UBSI - NASDAQ

Rex Smith - President & CEO Bruce Thomas - EVP & CFO

Catherine Mealor - KBW

Good morning and welcome the Community Bankers Trust Corporation's First Quarter 2016 Earnings Conference Call. All participants will be in 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 would now like to turn the conference over to Rex Smith, President and CEO. Please go ahead.

Good morning and thank you for joining us today as we review the results of the first quarter of 2016 for Community Bankers Trust Corporation which is the holding company for Essex Bank. Let me begin 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 strategies and goals. I'll 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 of 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. Following our typical call format, I will give a quick overview of the quarter then Bruce Thomas, our Chief Financial Officer, will cover selective financial highlights and lastly I will discuss our initiatives and strategy going forward. I am pleased with the results of the first quarter as we were able to continue our positive trends in loan growth, non-interest bearing deposit growth and of course net income. Net income for the first quarter was $2.4 million, a $1.1 million increase or 84.5% over the first quarter of 2015. This equates to $0.11 per share which is what we budgeted for the period. Earnings were driven by a combination of loan growth that carried over from the fourth quarter, non-interest bearing deposit growth and a change in securities mix. This allowed us to increase our net interest margin quarter-over-quarter despite a highly competitive environment in which many banks saw the margin decrease. Total loans excluding PCI loans ended the quarter at $765.5 million, increasing $16.8 million or 2.2% from year-end 2015. A majority of that growth was in adjust for rate loan types which is where we want to see growth in the current interest rate environment. On the funding side. We continue to focus on changing the mix of deposits. All business lines have non-interest bearing incentive goals, and as a result our growth in demand deposit is steadily increasing. Year-over-year our demand deposits are up almost $14 million or 15%. Additionally, we were able to increase non-interest income through gains from deliberate changes in the securities mix as well as improved mortgage income. Non-interest expense remained relatively flat from continued improvements in asset quality that lower credit and other expenses. This occur even as we opened our 22nd full service branch office in Fairfax, Virginia, which is a very dynamic market. With that, let me turn it over to Bruce with some details on the financial results for the quarter.

