Rex Smith - CEO Bruce Thomas - CFO.

Casey Whitman - Sandler O'Neill Blair Brantley - Brean Capital.

Good morning and welcome to the Community Bankers Trust Corporation’s Third 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 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 third quarter and the year-to-date for 2017 for Community Bankers Trust Corporation, which is the holding company for Essex Bank.

Let me start 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 website at www.cbtrustcorp.com.

The core metrics for the company continue to strengthen including growth in asset size and growth in non-interest-bearing deposits, both of which strengthen the overall franchise value. While loan growth for the quarter was weaker than expected, it was greater than the economy growth percentages we are seeing among our peers.

Total loans excluding PCI loans have grown $53.7 million year-to-date or 6.4%. That includes the purchase of $15.7 million of in-market adjustable rate mortgages. Subtracting the purchase arms of $15.7 million, loans grew approximately $10.2 million for the quarter which is 4.7% annualized.

Year-over-year the growth rate for loans is 9.6% which is slightly better than we anticipated. We continue to focus on credit quality and pricing discipline which caused us to lose some deals in the quarter but we believe it is the best strategy for adding long-term value.

The pipeline for the fourth quarter remains strong but we could see some fallout for our underwriting and pricing standards as well as general economic reputation. I do however believe that we are on track to finish the year at our targeted growth rate.

The tax-equivalent net interest margin was 3.8% for the nine months ended September 30, which was only 2 basis points lower than it was for the same period in 2016. From a balance sheet management standpoint, we remain interest rate neutral to slightly asset sensitive in a rates up scenario.

Helping to stabilize the net interest margin was the bank’s continued growth in demand deposits. Non-interest-bearing deposits grew $16 million or 12.4% year-over-year and now comprise 13.5% of total deposits. We are encouraged by this trend and continue to focus on increasing our core non-interest deposit balances.

Total retail deposits grew $157.6 million or 17.4% year-over-year which has systematically reduced our non-core funding. This is a very positive result given the competitive environment in which we operate. Non-interest income has declined year-over-year as we rebuild the mortgage group and we have not taken as many securities gains as last year.

We do expect mortgage income to continue to increase as we finish 2017 and head into 2018 and I am encouraged by the upward trend in their production. Net income was $2.4 million for the third quarter compared to $2.9 million for the second quarter of 2017.

The biggest change was an increase in the tax rate as the second quarter rate was abnormally low. Net income year-to-date is $7.8 million compared to $7.2 million for the same period of 2016. That represents a 9% increase year-over-year.

Now I would like to turn the call over to our Chief Financial Officer, Bruce Thomas to discuss the details on the financial results for the quarter and year-to-date..

Thank you, Rex. And I would like to thank all of you for joining us on this morning’s call. Net income was $2.4 million for the third quarter of 2017 compared with $2.9 million in the second quarter of 2017 and $2.5 million in the third quarter of 2016.

Basic and fully diluted earnings per common share were $0.11 per share, $0.13 per share and $0.11 per share for the three months ended September 30, 2017, June 30, 2017 and September 30, 2016 respectively. Net income was $7.8 million for the nine months ended September 30, 2017 versus net income $7.2 million for the same period in 2016.

Basic earnings per common share were $0.36 per share and $0.33 per share for the nine months ended September 30, 2017, and September 30, 2016 respectively. Fully diluted earnings per common share were $0.35 and $0.33 for the nine months ended September 30, 2017 and September 30, 2016 respectively.

Net income on a linked quarter basis declined $518,000 and was the result of an increase of $227,000 in income tax expense, an increase of $170,000 in non-interest expenses and a $150,000 provision for loan losses this quarter versus no provision in the second quarter of 2017.

The increase in income tax expense was due to the return to a normalized effective tax rate for the quarter. In the second quarter two non-recurring events affected taxes and as a result the effective tax rate was lower than normal for the second quarter.

The increase in non-interest expenses in the third quarter over the second quarter was primarily due to the first full quarter of operating our two newest banking facilities; West Broad Marketplace opened in mid-May and Lynchburg opened in mid-June.

