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

Andrew Taylor - Keefe, Bruyette & Woods, Inc. John Rodis - FIG Partners.

Good morning and welcome to the Community Bankers Trust Corporation Third Quarter 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 note this event is being recorded.

I would now like to turn the conference over to Rex Smith, President and CEO. Please go ahead, sir..

Good morning and thank you for joining us today as we review the results of the third quarter of 2016 for Community Bankers Trust Corporation, which is the holding company for Essex Bank.

But 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 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 format, I will give a quick overview of the quarter then Bruce Thomas, our Chief Financial Officer will cover selective financial highlights, and I will finish with a business, as we head into the final quarter of the year.

It was a year ago that we announced the loss due to the termination of the shared-loss agreements with the FDIC. Since that time, the purchase impaired loans or PCI that had been under the agreements have performed better than predicted. And thus continue to support the termination decision and our net interest income.

Additionally, loans excluding the PCI portfolio continue to show strong growth. Gross loans have grown just under $119 million, or 17% year-over-year. Loan mix continues to diversify, as 40% of the growth for the quarter was in commercial business loans.

This helps keep the bank well below the concentration guidelines for commercial real estate loans to risk-based capital. On the liability side of the balance sheet, we continue to focus on increasing our noninterest bearing deposits. Demand deposits were up just over $33 million year-to-date just over 34% growth rate.

The change in deposit mix has helped us continue to hold our margin. The net interest margin increased from 3.75% in the third quarter of 2015 to 3.82% in the third quarter of this year. Net income for the third quarter was $2.5 million, a $140,000 increase over the second quarter.

The increase includes a $250,000 provision for loan losses in the quarter. The provision was mainly the result of the positive loan growth of $26.8 million for the quarter. Earnings per share for the quarter was $0.11. With that, let me turn it over to Bruce with some details on the financial results for the quarter..

Thank you, Rex. Net income of $2.5 million for the third quarter of 2016 compared with $2.3 million in the second quarter of 2016. Earnings per share basic and fully diluted were $0.11 for both of the quarters ended September 30, 2016 and June 30, 2016. There was a net lot of $7.7 million reported in the third quarter of 2015.

In that quarter, the bank terminated its FDIC shared-loss agreements in order to improve profitability, beginning in the fourth quarter of 2015.

As part of the termination of the shared-loss agreements, the FDIC paid $3.1 million in cash to the bank, and the remaining $13.1 million of this FDIC indemnification asset related to the agreements was charged-off.

This transaction eliminated future indemnification asset amortization expense, which totaled $5.2 million for the 12-month period from July 1, 2014 through June 30, 2015. Excluding the one-time charge of $13.1 million related to the terminations of the shared-loss agreements. Net income for the third quarter of 2015 would have been $853,000.

Comparing the third quarter of 2016 to the third quarter of 2015, the increase in net income is 188.2%. This increase reflects the results we intended when we concluded the agreements with the FDIC.

In addition to the shared-loss termination charge, the company had write-down totaling $1.1 million in the third quarter of 2015, with respect to two bank buildings and one parcel in other real estate held for sale. These bank buildings have since been sold since September 30, 2015.

Even when you add back the OREO write-downs in the third quarter of 2015 from the year-over-year comparison, there would have been a year-over-year increase in net income of 55.7% Net income was $7.2 million for the nine months ended September 30, 2016 versus a net loss of $4.7 million for the same period in 2015.

Excluding the aforementioned one-time FDIC-related charges, net income would have been $3.7 million for the first nine months of 2015. Earnings per share were $0.33 through the first nine months of 2016. The termination of the shared-loss agreements was, but one of a meaningful number of steps we have been and are taking to improve shareholder return.

Our return on average assets for the trailing four quarters is 0.80% and our return on average equity is 8.55%. For the first six months of 2015 prior to the termination of the agreements, annualized return on assets was 0.53% and return on equity was 5.47%. Let’s look at some linked quarter income statement highlight.

Net income was $10.5 million – net interest income, I should say, was $10.5 million for the quarter ended September 30, 2016 compared with $10.2 million for the quarter ended June 30, 2016. This is an increase of 2.6%, or $270,000. Interest income on a linked-quarter basis increased $274,000, or 2.3% to $12.4 million for the third quarter of 2016.

This resulted in a yield on earning assets of 4.50%, a decline of only 1 basis point on a linked-quarter basis, as we have held firm on our loan pricing and not going too low on rate, or too far out in fixed rate loan terms either.

