UBSI - NASDAQ

Good morning and welcome to the Community Bankers Trust Corporation Fourth and Year 2018 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 note this event is being recorded. I'd now like to turn the conference over to Mr. Rex Smith, President and Chief Executive Officer.

Good morning and thank you for joining us today, as we review the results of the fourth quarter and the full year of 2018 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 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. On today's call, I'll give a quick overview of the quarter and the year, and Bruce Thomas, our Chief Financial Officer will then cover details selected financial highlights. And lastly, I will share our thoughts as we look forward to 2019. You may recall that we have been focused throughout 2018 on managing the growth and structure of the balance sheet. Credit quality and pricing structure are more important than the overall growth rate of loans. Additionally, we have been focused on growing core deposits specifically non-interest-bearing deposits to reduce our level of brokered funds. To that end, I am pleased to report that we finished the year with strong growth both in loans and in core deposits while slightly increasing our net interest margin. Net income for the year was $13.7 million, which is the best year in the history of the Company. That included opening two new branch offices in 2018, one in Edgewater, Maryland, and one in Lynchburg, Virginia. Net income for the quarter was $3.4 million, slightly lower than the third quarter of 2018 due to an increase in Non-interest expense. Some of that expense was related to one-time cost of opening the Edgewater office and residual cost of disposing of an older branch in the third quarter. Additionally, we are planning for several pending retirements and so we had short-term replication in salary expenses as we added important positions at the operational level as part of the succession planning. Our branch growth continues to allow us to change our deposit mix and control our overall cost of funds. This is particularly important in the forecasted rate environment and the competition for low-cost deposits. Non-interest-bearing deposits growth was $12.1 million or approximately 8% for 2018. Interest-bearing core deposits grew $57.2 million or 8.7% for 2018. This growth help reduce our reliance on other borrowings, including a decrease of $59.4 million in federal home loan bank advances, which helps lowered our overall cost of funds. Loans, excluding PCI loans grew $51.7 million for annualized growth rate of 5.5% and $31.3 million for the fourth quarter. A majority of the growth for the quarter was split between commercial real estate and adjustable-rate commercial and industrial loans. This growth rate was as expected and was a direct result of our deliberate approach to lending in this environment. Now, I would 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. Net income of $13.7 million or $0.62 basic and $0.61 fully diluted earnings per share for the year 2018 as a return on average assets of 1.01% and return on average equity of 10.59%. Net income of $3.4 million for the fourth quarter of 2018 equates earnings per share of $0.15%, both basic and fully diluted. This also was an annualized return on assets of 0.98% and an annualized return on equity of 10.01%. Now for a look at net interest income for the linked quarters and also the year 2018 compared with 2017. On a linked quarter basis, net interest income increased by $113,000. Interest income with respect to loans excluding PCI loans increased $276,000 or 2.3% on a linked quarter basis. The average balance of loans excluding PCI increased $9.7 million or 1%. However, this growth rate is in contrast to the growth of $31.3 million or 3.3% that occurred during the fourth quarter. That is because 47.2% of the loan growth that occurred in the fourth quarter was during the month of December. Looking forward to the first quarter of 2019, the average balance of loans should increase and reflect the higher level of interest income that is more reflective of the quarterly growth rate that occurred between the September and December periods. Additionally and also positive was a linked quarter increase in the yield on loans of 6 basis points from 4.89% to 4.95%. Securities income increased $52,000 for the linked quarter and the tax equivalent yield increased 10 basis points to 3.31% in the fourth quarter of 2018. This positive earnings activity in assets was offset to some degree by an increase of $251,000 or 7.9% in interest expense. However, on a positive note, we were able to lower the interest on more sensitive wholesale borrowed funds by $110,000 or 23.7%. The cost of interest-bearing deposit increased from 1.10% in the third quarter of 2018 to 1.22% in the fourth quarter. The cost of funds increased from 1.18 in the third quarter to 1.27% in the fourth quarter of 2018. With the aforementioned interest income and the interest expense activity, we saw a slight increase in the linked quarter net interest margin from 3.77% in the third quarter to 3.78% in the fourth quarter of 2018. Net interest income was $47.2 million for the year ended December 31, 2018 an increase of $3.1 million or 7% as compared with yearend, December 31, 2017. The yield on earning assets was 4.71% for 2018 compared with 4.54% for 2017. Interest and fees on loans of $46.3 million for 2018 was an increase of $6 million compared with $40.3 million for 2017 an increase of 14.9%. Securities income increased $336,000 or 4.7% for 2018, compared with 2017. However, on a tax equivalent basis, income on securities decreased $326,000, primarily as a result of less benefit on bank qualified municipal securities under the lower tax rate for 2018. Despite the lower benefit from the decrease in the tax rate, the tax equivalent yield on the portfolio actually increased and was 3.15% for 2018 based on a 21% tax rate and 3.12% for 2017 based on a 34% tax rate. Interest expense of $12.1 million represented an increase of $2.9 million or 31% for 2018, compared with 2017. Average interest-bearing liabilities increased 45.5 million or 4.5% as loan growth has been funded by an increase of $38.4 million or 4.1% in the average balance of interest-bearing deposit. Of this increase in average balances of interest-bearing deposits, $16.9 million was in interest-bearing demand deposit accounts and $14.5 million was in savings and money market account. Higher cost time deposit average balances only increased by $7 million or 1.2% in 2018, compared with 2017. The tax equivalent net interest margin declined normally during the year and was 3.76% for 2018 and 3.78% for 2017. While the yield on earning assets increased by 17 basis points over this timeframe, the competition for funding has pushed the cost of interest-bearing liabilities up from 0.9% to 1.13%. Likewise, the net interest spread declined and was 3.58% for 2018 versus 3.64% for 2017. The level of non-interest-bearing deposits increased on average $18.3 million or 13.4% in 2018 compared with 2017, just mitigating increased funding costs which in turn lowered the spread and its impact on the net interest margin. With regard to 2019, we look for a stable net interest margin given our very balanced asset liability management position. What could impact the margin negatively, will be migration towards higher cost funding sources. This is within the realm of possibilities and as a result, we will continue to emphasize obtaining lower cost funding out of our branch network. Meanwhile, what could affect it positively would be an increase in prime rate and/or the level of interest rates from the three year point of the curve and longer. Non-interest income is projected to see a slight increase based on a higher level of non-maturity deposit and increased mortgage and investment income. On to non-interest expense side, we wish that the variability that happened in 2018 in group insurance cost between quarters was not projected for 2019. However, we cannot give that assurance, what we can say is that we do not anticipate a rate of increase in 2019 that is in any way reflective of the increase between 2018 and the prior year. At this time, we have no new branches on the agenda and there will be three department head retirements in early 2019 that will lower salary and benefit cost. As a result, we do not anticipate more than a normalized rate of growth in 2019 for non-interest expense. With that, I'll turn it back to Rex.