Both of these branches are off to rousing starts as West Broad had $34.1 million in total deposits as of September 30th and $35.9 million as of October 22nd. Lynchburg had total deposits of $12 million as of October 2nd. The provision for loan losses in the third quarter primarily stem from charge-off activity of $972,000 that occurred in the quarter.

Roughly two-thirds of this total was from charge-offs associated with one credit that also led to an increase in credit expenses over the previous quarter. Net income of $7.8 million for the nine months of 2017 is an increase of $647,000 or 9% compared to $7.2 million for the first nine months of 2016.

Total interest income increased $3 million or 8.1%. Interest and fees on loans increased 11.6%, or $3.1 million. Net interest income increased $2 million or 6.5% in the first nine months of 2017 versus the same period in 2016.

Provision for loan losses was $150,000 for the first nine months of 2017 compared with $450,000 for the first nine months of 2016. Non-interest income declined $555,000 in the first nine months of 2017 compared with the same period in 2016.

This decline has been driven by a decline of $436,000 in mortgage loan income and in lower security gains which had declined $428,000.

The mortgage loan platform was changed at the end of the third quarter of 2016 to one with less overhead but favorable non-interest income potential and it is currently building momentum, partially offsetting these decreases was service charge income which increased $226,000 or 12.7% as a result of retail deposit growth.

Non-interest expenses increased $1.2 million or 4.7% for the first nine months of 2017 versus the same period in 2016 as the bank has added four new branches since the beginning of 2016. With regards to our balance sheet, I will look at the year-over-year changes.

Loan growth totaled $78.2 million or 9.6% from $811.8 million at September 30, 2016 to $809 million at September 30, 2017. Residential 1-4 family loans grew $22.3 million or 10.8%, which includes a $15.7 million in-market adjustable rate mortgage loan pool purchased as of September 28, 2017.

Commercial loans grew $17.9 million or 15.1% over this timeframe and totaled $136.6 million or 15.4% of the total loan portfolio. Commercial mortgage loans on real estate totaling $345.8 million grew $14.6 million or 4.4% from September 30, 2016 to September 30, 2017.

Construction and land development loans grew $14.1 million or 15.9% over this timeframe, but at $102.6 million represented only 11.5% of the total portfolio. Multifamily loans totaled $53.6 million and grew $10.5 million or 24.4% since September 30, 2016. On the funding side, we have successfully lowered wholesale funding sources in a significant way.

Brokered time deposits declined $46.5 million or 76.2% from September 30, 2016 to September 30, 2017 and were only $14.5 million at quarter end. Federal Home Loan Bank advances declined $27.8 million or 25.5% and were $81.3 million at September 30, 2017.

Our growing to win retail focus and branch expansion strategy is resulting in increases in core deposits as NOW accounts grew $19.3 million year-over-year, money market deposit accounts grew $34.6 million year-over-year and time deposits less than or equal to $250,000 grew $42.3 million year-over-year.

And all retail deposits grew $80 million or 8.1% during the first nine months of 2017 and had grown $157.6 million or 17.4% year-over-year which has allowed us to lower wholesale funding balances.

And looking to the fourth quarter of 2017 and into 2018, we will continue to focus on improving our already strong balance sheet by continuing our focus on asset quality, interest rate risk, loan growth, margin preservation and the growth in deposits especially non-interest-bearing deposits. With that, I will turn the call back over to Rex..

Thank you, Bruce. As a management team we have always been upfront with our shareholders about what we are doing and where we are going. In that vein, I can tell you that I am not satisfied with our quarterly net income number.

There were a lot of moving pieces that accounted for the drop-in quarter-over-quarter net income and it was just one quarter but I want to assure you that we will continue to focus on ways to improve.

There are however a lot of positive takeaways such as the continued growth in core deposits and the increasing percentage that are non-interest bearing. Interest and fees on loans continues to increase as we continue to focus on growth at appropriate pricing levels.

