UBSI - NASDAQ

Rex Smith - CEO Bruce Thomas - CFO

Andrew Taylor - KBW Austin Nicholos - Stephens

Welcome to the Community Bankers Trust Corporation First Quarter 2017 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 that today's event is being recorded. I would now like to turn the conference over to Rex Smith. Mr. Smith, please go ahead.

Good morning. And thank you for joining us today as we review the results of the first quarter of 2017 for Community Bankers Trust Corporation, which is the holding company for Essex Bank. Let me open 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’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 that Community Bankers Trust Corporation files with or furnishes to the Securities and Exchange Commission. You can access all of these documents through our Web site at www.cbtrustcorp.com. On today’ call, I will give a quick overview of the past quarter, Bruce Thomas, our Chief Financial Officer will cover selective financial highlights and then I will share our thoughts on the rest of the year. We’ve continued to build the earnings power of the Company, which is evident in the results of the first quarter. Loans grew approximately $16 million for the quarter, just under 2%, which was expected for the short-winter quarter. Year-over-year, loans grew $86.7 million or 11.3%. The growth was diversified between loan types, and geographically spread among our major markets. This growth was accomplished while increasing the yield on loans from 4.56% in the fourth quarter of 2016 to 4.64% in the first quarter of 2017. This translated to an increase in the net interest margin of 18 basis points from year end. The Bank continues to expand its market base and customer relationships through increases in demand deposits in both existing offices, as well as opening new offices in congruent and vibrant markets. In 2016, we opened two new branch offices in FareFax and Comberlin, both in Virginia and absorbed the expense, while continuing to grow net income. We continue to look for opportunities that will allow us continued profitable growth in very dynamic markets. In 2017, we have new offices committed in the Short Pump area of Richmond and in Lynchberg, Virginia. Demand deposit growth was approximately $25 million or 24% year-over-year. This growth, combined with meaningful improvement in the non-performing asset category, help to increase net income year-over-year. Net income for the quarter was $2.5 million compared to $2.4 million for the same period in 2016, which is in line with our budgeted expectations. Now, I would like to turn the call over to Bruce Thomas to discuss the details and the financial results of the first quarter.

Thank you, Rex. And I would like to thank all of you for joining us on this morning’s call. Net income of $2,493,000 for the first quarter of 2017 is $0.11 per common share. This is 3% increase over first quarter 2016 net income, which was also $0.11 per common share. Income statement analysis shows that net interest income increased $754,000 or 7.5% year-over-year. Within net interest income, total interest and dividend income increased by $910,000 or 7.6%. This was driven by 6.9% growth in the level of earning assets and an increase in the tax equivalent yield on earning assets of 8 basis points from 4.53% to 4.61%. The average balance of loans, excluding PCI loans, increased $85.5 million or 11.3% in the first quarter of 2017 compared with the first quarter of 2016. The yield on non-PCI loans was 4.64% in the current quarter versus 4.55% in the same period in 2016. Not only has the Bank benefited from the rate increases by the Federal Reserve, we have sacrifice to some degree, on loan growth to preserve the yield on loans and thus the net interest margin. Additionally, the Bank had a first quarter of 2017 tax equivalent yield of 3.22% on its securities portfolio which contributed $2.2 million in tax equivalent interest and dividend income in both the first quarters of 2016 and 2017. Meanwhile, interest expense increased only $156,000 year-over-year on average balance increases on interest bearing liabilities of $44.5 million or 4.7%. Thus, the cost of interest bearing liabilities increased only 4 basis points year-over-year from 0.81% to 0.85%. The combination of these items resulted in an increased net interest income margin year-over-year of 5 basis points from 3.83% from the first quarter of 2016 to 3.88% in the first quarter of 2017. Likewise, the interest spread increased from 3.72% to 3.76%; therefore, the net interest spread and margin increases were most heavily influenced to the rate and volume increases being generated by the core loan portfolio. The Company took no provision for loan losses in the first quarter of 2017 as was the case in the first quarter of 2016. Despite PCI -- non-PCI loan growth year-over-year of 11.3% or $86.7 million, asset quality continues to improve thus abating the need to support loan growth through provisioning. Non-performing assets, excluding PCI of $12.8 million at March 31, 2017, is 1.49% of loans and other real-estate. This is the lowest levels since the effects of the 2008 economic downturn. The allowance for loan losses is 1.12% of total loans, while the allowance is 76.75% of non-performing assets and also is $104.64 of non-PCI non-accrual loans. Net interest income declined $168,000 year-over-year as there was a decline in gains on securities of $164,000. Securities were liquidated in the first quarter of 2016 to fund loan growth. Management has funded loan growth since that time, primarily through the liability side with the balance sheet. This is likely to be the case going forward as well. Also, mortgage loan income declined $140,000 year-over-year, but should improve as the Bank has revamped this business model with a more efficient less costly platform. Partially offsetting these declines were sustainable increases, I should say, of $74,000 to service charge income and $46,000 to bank owned life insurance. Non-interest expenses increased $420,000 or 5.2% when comparing the first quarter of 2017 to the same period in 2016. Other real-estate income and expense was up $129,000 exhibited by the largest -- exhibiting the largest increase year-over-year; followed by occupancy expense up $91,000; data processing expenses up $73,000; salaries and employee benefits up $71,000; other operating expenses up $61,000; and equipment expenses up $45,000. These higher expenses for the first quarter of 2017 was a result of staffing and equipping two new full service banking offices opened after the demand in the first quarter of 2016. FDIC assessment declined $50,000 year-over-year due to lower assessment rates by the FDIC. With that, I turn it back over to Rex.