Thank you Bruce, we are facing uncertain times in both the economic and the interest rate environments. To that end, we continue to manage the balance sheet for flexibility in multiple scenarios. We believe that the key areas to continue to focus on are credit quality, low-cost deposit growth, liquidity and asset pricing mix. By doing this, we have patiently structured a strong balance sheet that is well-positioned in either a rates up or a rates down environment. This strategy slows our overall balance sheet growth rate, but it allows us to focus on consistently improving earnings. The fourth quarter showed a lot of good trends in that growth and the net interest margin. As we move into 2019, we will focus on containing the controllable non-interest expense lines. We will also continue our focus on a higher level of performance for our shareholders and efficient uses of capital. That has included more internal discussions of a cash dividend on our common stock as well as potential acquisition opportunities. I believe we had a successful 2018 and accomplished most of our goals. We have a lot of positive operating momentum currently, and we are excited for the challenges of the New Year. I thank all of you who have participated in the call today and 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 Casey Whitman with Sandler O'Neill. Please go ahead.

This is Charlie Hough. I'm on for Casey Whitman this morning. So, you had some really nice loan growth in the year. Is mid-single digit still a good outlook for growth in 2019?

Yes, I would say that's what we're aiming for.

Okay, great. And then also, you've referenced a large development loan on the last quarter's call that you thought might clear. Do you have any update on that?

I have a meeting -- this is all pending bringing water and sewer into this project, which is -- we're a small piece of this project. The good news is we are on the first part of the project that would bring the roadways and sewer in. The roads have already started, but the county has not made up its mind yet on how they're going to give to divvy up cost of the sewer between proffers. And they already have a bond that's in there too. We have a meeting with the county with all the contiguous land owners at the end of the month just try to push this forward. And whenever I deal with government authorities like that it's always hard to predict time of resolution. But I would think, this year will be the end of this for us. I think we can get out of this and get out in a good fashion.

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

So maybe just on the expense run rate, obviously, there are some temporary items this quarter along with some kind of excess salaries. I guess can you help us maybe just understand the run rate going into the first quarter and then maybe the timing of that normalization and how we should think about what that normalized run rate would be as you got to look towards the second quarter?

This is Bruce. Maybe in retrospect I wish I had given a little more details that would be forward-looking it's concerning expenses although, we put a lot of information out there. But in light of the fact that growth expectations for the economy in general are although muted as opposed to where they were 12 months ago and we were having a great 2018 compared to in the past. We made sure that we did the investment in our branch facilities and doing the maintenance and those type of things as well as investing in technology and getting our platforms and bill pay and digital platform all software and sport all those things non-recurring charges, we wanted to get that invested in behind us and we successfully did that we think in the fourth quarter. So with regard to the run rate the way I view it and you will have to apply some sort of growth factor to this. But if you take the last four quarters of our non-interest expenses and average them out and apply 3% growth rate for 2019 then you're looking on average at $9 million in non-interest expenses for a quarter. And likewise a little more specifically and two items here, of that 550 a quarter, $550,000 a quarter, and DP on average for 2019. And with regard to the group insurance costs which were 1 million higher in 2018 than in 2017, we do not anticipate our growth rate in 2019 that will any way replicate what we incurred in 2018. So hopefully that’s to some degree and we have our fingers crossed and hope for a healthy, happy, hearty employee base, but we certainly think that that has normalized as well. Unfortunately, we can't do anything about the swing there. And as CFO nobody despises swings and expense categories more than me, but that’s just a fact of life, but I can tell you what we anticipate the run rate to be. So, I hope that answers the question.