Interest income with respect to loans increased $283,000, or 3.2% during the third quarter of 2016, when compared with the second quarter of 2016. The tax equivalent yield on the securities portfolio improved and was 3.09% for the third quarter of 2016 and 3.03% for the second quarter of 2016.

The cost of Federal Home Loan Bank borrowings improved and was 1.05% in the third quarter of 2016 compared with 1.17% for the second quarter of 2016. With the changes in net interest income noted above, the tax equivalent net interest margin held firm and was 3.82% in both the second and third quarters of 2016.

Likewise, the interest spread was 3.71% in both the second and third quarters of 2016. Now, let’s examine some balance sheet highlights from both year-end 2015 and September 30, 2015 to the most recent period end of September 30, 2016. Total assets increased $55 million, or 4.8% since September 30, 2015.

Total loans were $811.8 million at September 30, 2016, increasing $63.1 million, or 8.4% from year-end 2015 and $118.8 million, or 17.1% from September 30, 2015.

During the first nine months of 2016, construction and land development loans grew by $21.1 million, or 31.4%; commercial loans grew $16.3 million, or 15.9%; commercial mortgage loans on real estate grew $13.2 million, or 4.1%; and residential 1-4 family loans grew $12.8 million, or 6.6%.

Noninterest bearing deposits grew $33.1 million, or 34.4% during 2016. This has resulted in an actual increase in our net interest margin from 3.75% in the third quarter of 2015 to 3.82% in the third quarter of 2016, as the ratio of noninterest bearing deposits to average earning assets has increased from 9.46% to 10.96%.

This has come about as we have emphasized being a full service bank to our clients, not just looking for the easiest way to fund our desired loan growth with only high cost certificates of deposits. Common tangible book value increased $0.60, or 13.2% per share from September 30, 2015 to September 30, 2016, and was $5.16 at period end.

With that, I’ll turn it back to Rex..

Thank you, Bruce. As I said in the press release, the results so far clearly show the bank is on a path for posting consistently positive results going forward. We continue to gain market share in both loans and deposits without undue risk. Both sides of the balance sheet continue to show improvement.

A very diverse mix of loans are replacing securities and we continue to improve our deposit mix with a robust growth in our demand deposit balances. Management is committed to accelerating those trends for the remainder of 2016. We have a lot of positive momentum going into the fourth quarter, and I’m excited for what we can accomplish.

We remain committed to creating value for our shareholders by delivering strong results. We thank you all for your support and look forward to the next couple of months. With that, we will now open the call for any questions..

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions]. And our first question comes from Andrew Taylor from KBW. Please go ahead..

Hey, good morning, guys..

Good morning, Andrew.

Hello?.

Yes. So a quick question. Good quarter first of all. Growth looks really good, as you mentioned on the C&I growth, particularly.

Could you just sort of give some more color around the growth you’re seeing in your markets and just with respect to the commercial book, and maybe you guys are now looking through the pipeline going forward, or were there sort of any larger credits that drove the increase this quarter? And yes, that’s all. Thank you, sorry..

We really aren’t pushing a lot of larger credits through right now, Andrew, and that’s one of the things we’ve done as a bank is to lower the total loan amount that we’re looking at on credits. We really don’t try to go out and find credits that are above $4 million, if we stick. Sweet spot is really about $1 million to $3 million.

We’re getting a lot of diversity in the portfolio. We’re getting geographic diversity, it split among from Maryland to Virginia, and it’s really encouraging. I think we’re planning that there are a lot of community banks that don’t really know what they’re doing or don’t want to participate in the true C&I space.

And some of the largest situations keep raising the bar as far as what they want to do and they’re looking at more of the national level companies. So there’s a space in-between there that I think we can really make some gains on and that’s what we’ve been doing..

And our next question comes from John Rodis. Please go ahead..

Good morning, guys..

Good morning, John..

Good morning..

You guys had a nice quarter. Rex, I guess, one question or maybe for you, Bruce. I guess, you did have a little bit of, I guess, migration or between special mention and substandard. And I know in the press release, you said it was related to two credits. And I know overall credit quality looks good.

But are you – can you talk about just the shift right there? And then what else are you sort of seeing behind the scenes on credit?.

I’lll work on that and Bruce can follow up. It really – it was related to two credits, and in those credits, the person is refinancing out of this bank. I think they’re trying to actually go for like conduit type financing with limited guarantees and things that we don’t offer.

And so – and waiting for that to come through that drag across the payment line and put us in a situation we had to put it in that bucket and we expect those to be paid out. And overall though, the markets we’re in, the economy appears to be running well. We get – we’re getting good results. We’re seeing home sales go up. We’re seeing building increase.