It is also important to remember that net income is up 9% year-over-year after opening three new branch offices in that time period. As our new offices gain market share, they were beginning to contribute positively to our bottom line and increase their earnings while gaining long-term value through that market share.

Our management team is focused on getting our newer branches into the black more quickly so that we can continue to expand in [indiscernible] markets where we need more density. We also continue to improve our delivery systems through our digital and electronic banking programs.

These improvements involve some upfront costs but have strong returns as they gain news. Our goal has always been and continues to be to consistently enhance the franchise and therefore shareholder value. I believe that we are accomplishing that goal and as I look back year-over-year I see the trend is strong.

I hope that you our shareholders and investors feel the same way and 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. I will now open the call for any questions. .

[Operator Instructions]. And our first question comes from Casey Whitman with Sandler O'Neill. Please go ahead..

Rex, you commented in your prepared remarks that you hope to finish the year at your target growth rate for loan.

Can you remind us what that target is? And then does that outlook include or exclude the purchase pools?.

That does include the purchase pool and it’s running right at that annual growth rate of about 9.5%, and that’s where we feel like we’re going to hit by the fourth quarter. It’s about -- what I am looking at the other day Casey, it’s about another $25 million to $30 million we’re trying to hit..

Okay.

And then can you walk us through may be some of the details of the pools you purchased this quarter, may be give us deal in that book or the duration and what’s your strategy going forward for purchasing additional pools?.

Casey, they are five-year mortgage loans. They are all within Virginia, Maryland and DC. So, it was a new market transaction. They are all new production. So, we are looking five years tent for those to reprice.

The yield on the pool is roughly 3.12 certainly not where we would get our new loan generation, however, given the duration of those assets it was we felt one of the best assets alternative out there aside from new loan growth generation..

Okay.

And then, I am sorry I don’t know if you’d answer this or not, but are you planned to purchase more going forward or is this kind of?.

Well I would say no with a caveat. However, we have targeted growth rate and we’re determined to hit those growth rates. And it is our goal to find the best assets, within reason the best assets available i.e. as in-market as this transaction was.

So, if our loan growth goals don’t hit our metrics, we would be open to looking at the next best available asset class. In this case, it was the purchase of loan pool. However, I don’t think it is an ongoing strategy that we will be implying.

It may happen now and then but given what our pipeline looks like for the fourth quarter I don’t think it’s an ongoing strategy..

Got it. Helpful. And then thinking about deposits you had some nice growth in money market deposits this quarter and you referred to some new bank promotions during the quarter in the release.

So, were those mostly targeting money market and are you still running specials today?.

Yes, they were money specials and we’re running still up in Lynchburg, that’s a relatively new office, there is a special in just to that one location right now. And then from time to time Casey we will do some CD specials. We’ll try to time to the DDA accounts too. But that’s just some kind of just to generate some foot traffic in the newer locations.

And we’ve been able to really tie the non-interest deposit accounts to those promotions I think nicely and that’s helped a lot. And we were as I said, Bruce said in his remarks, we were very pleased with what happened with the two new branches in Lynchburg and West Broad Marketplace in West Richmond. .

Okay. And last question, I’ll let someone else jump on.

How should we think about your outlook for expenses from here? It seems like you had some elevated credit related expenses that I presume would come back otherwise is the third quarter a good run rate and also remind us do we have any additional branch expansion plans now?.

Yes, we typically target two branches a year, and some times that timing is a little off. We may end up with one coming in in the fourth quarter and then we’ve got one we are building out that should hit on the books probably April, May of next year.

But all along our idea has been to try to keep the non-interest income growth rate and the interest income growth rate in the 10% to 12% range but try to hold the non-interest expense in the 5% to 6% range. So, we’re trying to make sure that our expenses don’t outstrip our income growth. But we have got one of the branches that’s opening.

It’s going to be just like the West Broad which is we built a 5,000-square foot building because of the ground lease and we ran out 3,000 square feet and we do have a lease that will be starting in January 1st for the West Broad marketplace that will cut the expense there by $110,000 a year approximately.

And we anticipate when we open this unhinged on the Southside of Richmond it will be a very similar situation. So that will help cut some of those operating costs of that branch expansion..

