UBSI - NASDAQ

Rex Smith - President and Chief Executive Officer Bruce Thomas - Executive Vice President and Chief Financial Officer

Austin Nicholas - Stephens Inc. Catherine Mealor - KBW

Good day, everyone, and welcome to the Community Bankers Trust Corporation Fourth Quarter and Year 2016 Earnings Conference Call. 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 also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Rex Smith, President and CEO. Sir, please go ahead.

Good morning, and thank you for joining us today as we review the results of the fourth quarter and the full-year of 2016 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'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 risk 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. On today's call, I will give a quick overview of the past year, Bruce Thomas, our Chief Financial Officer, will cover selected financial highlights and then I will share thoughts on the upcoming year. We had a good year in 2016 with a strong finish in the fourth quarter. Net income for the year finished at $9.9 million or $0.45 per share. Net income for the quarter was $2.7 million, up approximately 11% from the third quarter of 2016. Year-over-year results are affected by the termination of the shared loss agreement in 2015 which resulted in a negative number for that year. Excluding the one-time charge of $13.1 million for the termination, net income for 2015 would have been $6.1 million, therefore net income grew by over 62% year-over-year. The Bank was able to grow net income consistently while expanding its market base and growing in total relationships. In 2016, we opened two new branch offices in Fairfax and Cumberland both in Virginia. For 2017, we have new offices committed in the Short Pump area of Richmond and one in Lynchburg, Virginia. Our branch growth has allowed us to change our deposit mix and control our overall cost of funds. Non-interest bearing deposit growth was $32.6 million or 34% for 2016 which is exceptional. This growth helped fund double-digit loan growth for the year. Loans excluding PCI loans grew $87.6 million for the year and over $24 million for the quarter. A majority of the growth for the quarter was adjustable rate commercial and industrial loans, which grew $10.5 million in the fourth quarter. Meaningful improvement was also made in the non-performing asset category, as we decreased non-performing assets for 2016. This helped lower credit and legal expenses for the year. We also continued our focus on holding operating expenses down. Non-interest expenses declined slightly on a linked quarter basis. Year-over-year operating expenses decreased $17.5 million, a majority of which was due to the termination of the shared-loss agreement, but also from other decreases during the year. Now, I'd like to turn the call over to Bruce Thomas to discuss the details of the financial results for the fourth quarter and the year.