And then Rex, maybe just on the M&A obviously capital continues to build and I think you mentioned a little more discussion on the cash dividend and M&A opportunities. Maybe just focusing on the M&A side, has the environment changed or conversations increased? Just any thoughts you have on the appetite for M&A and where the market expectations are versus your institution?

Yes, we were having and had some good conversations in the fall of 2018 and then of course as the multiples of banks changed. When we were having that conversation in my stock trading above nine, it's one conversation and you know value is relative but that’s difficult for some of the small banks for talking to it’s a little bit hard for group of board members to say, oh gosh, value is relative almost going to get ex per share and now its ex minus, but it's relative to where the market is. But I do think that they -- some of the folks we are talking to will get it and understand it and we are going to continue those conversations. I'm more optimistic right now than I started was a year ago our ability to do something in 2019. And then obviously we are still looking at that capital and as far as small cap peers we have got a little bit bigger ratio and so the dividend is something that we are discussing as far as trying to see -- get some share return back to our shareholders.

And then just one last one kind of modeling question, is 18% tax rate still good for '19? You may have mentioned it I'm sorry if I missed it.

Yes.

The next question comes from John Rodis with FIG Partners. Please go ahead.

Bruce, maybe just real quick on the tax rates, so the tax rate this quarter was closer to 19% but you are saying it's going to go lower in next year?

Well to some degree that’s going to be determined by the level of bank qualified that a whole. And I don’t anticipate dramatic change in that. It's going to be in the 18%, 19% you know the specific -- specific it's hard to pay. It's going to vary from quarter-to-quarter, but it's going to be -- I would anticipate between 18% and 19%. There is some variation in between.

Rex, just to your discussion on capital dividends M&A. What about -- you know we have talked about this before, but what about a buyback just obviously given the pullback in the stock?

Yes, when we talked about the buyback, our ability to buy a lot back is going to be fairly limited. The concern I think we have there is that we come out with the buyback and then somebody wants to trade one large block and we -- the power is gone, that takes away what we really want to accomplish by the buyback which is sort of set a level of expectation for the stock. So I think we continue to talk about it, but my hope is everybody looks at the core metrics of the Company, they realize it's still a value in that. We had the dividend on top of that that pushes us back to where we need to be.

No, I hear what you were saying, I guess obviously if you did a buyback though you can dictate how you want to proceed. So just something good to have obviously given what we've been through the last few months, as far as, I mean just curious from a business sentiment standpoint. You guys were in some pretty vibrant markets and stuff, but what are sort of some of your best customers telling you as far as the environment out there?

Yes, I think there was some trepidation in the middle of the year, and we then we did see -- we saw a fair amount of payoffs in the commercial real estate portfolio, and it was not competitive things, it was people cashing out, monetizing their investments and kind of going to the sidelines a little bit. And so, I think on the real estate front that's, that has rebounded a bit. It comes in certain pockets, but there still good commercial loans, there're opportunities in our marketplace and of course the C&I team has done a great job. We did have one of the retirements was leader of the C&I team, so we got our new person in who's got 30 plus years experience in that business in the Mid Atlantic, and we've kind of staffed back up in both the Maryland and Bridgeton marketplaces for that and that's. I think we're looking at a good pipeline. So things a little bit better than it was as we guide into the third quarter and spurts on to the fourth quarter, but you know conservatively we're looking at like a 5 to 6% growth rate.

Okay, and then one other question on the provision, or I guess lack thereof so you had zero provisioning in 2018 and obviously at some point you'll have some provision expense going forward, but any help you can provide there as far as forward provisioning.

I think you know, I think we're looking at maybe like, if you just want to put a round number on a million dollars for provision in 2019, that's kind of what we've looked at for a budget standpoint or growth rate of 5.5% to 6%.

Makes sense, okay thank you guys.

I should never bud in, but if I've already answered the question but since two of you asked about it while Rex was answering that question, I scratched out some stuff here on the tax rate, and to give a little more specific answer and looking at our 2019 budget. I go back to clean up the answer for Austin and John's probably a little and we're talking about a very narrow range here and it can vary. But, John, you are right, probably a 19% effective tax rate is a better one to plug in more specifically than on the lower side because given less benefit from municipals, my future investment and the growth in the portfolio probably will not go there to the degree that they've gone there in the past.

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

I'd like to remind everybody that if they have any follow-up questions that Bruce and I will be available throughout the day today. Please feel free to give us a call and we thank you for your support. Look forward to a great 2019.