Thank you, Rex. Net income was $2.4 million for the first quarter of 2016 compared with $2.2 million in the fourth quarter of 2015 and $1.3 million in the first quarter of 2015. Earnings per common share basic and fully diluted were $0.11, $0.10 and $0.06 for the quarters ended March 31, 2016, December 31, 2015 and March 31, 2015, respectively. Net income increased on a length quarter basis by 9.3% and year-over-year by 84.5%. There were two main drivers that positively influenced net income in the first quarter of 2016, compared with the fourth quarter of 2015. First, non-interest expense was reduced by $297,000 on a linked quarter basis due to gains of $152,000 on the sale of two bank-owned properties which resulted in a $102,000 credit to Oreo for the quarter, compared with an expense of $195,000 in the fourth quarter of 2015. Additionally, interest in fees on loans excluding PCI loans increased $313,000 or 3.8% on a linked quarter basis due to increased loan volume. All comments about loans and loan income will exclude PCI loans. The increase in net income when comparing to first quarter of 2016 with the same period in 2015 was a result of $1.5 million decline in total non-interest expense combined with a $328,000 increase in net interest income after provision for loan losses. The 15.6% decline in total non-interest expense was primarily due to a reduction of $1.2 million in FDIC indemnification amortization expense. In September, 2015, the company and the FDIC mutually terminated the share loss agreements which resulted in the elimination of this expense in future periods. Also, other operating expenses declined $117,000 or 7.2% year-over-year. Again, interest income with respect to loans increased $313,000 or 3.8% during the first quarter when compared with the fourth quarter of 2015. This increase quarter-over-quarter was primarily attributable to a full quarter of earnings from the $55.7 million or 8% in loan growth in the fourth quarter of 2015, coupled with solid loan growth of $16.8 million or 2.2% in the first quarter of 2016. Average securities balances were down $32.4 million on a linked quarter basis. This decline in securities balances was created over the last 2 quarters to fund higher yielding loans. However, the overall tax equivalent yield on the securities portfolio improved 25 basis points from 2.96% for the fourth quarter of 2015 to 3.21% for the first quarter of 2016. The tax equivalent net interest margin improved 7 basis points from 3.76% in the fourth quarter of 2015 to 3.83% in the first quarter of 2016. Likewise, the interest spread increased from 3.66% to 3.72% on a linked quarter basis. This increase was due to an increase of $9.2 million in interest earning assets coupled with an increase in the yield on those assets of 8 basis points, from 4.45% in the fourth quarter of 2015 to 4.53% in the first quarter of 2016. Net interest income increased $328,000 or 3.4% from the first quarter of 2015 to the first quarter of 2016. Interest income increased $388,000 or 3.3% over this time period. The average balance of loans increased $86.2 million or 12.9% from $667.5 million in the first quarter of 2015 to $753.6 million in the first quarter of 2016. Interest income on securities on tax equivalent basis increased by $130,000 year-over-year from $2 million in the first quarter of 2015 to $2.2 million in the first quarter of 2016. Total loans were $765.5 million at March 31, 2016 compared with $748.7 million at year end 2015 and $677.4 million at March 31 2015. The year-over-year growth is 13% or $88.1 million. During the first quarter of 2016, construction and land development loans grew by $5.5 million, commercial loans grew by $3.8 million, residential one to four-family loans grew by $2.8 million and commercial mortgage loans on real estate grew by $2.5 million. In comparing March 31, 2016 and March 31, 2015, commercial mortgage loans on real estate grew by $36 million, residential one to four-family loans grew by $25.8 million, construction and land development loans grew by $16 million, multi-family loans grew by $5.7 million and commercial loans grew by $4 million. Non-accrual loans were $10.9 million at March 31, 2016, increasing $262,000 from year-end and decreasing $6.3 million from March 31, 2015. The decrease year-over-year is 36.4%. The level of both internally classified sub-standard and special mention loans excluding PCI has improved over the last five quarters demonstrating continued improvement in asset quality. The allowance for loan losses equaled 87.8% of non-accrual loans at March 31, 2016 compared with 89.6% at year-end and 52.4% at March 31, 2015. The ratio of allowance for loan losses to total non-performing assets was 62.9% at March 31, 2016 compared with 62.2% at December 31, 2015 and 40.0% at March 31, 2015. The ratio of non-performing assets to loans in Oreo was 2.1% at March 31, 2016 compared with 2.1% at year-end and 3.5% at March 31, 2015. The quarterly figures reflect a stable level of allowance and non-performing assets while the year-over-year comparison is indicative of the lower level of non-performing asset. Loans internally designated as classified and criticized improved $5.3 million or 13% during the first quarter of 2016, and by $15.9 million or 31.1% year-over-year. Lastly, common tangible book value increased 4.7% during the quarter and the ratio of common tangible equity to common tangible assets is strong at 9.20% at March 31, 2016. With that, I'll turn it back to Rex.

Thank you, Bruce. The overall picture for the company is very positive. While many of our peers continue to suffer decreases in there net interest margins in the past 12 months, we've been able to keeps ours stable without taking extension risk while consistently growing ones. Our ability to continue to grow our low cost deposit mix is a key contributor to holding the net interest margin. Given our branching strategy, we have the ability to continue that growth trend. The first quarter numbers bode well in all respect considering that typically things are slower during that time of year from the shorter time period and the bad weather. Management has a strong commitment to enhance franchise value to core growth in the balance sheet and in our earnings per share. We continue to do so in a highly competitive and somewhat cluttered market. All of our associates understand the importance of relationship growth and differentiating ourselves from our competitors. Our growing to win campaign is creating a lot of internal excitement and driving our sales success. I am confident that we can continue our positive trends and increase value for the rest of 2016. I thank all of who participated in the call today for your ongoing support of the company. With that, we will now open the call for any questions.