We’re seeing a lot of job increases. So everything we’ve seen from Maryland and Virginia looks pretty strong. I think this is just ebb and flows of things that happened in quarter-to-quarter in credits and these are two particular ones that we’re not particularly concerned about at this time..

Okay.

And then the provision for the quarter was really entirely driven by growth and loan growth during the quarter then?.

Pretty much and that’s a driving factor. Of course, there are always some factors that are a little more subjective. But certainly, the loan growth was the primary one looking at the net charge-offs for the year, I think they were $529,000 year-to-date.

And just the shift from special mention to sub-standard is that a bellwether, the things aren’t foreseeing in the economy, subjective soft factors. But the bulk of it was generated by the loan growth..

Okay, fair enough. Rex, maybe just one other question for you.

I mean, capital continues to build TCES 9.4% stocks trading pretty close to tangible book of 105%, 106% just sort of remind us again your thoughts on potential buybacks in the – and so forth going forward?.

And we are obviously looking at lots of opportunities to utilize the capital in the best way possible. And I will say, John, when you look across aerospace, the M&A activity is getting pretty, pretty strong.

And we – what we don’t want to do is use all our powder up on a stock buyback, or announced a buyback, and then not be able to perform on when M&A opportunity comes along.

And one of the things we know the other day was that, Bruce never talked about this was over a year ago, they did a survey of banks in the mid-Atlantic and what these CEOs and CFOs thought about M&A activity.

And most of them at that point in time were saying, well, it’s going to be a certain level, but we might be the acquirer, or that has shifted back now and among community banks a lot of the smaller community banks, the CEOs say, well, we think we would be involved in an M&A activity, where we are not – where we get acquired.

So I think some of these small and mid-sized community banks are realizing that the regulatory burdens and the burdens of trying to make it in this environment are going to be too tough for them to give any real value to the shareholders.

And I just – I feel like, we’re going to probably see some opportunities that we want to be able to jump on in the next year or so..

Okay, fair enough. Okay. Thanks, guys..

Okay. Thanks, John..

[Operator Instructions] Our next question comes from Andrew Taylor from KBW. Please go ahead..

Hey, guys. I just had a quick follow-up question for you on the margin. Obviously, it was stable this quarter. But looking at the average balance sheet, it looks like the core loan yields actually compress a little bit.

Can you maybe talk about what drove that compression and whether you’re seeing – do you think there any of that compression is driven by some banks maybe trying to reverse by out of CRE and seeing more competitive pricing pressures on the C&I book as a result?.

I think it’s – some of it is competitive pressures, Andrew, but some of it is loan mix. When you go out and you’re doing C&I loans like we did in this quarter, they’re going to be adjustable rate. So they’re not going to start in with floors that are as big as you would – we would see in the C&I deals, I mean, in a commercial real estate deal.

So when you guys do a commercial real estate deal and it’s going to be a fixed rate three-year, five-year floater rate for the quarter or something like that. You’re going to do a C&I deal. It’s going to be adjustable rates, it’s going to be prime based. And so it’s going to be in the sub-4 range.

But the good news is it’s adjustable and it’s short-term and it’s usually, it comes with a relationship with deposits. So it’s hard to look at that. You can’t really just look at that compression what we do as we look at the relationship probability on it.

So we’ve got a loan out there that’s – we terminated at prime plus something and we’ve got a 3.5 yield. But I’ve got 15% of the loan is funded by the balances that they brought over into the bank. My actual yield on that relationship is a lot better. So you may see some, what it looks like compression and then just looking at the loan yield.

A lot of it in this quarter was not competitive as much as it was mix..

And if you look at the rate volume analysis, if you were to take the nine months versus nine months, yes, the yield on the loan portfolio has gone from 467 to 456, which I think in this market is just outstanding that we’ve been able to hold up and only lose a 11 basis points through nine months versus nine months of last year.

But the volume increase has meant that, we’ve picked up almost $3 million in interest income, because the volume has recaptured the loss in rate..

That’s very helpful, guys. Thanks for the color and good quarter..

Thank you, Andrew..

There’s no more questions at this time. This concludes the question-and-answer session. And I’d like to turn the conference back over to Mr. Smith for any closing remarks..

I’d like to thank everybody for joining us this morning. And just remind you, if you have any follow-up questions that you’d like to address with us, Bruce and I are here today and tomorrow, and we’re happy to answer any questions and talk about what we’re trying to go with the company. So thank you all for coming this morning..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect the lines..