Rex Smith - President and CEO Bruce Thomas - EVP and CFO.

Catherine Mealor - KBW Austin Nicholas - Stephens Casey Whitman - Sandler O’Neill John Rodis - FIG Partners Blair Brantley - Brean Capital.

Good morning and welcome to the Community Bankers Trust Corporation’s Fourth Quarter and Year 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 fourth quarter and the full year of 2017 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 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.

My discussion today will be in terms of performance prior to recording a one-time charge to income tax expense from the change in the deferred tax assets. That write-down was $3.5 million and is a one-time event. Bruce Thomas will review the full financials in more detail following my comments.

A reconciliation of our earnings before and after the effect of this charge is included in our earnings press release. You may remember that I was not particularly satisfied with the growth rates or the results of the third quarter. However, I am pleased to report that we finished 2017 with very positive results for the fourth quarter and the year.

Pretax net income for the year was $14.1 million, a 2.7% increase over the previous year. That included opening three new branch offices in 2017, one in Richmond and two in Lynchburg, Virginia. Pretax net income for the quarter was $3.6 million, up over 7% from the third quarter of 2017 while including an additional $250,000 provision expense.

The fact that the Bank was able to grow net income consistently while expanding its branch and market base is significant for earnings going forward. 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 for 2018.

For 2017, noninterest bearing deposit growth was $24.1 million or 18.7%, which is above our budgeted growth. Interest bearing core deposits grew $74.1 million or 8.7% for 2017. This growth helped reduce our reliance on broker deposits as well as fund double-digit loan growth for the year.

Loans, excluding PCI loans, grew $105.7 million for the year and $52 million for the quarter for an annualized growth rate of 12.6%. A majority of the growth for the quarter was adjustable rate commercial and industrial loans which grew $22.4 million in the fourth quarter.

Meaningful improvement was also made in the nonperforming asset category as we decreased nonperforming assets from $37.4 million at year-end 2016 to $25.6 million at December 31, 2017. This 31.5% decline helped to lower other operating expenses such as credit and legal expenses for the year.

Total operating expenses increased by only $1.4 million year-over-year, the majority of which was related to the expenses of the three new branches. This means other noninterest expense held flat or were reduced year-over-year.

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. The Company recorded net loss of $640,000 for the fourth quarter of 2017 compared with linked quarter net income of $2.4 million in the third quarter of 2017 and year-over-year net income of $2.7 million in the fourth quarter of 2016.

Earnings per common share basic and fully diluted were negative $0.03 per share, $0.11 per share and $0.12 per share for the three months ended December31, 2017, September 30, 2017 and December 31, 2016 respectively.

For the year ended December 31, 2017, net income was $7.2 million or $0.33 per common share basic and $0.32 fully diluted compared with net income of $9.9 million or $0.45 per common share for the year ended December 31, 2016.

Net income in 2017 was affected by the charge of $3.5 million to income tax expense in the fourth quarter of 2017 related to the remeasurement of the net deferred tax asset, resulting from the new 21% tax rate established by the Tax Cuts and Jobs Act.

Excluding the onetime charge related to the Act, net income for the fourth quarter of 2017, would have been $2.9 million, a linked quarter increase of $491,000 or 20.3%, as net interest net interest income increased by $223,000 or 2.9% [ph] and non-interest expenses declined $242,000 or 2.8%.

Additionally, income tax expense for the fourth quarter of 2017 prior to recording the deferred tax asset write-down associated with the Act would have declined by $250,000.

This decrease was affected by stock options exercised during the quarter and by an adjustment to reconcile the payable accrued on the Company’s book and the preliminary income tax calculation for the tax return at year-end 2017.

Partially offsetting these increases to net income was provision for loan losses of $400,000 in the fourth quarter of 2017, which supported the strong loan growth of $52 million or 5.8%. Net income excluding the onetime entry associated with the Act would have been $10.8 million or $0.49 per basic common share.

This would have been an increase of $828,000 or 8.35% in net income. For the year 2017, net interest income increased $2.6 million or 6.4% and was $44.1 million. The tax equivalent yield on earning assets was 4.54% in 2017 compared with 4.50% in 2016.

Interest and fees on loans of $40.3 million in 2017 was an increase of $4.3 million or 12% compared with $36 million for 2016. Securities income increased $139,000 for 2017 compared with the same period in 2016, and the tax equivalent yield on the portfolio was 3.12% in 2017 and 3.11% in 2016.

The tax equivalent net interest margin was 3.78% for the year ended December 31, 2017 versus 3.80% for the year ended December 31, 2016. The net interest spread was 3.64% for 2017 versus 3.69% for 2016. Total assets increased $86.4 million or 6.9% to $1.336 billion at December 31, 2017 as compared with $1.250 billion at December 31, 2016.