Thank you, Bruce. Our main goal has always been to increase shareholder value. We believe that in the current environment and the markets we occupy, the way to accomplish that is to focus on the micro level details of our products and delivery systems, and the customer relationship dynamic. We always look at earnings growth and asset growth, but we are not focused on growth for the sake of growth. Ultimately, we focused on the long-term implications of the mix of earnings and asset growth and the most efficient and effective ways to deliver it. We constantly model ways to improve earnings, while building overall franchise value. We look at product level profitability and mix and the customer level profitability and mix, both as they affect the economic value of equity going forward. This creates a conservative yet productive operating momentum, which translates to a strong balance sheet positioned to adjust positively to market conditions. In short, we may not show the asset growth of some of our peers, but we know we can create more earnings from controlled and well thought out growth then from sheer volume. We believe this is the best path to continue our commitment to enhance franchise value and to grow earnings per share at a better than average level. We are excited about position of the Company with where we are positioned in the competitive environment and the economic environment, and with the interest rate forecast. We believe we can balance the growth of the franchise with increased earnings and reducing the overall risk profile of the Company. We look forward to the rest of 2017. I thank all of you who participated in the call today and for your ongoing support of the Company. With that, we’ll now open the call for any questions.

Thank you [Operator Instructions]. And our first question will come from Andrew Taylor of KBW.

Maybe, first on the margin, you obviously saw as the nice extension from the excess liquidity that you guys deployed. You also mentioned on the call that benefitting from higher rates. Can you provide anymore color on what you’re seeing on loan pricing? And in fact what drove the large linked quarter increase in the core loan yields? Also maybe just directionally why you think the margin has upper backed from here, or if you think it can moderate some? Thanks.

I can speak to the comparative environment, which is -- and I think I alluded to that in my notes just now. There are some spot areas of expenses that relate to fixed rate real-estate lending. We've got some competitors in the Central Virginia marketplace who are trying to buy into the market and some new comers. And as I said, we’re just kind of walking away from deals that are under price to the market, we see a few of that, a few of those coming through. But we look at last year, the quarter-over-quarter volume wise, we were about the same percentage of growth, it's not -- it might have been a little less. But as I said, we're going to be more concentrated on the types of relationships that are, full relationships, that are priced appropriately for the marketplace. And we're going to be focused on that kind of growth rather than just throwing asset numbers on the books. But I still think we’ll have good solid loan growth and we’ll be able to hold the yields that we want to hold instead of digging down in the dark just to get volume for volumes sake.

Maybe switching to expenses, I know you guys mentioned the higher FDIC assessments up from fourth quarter. But I think about your run rate going forward from the $8.5 million level; obviously, you have to keep branches coming in. Is that going to uptick at all in second quarter, or also if there is any seasonal items in first quarter run rate that we should strip out?

Well, back to the FDIC assessment for a moment, actually the run rate it did not go up from a higher rate in the first quarter. What happened was in the fourth quarter, the FDIC lowered its assessment rate. And so our accrual was too heavy as we had accrued it through 930, so we have adjusted in the fourth quarter. Now, the first quarter of 2017 is going to be more reflective of what our run rate will be going forward. So we got a little bit of windfall in the fourth quarter, is what I'm trying to say. Now, with some of the other expenses, I think it's pretty typical of the run rate going forward; although, we may have been a little heavy in the first quarter in a couple of categories, but not agreed to it, so that's being advertising, but in particular supply. So hopefully, we’ll see that expense come down some, now that we’re stacked for these two new branches coming on board. But I think it's pretty close to what our run rate will be for the year.

As Bruce said, we've already staffed for the two branches, so that's already in payroll. The expense is actually operating expense on the branches and sales to take the expenses were hit in, but the CDI is falling off this quarter too.

So I think after the second quarter, you’re going to see, the CDI, the 154,000 a month.

So it all even out…

That's going to go away. So certainly, we might see a slight decrease in the expense run rate after the second quarter.

Last question from me just housekeeping, I calculated the effective tax rate around 30% this quarter we have 26% modeled for the rest of the year. What’s a good tax rate, going forward?

I would say that 28% is probably a good target. The first quarter of each year is going to be the quarter that’s going to be the most prone to have some type of fluctuation in the tax rate, either good or bad as you go through your year-end external audit. And you look at your tax schedules and there may be clean up entries based on that activity in the first quarter. So I feel like the 28% tax rate from 2Q on out.

And our next question will come from Austin Nicholos with Stephens.

Could you maybe give us a little bit more color on where you’re seeing growth geographically in your markets?

I’ve said earlier that the loan growth was fairly evenly split geographically between the Maryland, Northern Virginia market and Central Virginia. So it is pretty evenly spread out, I think going forward you’re going to see it stay fairly consistent that way about somewhere between 55, 45 being the Central Virginia market to the Maryland, Northern Virginia market. But it’s been fairly consistent but split between the two.

[Operator Instructions] And I am showing no additional questions. This will conclude the question-and-answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.

I just want to say thank you for everybody that participated this morning. And remind you that Bruce and I are available here all day if anybody has any follow-up questions, we’re happy to address them. So thank you all.