We will now begin the Question-and-Answer Session. [Operator Instructions] The first question comes from Catherine Mealor of KBW. Please go ahead.

Hey, good morning, everyone.

Good morning, Catherine.

Good morning.

I think we can start with the margin, and could you cover a little bit about what two of the increase in security deals and then maybe talk about some of your strategies within the bond book, also thinking about the size of that book since we saw a little bit of shrinkage in this quarter.

We did. When we did our budgeting we determined that we had pretty aggressive loan growth and we had three palatable strategies to fund that growth, and with what's happened to the yield curve, it is above that selling some securities and transferring those into the high yielding loans was the best course of action. And given where interest rates were worldwide, interest rates are the mixed data on the economy, we gave up if you will some of the insurance that we had and some variable rate, low yielding SBA [ph] primarily, and they've been paying down at an accelerated pay so the yield was, in many cases less than 1%. So we were able to get out of those securities and transfer those into loans and those as a result the yield on the portfolio went up by 25 basis points in the quarter.

Got it. Okay, and so then would you expect in giving your outlook for positive loan growth throughout the rest of the year to expect to see that funding with the kind of shrinkage in the securities book or you think deposit growth will fund it moving forward?

We keenly want deposit growth to fund it, but I don't anticipate it will put much more volume in wholesale funding either through thorough home-own bank advances or broker deposits on our books. So if retail is option one and it doesn't come, option two is wholesale and we've got the level of that we want, so then option three, door number three if you will, would have to be through the liquidation of securities. It's not what I want to do, but obviously if a loan has been closed I've got to find a way to fund it.

Got it. Okay, and then just a picture outlook for the margin this year and do you think you can keep it stable this higher level through here or just now still with a little bit of compression from this higher level?

I think we'll see a little compression on the asset side but not appreciable. We've walked away from deals where we didn't like the rate and term, and if there's not a deposit relationship, if it's not a loan that's going to give some franchise value and the rate and term is not something we like, we walk away from it. So with that mindset we may give up a little of our loan growth. I don't really see it because this market is robust as is the Maryland, DC market but I don't see a big decline in the yield on earning asset just based on the mindset that we have. But we'll probably get a couple basis points a quarter if the yield curve stays like this.

And Catherine, just to follow up on Bruce's. Yes we see a lot of folks in the marketplace, it's growth for growth sake that's what they're going after and I'm looking at what that does and for a lot of them they're taking a lot of extension risk doing it. And when you look at what Dodd-Frank's going to from a regulatory standpoint, everybody from a regulatory perspective is going to be looking at economic value of equity in a rates up environment, and a lot of our competitors have taken this long extension risk, and it did does give them, in the short run it gives them some yield but you look at what happens to their capital valuation it rates up and it's going to kill them. So as Bruce said we're going to take the steady route on this and I think that will allow us, we might not see double-digit loan growth but I think we'll see 8% to 9% steady loan growth with a good yield without taking extension risk and building a relationship. So that's our focus.

Okay, that's perfect. Thank you so much. And then can anyone follow up on the tax rate up a little bit this quarter. What's a good tax rate to you moving forward?

Yes, that was one of my questions as well when I got there. What's up with this tax rate? But obviously a higher taxable income, annualize, also estimated tax payment that we made in the first quarter, I don't think tax rate is going to steady at that level. It should come down in quarter two and I would say maybe 28%, it was close to the 30% this quarter. So hopefully it will come down in the 28% range.

Okay, great. Thank you very much. Great quarter.

Thank you.

[Operator Instructions] There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Rex Smith for closing remarks.

I'd like to thank everybody who joined us this morning. We're very pleased with the quarter. We look forward to the rest of 2016 and if anybody has any follow up questions, Bruce and I are available today. We welcome your calls and thank you again for your support.