Total loans were $942 million at December 31, 2017, increasing $105.7 million or 12.6% from year-end 2016. During 2017, commercial loans grew $29.7 million or 23% and totaled $159 million at December 31, 2017. Multifamily loans grew $19.9 million or 51% and were $59 million at year-end 2017.

Residential 1 to 4 family loans increased $19.7 million or 9.5% and totaled $227.5 million at December 31, 2017. In all, total real estate secured loans increased by $76.5 million or 10.9%. Interest bearing deposits at December 31, 2017 were $942.7 million, an increase of $34.3 million or 3.8% from $908.4 million at December 31, 2016.

Money market deposit accounts increased $32 million or $28.8% during 2017, primarily the result of new deposit accounts opened at two of the new branch locations that began operations during the year. NOW accounts increased $19.7 million or 14.3% and were $157 million at December 31, 2017. Total time deposits declined $21 million or 3.7%.

While retail time deposits increased by $18.8 million or 3.6%, the level of brokered deposits declined $39.8 million or 74.5% and were at $13.6 million at year-end 2017. Excluding brokered deposits, retail interest bearing deposits increased in 2017 by $74.1 million or 8.7%.

When including noninterest bearing deposits to this comparison, we find total retail deposits grew by 10% in 2017. Nonaccrual loans were $9 million at year-end 2017, decreasing $3.7 million during the fourth quarter of 2017 and $1.2 million from December 31, 2016.

The level of total classified and criticized assets has consistently declined over the last five quarters. Total classified and criticized assets were $25.6 million at December 31, 2017 compared with $37.4 million at year-end 2016. This is a decline of $11.8 million, or 31.5%.

Total nonperforming assets totaled $11.8 million at December 31, 2017 compared with $14.7 million at December 31, 2016, a decline of $2.9 million. Total nonperforming assets decreased $3.6 million since September 30, 2017. There were net charge-offs of $1.1 million during 2017.

The allowance for loan losses equaled 99.4% of nonaccrual loans at year-end 2017, compared with 68.4% at September 30, 2017 and 92.7% at December 31, 2016. The ratio of nonperforming assets to loans and other real estate owned was 1.3% at December 31, 2017 compared with 1.7% at September 30, 2017 and 1.7% at year-end 2016.

Lastly, I want to point to the fact that the write-down to our deferred tax assets still left that capital in a strong position. The Company’s ratio of total risk-based capital was 12.7% at year-end 2017 compared with 13.2% at December 31, 2016. The tier 1 risk-based capital ratio was 11.9% at year-end 2017 and 12.2% at year-end 2016.

The Company’s tier 1 leverage ratio was 9.7% at December 31, 2017 and 9.6% at December 31, 2016. With that, I’ll turn it back to Rex..

Thank you, Bruce. While we continue to grow the franchise, it is important to know that we also continue to focus on consistently improving earnings.

To put that into perspective for 2017, we opened three new branch offices, grew loans and deposits by double digits, added an additional $250,000 in provision, upgraded our remote and digital platform, and still increased pretax net income by almost 3%. This translates well as we have a lot of positive operating momentum going into 2018.

We also have patiently structured a strong balance sheet that is well-positioned for rising rate environment. Our past product and pricing discipline will be quite evident as rates increase in the coming months.

For 2018, we will continue our commitment to enhance franchise value through core growth in the balance sheet, getting efficiencies in our operations, managing our branches to a higher level of performance and expanding our digital bank platform, with a very distinct and readily usable identity.

We’re intensely focused on accelerating the achievement of these priorities and generating top tier financial performance for our shareholders. With the tax rate changes and the potential rate increases, we believe we’ll have a highly successful 2018. I thank all of you for participating in the call today and for your ongoing support of the Company.

With that we’ll now open the call for any questions..

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Catherine Mealor with KBW. Please go ahead..

Thanks. Good morning. Rex, the growth was really strong this quarter. It looks like it was particularly strong in the C&I front.

Can you just give a little color there and your outlook for growth going into 2018?.

It’s -- that has become a very seasonable line of business. We had that same effect two years ago; it wasn’t quite as dramatic last year. But I think a lot of folks were sitting on the sidelines kind of waiting to see what was going to happen in Washington. We had a good pipeline.

And when the tax law changes hit, we had a lot of folks that pulled the trigger. There’s still a nice pipeline going into 2018, and we’re very pleased that that is one of the lines of business we’re pushing because they tend to be full relationships and not just transactions.

And we’ve had a good geographic distribution between Maryland and Northern Virginia, and Central Virginia too..

And then, what about the yield on the new production? It looks like your legacy loan yields were fairly stable linked quarter.

So, would you say that the new production is coming on at a lower level than that, 463 current rate, and how should we think about how your legacy loan yields should trend as we move into this year, particularly as rates move?.