[Operator Instructions]. Our next question comes from Blair Brantley with Brean Capital. Please go ahead..

Hey a couple of things. I guess first is can you just give us a sense of what just you need in terms of the loan growth opportunities and you had mentioned that that some structural pricing issue that kind of kept you out.

Can you just kind of give us a sense of what’s going on in the main markets like Richmond and Virginia?.

Yes, I think in both markets there’s been some -- there’s some new players that are coming in, some of it’s due to mergers and acquisitions, trying to grab some extra market share I think, some of it is new players in the marketplace.

But we think some things on a fixed rate and not just in real estate, we had a company that we do to see an odd type of credit but we do some fixed rate financing for them for equipment they get underneath in and we’ve just seen people come n and really put some pricing and it just doesn’t make any sense.

And we understand if you’re a client that if somebody has got to love you to give that pricing, you're going to take it. But we’re just not going to jump in that game. And I think those things as I said quarter by quarter you just see -- I don’t get excited about it.

I think we’re seeing now that a few of those players have started to back off some of that irrational pricing and the pipeline looks strong. Some of it is just economic trepidation.

Their folks got there -- the yield curve bouncing all over the place, there is all sorts of information coming and going that gets people concerned and some of our guys that use lines and grab inventory at year end, they are talking about, they might not build as much inventory this year as they did last year just.

So, as you try to expand your C&I and small business portfolio, some of that is subject to fluctuations quarter by quarter. But I think a lot of that irrational pricing is starting to back off a little bit.

And as Bruce said, we’ve got a good pipeline going into the fourth quarter, we may see some fallout from it but I think it’s going to be a pretty good production quarter..

Are there any areas that you guys are kind of pulling back from, any one segment?.

We are always careful with multifamily, AD&C type stuff because that is really very specific from a geography standpoint of how it performs and what it does. So, we have been very particular on that while we are watching on those things. Otherwise, we have seen -- all the metrics look pretty good for the other one types..

Alright. Then just a quick question on margin.

Can you give us some updated thoughts on what you’re seeing and what’s your thoughts are there and obviously saw a noticeable increase in some of your funding costs on the demand side even as the mixed improved? Can you kind of give us a kind of relative near-term view and then how you are kind of thinking about the margin and future rate hikes?.

I would be glad to. We predicted this a year ago and it’s come to fruition that if rates increase then wholesale funding cost would go up higher, a year ago that were achievable in retail deposits, they would go up higher than retail deposits and that in fact is the case.

And so, we have probably gone up on our selected deposit rates a little more than we normally would have so we could replace what would inevitably become a higher funding source with retail deposits i.e. something that has franchise value and a strong stable average life to it maturity days.

That being said as far as looking to the future with regard to margin, and it would affect the first quarter of next year as see a 25-basis point increase then on the liability side that’s probably a beta of about 3, we’ll see about a 3-basis point increase in funding cost given a 25-basis point increase in the discount rate.

The wild card will be on the asset side. And it's going to depend on loan growth and is loan growth sufficient enough to replace what’s rolling off the loan book, one thing now, the next increase should it occur in December will be through the fourth.

So, there is 50% of our loan portfolio, not all of it but about a third of it will get an immediate lift given a 25-basis point increase. So, then the question becomes is loan growth sufficient enough to supplant what’s rolling off and certainly if the fourth quarter any indication then that would be the case.

So, we would see a greater increase at the capital house with regard to yield than we would to 3 basis points. That’s one is a little easier for us to control and put our finger on. So that’s what we would pay given a 25-basis point increase, its 3 bps at the bottom. But indications would be that we see a greater lift at the top..

And then finally just some thoughts on the PCI portfolio, there’s one-offs kind of takes that a little bit this quarter.

Is anything going on there just kind of ebbs and flows?.

It’s a normal brand just sitting right on where the model had predicted it..

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

I’d like to thank everybody for participating this morning and remind you that Bruce and I are here today if anybody wants to follow up just give us a call we appreciate your support..

The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect..