maryland is always competitive, but we haven't seen as much irrational pricing up there as we have in Central Virginia.

[Blair Brantley:]

Okay. And then just flipping [ph] to kind of external growth opportunities, any update on the level of conversations or any change intern or anything like that?

[Rex Smith:]

It's -- Blair, like I said before, it reminds me efficiently put some lines in the water and you just keep conversations open and conversations going, but you never know.

[Blair Brantley:]

Has this lower corporate tax rate changed the confidence of being -- of these guys to say independent, you think.

[Rex Smith:]

It's certainly -- [indiscernible] matters because everybody got a little lifted in common that tends to breathe some life, it is -- I think a lot of the smaller players I do think are going to still continue to feel the pressure of trying to be able to comply in a world where digital is becoming a big part of that world and cyber risk is becoming a huge risk factor and I'll think some of the smaller guys can afford to do the things they need to do to stay competitive in that market. And I think that pressure eventually gets in and starts conversations.

[Blair Brantley:]

Okay, great. And then just one more question on the operating expense side. So are you kind of saying that your year-over-year operating expenses will be kind of flat? Based on your commentary for second half of '18?

[Bruce Thomas:]

No. I think what we’re saying is the run rate for the second half of the year can be ramped off of the second quarter. Or if we keep that kind of flat, that’s [indiscernible] at $34 million of operating expenses which is pretty similar to '17. That’s all I have [indiscernible].

[Blair Brantley:]

So that’s pretty flat, [indiscernible] holding this flat. If that’s the case, how do you guys feel about infrastructure build out growing? Are you guys in a good place there, or those need to be other investments involved?

[Bruce Thomas:]

[Indiscernible] go ahead.

[Rex Smith:]

So we’ve got one new office starting at Stonehenge. We are -- we always do branch rationalization on a regular basis. So we're -- we continually look at where we need to expand in markets and as I said the digital side we're spending some money in the digital side of things to make sure that we can stay competitive there. We will have some product upgrades there that allow us to do account openings and online now in both deposits and loans. So those things will be …

[Blair Brantley:]

Okay. Thank you. I appreciate it.

[Operator:]

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

[Rex Smith:]

I’d like to thank everybody from participating today and would remind you that Bruce and I will be available most of the day today, if anybody has any follow-up questions, we welcome then and we appreciate your support.

[Operator:]

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