Thank you, Rex, and good morning to everyone. First, I will review fourth quarter financial highlights and then I will note financial highlights for the year ended December 31, 2016. Net income was $2.7 million for the fourth quarter of 2016 compared with linked quarter net income of $2.5 million in the third quarter of 2016 and year-over-year net income of $2.2 million in the fourth quarter of 2015. Earnings per common share, basic and fully diluted, were $0.12 per share, $0.11 per share and $0.10 per share for the three months ended December 31, 2016, September 30, 2016 and December 31, 2015, respectively. Interest income on a linked quarter basis increased $310,000 or 2.5% to $12.7 million for the fourth quarter of 2016. Interest income benefited from both loan growth and the increase in discount rate, which in turn increased prime and short-term interest rates. There will be a full quarter of benefit from this in the first quarter of 2017. Interest income with respect to loans increased $260,000 or 2.8% during the fourth quarter of 2016 when compared with the third quarter of 2016. This increase was generated by the $51.3 million in loan growth in the last two quarters of 2016. Interest expense was $2.1 million for the fourth quarter of 2016, an increase of $187,000 or 9.8% over the third quarter as interest bearing liabilities increased 4.9% or $46.9 million on average in the fourth quarter. The Bank embarked upon a successful certificate of deposit campaign in the third and fourth quarters of 2016 ahead of the anticipated increase in the discount rate that occurred in December and to fund our strong loan growth. The Company's cost of interest-bearing liabilities increased nominally as a result of this campaign from 0.79% or $1.9 million in the third quarter of 2016 to 0.83% or $2.1 million in the current quarter. Net interest income was $10.6 million for the quarter ended December 31, 2016 compared with $10.5 million for the quarter ended September 30, 2016. This is an increase of 1.2% or $123,000. There was no provision for loan losses excluding PCI loans during the fourth quarter of 2016. Despite strong loan growth in the fourth quarter, our level of non-performing assets to loans and other real estate decreased from 1.97% at September 30 to 1.74% at December 31. Also, our coverage ratios of allowance to non-performing assets and non-accrual loans increased from September 30 to December 31. With regard to the PCI portfolio, due to its continued improved performance there was a credit of $284,000 to its provision in the fourth quarter of 2016. For the year ended December 31, 2016 net income was $9.9 million or $0.45 per common share basic and fully diluted compared with a net loss of $2.5 million or $0.11 per common share for the year ended December 31, 2015. As Rex mentioned, results for 2015 were impacted by the charges associated with the termination of the shared loss agreement. For the year 2016, net interest income increased $1.4 million or 3.6% and was $41.5 million. The tax equivalent yield on earning assets was 4.50% for 2016 compared with 4.57% for 2015. Interest and fees on loans of $36 million in 2016 was an increase of $4 million or 12.5% compared with $32 million for 2015. Interest expense of $7.8 million for 2016 represented an increase of $323,000 or 4.3% compared with 2015. Total average interest bearing liabilities increased $21.4 million as loan growth has been fueled by this increase and an average balance increase of 23% or $21.7 million in non-interest bearing deposits. Also funding loan growth has been a decline in the average balance of securities of $36.3 million during 2016. The tax equivalent net interest margin was 3.80% for the year ended December 31, 2016 versus 3.87% for the year ended December 31 2015. The net interest spread was 3.69% for 2016 versus 3.77% for 2015. During 2016, total assets increased $69.3 million or 5.9%. Total loans were $836.3 million at December 31, 2016, increasing $87.6 million or 11.7% during the year. Within that loan growth, construction and land development loans grew by $30.9 million or 45.8%. Commercial loans grew by $26.8 million or 26.1%, commercial mortgage loans on real estate grew $21.8 million or 6.9% and residential 1-to-4 family loans grew $13.3 million or 6.8%. The Company's securities portfolio, excluding equity securities, declined $17 million or 6.1% to $262.7 million at December 31, 2016. Net realized gains of $634,000 were recognized during 2016 through sales and call activity as compared with $472,000 recognized during 2015. The decline in the volume of securities was a strategic decision by management to fund strong loan growth through the disposition of lower yielding securities, which resulted in a tax equivalent yield on the securities portfolio of 3.09% in the fourth quarter. Non-interest bearing deposits exhibited phenomenal growth of 34% or $32.7 million during 2016, thus helping negative pressure on our net interest margin, as a result of the low rate flat yield curve environment during 2016. Meanwhile, interest-bearing deposits at December 31, 2016 were $908.4 million, an increase of $59.1 million or 7% from $849.3 million at December 31, 2015 as a result of the successful retail CD promotion in the third and fourth quarters of 2016 that brought in over $40 million in new money. Total non-performing assets were $14.7 million at December 31, 2016 compared with $16.2 million at December 31, 2015. The allowance for loan losses, excluding PCI loans, equaled 92.7% of non-accrual loans at December 31, 2016 compared with 84.5% at September 30, 2016 and 89.6% at December 31, 2015. The ratio of allowance for loan losses to total non-performing assets was 66.1% at December 31, 2016 compared with 61.8% at September 30, 2016 and 62.2% at December 31, 2015. The ratio of non-performing assets to loans and OREO was 1.7% at December 31, 2016 compared with 2.1% at December 31, 2015. We are optimistic about 2017 given our continually improving asset quality, the performance of the PCI portfolio and how we are positioned for potential increases in interest rates. With that, I'll turn it back to Rex.

Thank you, Bruce. As a franchise, we are in some of the top growth markets in the Mid Atlantic. Therefore, it is important that we continue to grow our presence, so that we can expand our market share in these areas. We will however, continue to focus on improving earnings while building the overall franchise value. As I look back at 2016, this goal was accomplished and the Bank continues on a course of positive operating momentum going into 2017. We have a strong balance sheet that is positioned for rising rate environment. Through the years, our management has laid out a path to create shareholder value and everything we have discussed with you has come to pass as stock price continues to excel due to this and 2016 alone showed 35% increase. We continued our commitment to enhance franchise value through core growth in the balance sheet and growth in our earnings per share. We are excited about the trends we see in the competitive environment, in the economic environment and in interest rates. We look forward to what we believe will be a highly successful 2017. 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 any questions.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Catherine Mealor from KBW. Please go ahead with your question.

Thanks. Good morning, everyone.

Good morning, Catherine.

Good morning. First question is just on the margin. You had a little bit of a pickup in excess liquidity this quarter that impacted the margin. How quickly should we deploy that excess liquidity going into next year and what is your outlook on the margin with that dynamic in place? Thanks.

So, Catherine, we anticipated the increase that did occur in interest rates in the fourth quarter and we were able to lock in some funding with a 13-month CD promotion and the timing of that was pretty good. And in the short-term, we deployed it in some short-term treasuries. We allotted them through mid-year of 2017. And when those treasuries mature, we will roll them into loan funding. We still have a strong loan pipeline. In turn, that helped our risk-based capital ratios at the end of the year and it also will lower our bank franchise tax in 2017. But ultimately all of those proceeds will be rolled into loan funding and the average balance of interest bearing bank balances was up almost $30 million in the quarter. And you will see that in the first quarter will be much lower short-term in securities, higher yielding securities, but over the course of 2017, it will go in the loan portfolio.

What was the rate on that CD promotion?

It was 1.29 for the most part. There was an option which – if it was new money and you opened up a checking account it was 1.49, but most of it went into 1.29.

Okay, and also thinking big picture, your stock has had a nice increase over the past year, along with other banks in the industry. And so how do you think about – you've been much more of an organic story over the past couple of years, but with the higher currency, dose that change your thoughts on M&A potential? I mean, how should we think about where you be interested in going in your appetite for that moving forward?

Catherine, we've always been interested in acquiring some folks in our footprint, which would be south of Baltimore around the Beltway into Northern Virginia. We would look at the Lynchburg, Charlottesville area. We had an LPO in Lynchburg. We're going to open a branch there middle part of this year and then of course, anything around the Richmond area that would suite the franchise. And we think now that currencies finally got some good value to it that that will open some opportunities and we're going to explore all those potentials.

All right. Great, thank you.

[Operator Instructions] Our next question comes from Austin Nicholas from Stephens. Please go ahead with your question.

Hey, guys good morning.

Hi, Austin.

Good morning.

Maybe could you talk a little bit about the dynamics within the net charge-offs, maybe, what the gross recoveries and the gross charge-offs were there and what drove that if there is any large credit there?

For the most part there wasn't anything particularly large. Some of them were income producing properties and we were able to manage those to a place where we were able to sell them for slight gains. We've had a few smaller properties, a couple of residentials that came and went out of it. It's a pretty diverse set of group. It’s nothing really big and we will have – we'll be able to move a few, I think in the first half of this year and I think we've got a pretty good job of writing those things down to a level that's consistent with where we think the market value is.

Gotcha. Okay, that's helpful. And maybe just on the loan growth. It's been pretty solid over the last year, maybe around the 10% rate in the total portfolio for the full-year 2016. Is that kind of 10%, maybe closer to 11%, 12% on the core portfolio? Is that a good number to think about going into 2017?

I think we're probably going to be looking around 9% to 10%. That would be my guess. When rates pop-up a little bit people sort of – they get a little nervous, we get a flurry and then sort of sit on the sidelines a little bit and it's been a very competitive marketplace. We've got competitors that are coming into the market and sometimes they want to buy a business and we all sort of sit on the sidelines for those. You can tell where we are very interested in doing a lot of growth in the C&I portfolio and the small business portfolio. and I'm not going to jump into the – there are folks out there doing, still doing 20-year fixed rate, 15-year fixed-rate income producing property real estate loans that are around four something – four to five and I'm not going to get in that game. But I think if we sustain a 9% to 10% growth based on what we've predicted our funding sources are going to be. We'll be in very good shape.

Makes sense, and then maybe just a last question, going back to the margin a little bit, I understand the excess liquidity is kind of parked in the – will be parked in the securities for a couple months. So, just as we think about the margin and maybe benefits from the other side of the balance sheet, do we see the margin pretty stable over the first-half of 2017 and then maybe increasing towards the end as you deploy that capital or that liquidity, I should say?

Yes, I do not look for much in the way of a decline from the three-month fourth quarter net interest margin of 3.70% in the first quarter and should we have increases in interest rates, we are well positioned each and every increase in the discount rate will in turn improve our margin.

Okay. And then maybe just one quick question on mortgage, I know you guys kind of exited the wholesale division a couple of quarters ago, is there any initiatives to grow that to hire loan officers or any color around that would be helpful?

Yes. We brought in a lead mortgage banker in the fourth quarter. And we basically decimated that group. We had one lender left. So we've got this new lead person with one lender and two of them did about $3 million in the last 30 days. So they're starting to gain a little traction and we've got – I just signed out a couple of postings. We're looking for adding to that group in – two in Northern Virginia, Maryland and one extra in the Richmond area. So we're going to try to rebuild that group and that's one of the things we don't want to put a whole lot of resource out and have it not work. So we're building it kind of slowly. But I'm looking forward trying to get that group – that non-interest income to just begin to rise consistently throughout the year.

Gotcha, okay.

We've budgeted a pretty low amount in the budget and we still got good income growth, but I think we can beat that estimate – our internal estimate because I think we're getting some traction with this new person is doing a good job for us.

Sounds good, and then just in the fourth quarter, so I guess the low level of mortgage income there – was there any hedges or anything going on in that?

No.

Gotcha, Okay. Well, I think that's all I’ve got. Thanks guys. I appreciate the time. End of Q&A

[Operator Instructions] And at this time, it’s showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

I like to thank everybody who participated today and remind you that Bruce and I will be here most of the day today, if anybody wants to add any further questions or thoughts, we'd be happy to talk with you. So we appreciate your support.