Yes. The loan yield of course gets a little bit skewed by the PCI stuff that’s in there, and as some of that -- and that’s been performing great. It doesn’t -- it’s not running down the curve too quickly. But as that runs down the curve, $7 million, $8 million a year, we lose a fair amount of yield off of those.

But, I think the new stuff is now coming on at a little bit higher than the legacy, especially on the adjustable rate stuff. Some of the real estate is very competitive right now. And that has not bumped as much as we’re booking a lot of the real estate stuff at the same rate as we did for the last year or so because that is competitive.

But, the C&I and small business has moved up with the rates. And so, we’re getting another 35, 40 basis points off the new stuff than what we booked in that say a year ago..

Your next question comes from Austin Nicholas with Stephens. Please go ahead..

May be on the branches. I know, you build a couple this year or last year. I guess, maybe starting there, maybe how would you describe the maturity of those branches, just on their ability to attract further deposit? Clearly that takes some time to build from initial expense that you put up.

And then, beyond that, are there any more expectations to build branches this year and then how should we kind think about expenses of the next few months?.

That is a great question. And you’ll recall my comments, focusing on driving performance in those branches is a big item for us in 2018. If you look back in the last three years, there is about nine branches that are relatively new and it’s -- normally, it takes somewhere between 30 months to 40 some months to get a branch to a profitable state.

We’ve had a couple that had outperformed that. The one we opened in Richmond last year, West Broad jumped up significantly; our first Lynchburg office has done the same but.

But, I think right now, we’re focused on getting those newer branches, especially ones that are sitting out there that we’ve brought on two and a half, three years ago, getting them to a point where they are at a profitable basis. And driving a lot of business through those is key, before we start adding a lot of new ones.

We have one on the tap for 2018, which is going to be in Stonehenge village, which is in the Midlothian section of Richmond, South Richmond, it’s a nice filling spot for us and a great neighborhood in a grocery store complex that is Wegmans is the anchor tenant.

And that’s what we did at Short Pump with the West Broad marketplace when that has done so well. So, we’re excited about that one. We don’t have any new ones on the horizon yet. We always keep our eye up for a closed office or something we can take over, and we’re always looking expanding our presence in Maryland and Northern Virginia.

But, I think the main focus for us this year is to go ahead and catch up with the branches that we’ve added de novo. .

I guess, my other question, maybe just on NPA, they dropped down quite a bit.

Was there a large credit that rolled off NPA status or is it a few or maybe just kind of what went on in that line?.

We had one C&I credit that was relatively large that we worked through and got off the books. And of course, we still have that one credit that is the real estate development loan.

And that’s another issue for 2018 that we want to get resolved because we’ve just kind of been waiting for the development of the accounting around that parcel to get sewer and roads, and we now have roadways to that parcel but we’re waiting for the bond referendum or to come up with the proffer for what they want to do on the sewer.

I think that will take place in the first half of this year and my goal is to get that resolved. That’s about $4 million. So that moves in significantly too..

So, potentially before that property is marketable, call it to an investor, a buyer, you need to kind of have -- the sewer is in place and that’s kind of the last piece?.

Yes. They’re going to want to know that there is -- that the county has made a commitment to how that -- that sewer will come there, it’s going to be the question of how it’s going to be paid, whether it’s a bond or whether you get proffered as the developer or what it is.

And as long as that number is unknown, it’s difficult for anybody to put a price on it. So, I think when we get clarity on that, we can make some progress..

And then, maybe just my last question, for 2018, you may have mentioned this, but I may have missed it.

Just what your expected effective tax rate would be for 2018, is it in that, call it 19% range or is it a little higher?.

I think a little lower -- about 18..

Yes, I’ve got 18 pegged in. So, if you take the 34% tax rate, we had been running an effective 28%; and if you apply that same basis point advantage to a 21% rate, you round down to 18%..

And then, is there any changes in the margin that will be related to that in terms of changing your securities mix or tax advantage investments?.

Yes. We’re going to take about 4% -- 4 basis-point haircut on the tax exempt municipal bank qualified portfolio which in dollar terms, if you’re running a tax effective margin, is $585,000..

And that will happen in the first quarter?.

Correct..

Our next question comes from Casey Whitman with Sandler O’Neill. Please go ahead..

Most of my questions were answered, but just you touched on this in your opening remarks but looking at the tax rate this quarter, can you walk us through again just what drove that lower, excluding the DTA write-down?.

Yes. Excluding the DTA write-down, there were some options that were exercised, and we had a true-up from our tax schedule to the payable on our books, and we made that adjustment. It was an adjustment we just had and didn’t need to but we decided since we’re doing tax cleanup we go ahead and true up the payable to the tax accrual.

And so that’s behind us and get all the tax related items in one quarter..

And then, do you have what the tax rate -- what your expected tax rate will be on a fully taxable equivalent basis in 2018?.

Yes, 18%..

That’s on a fully taxable equivalent basis?.

Are you looking for the effective tax rate or…?.

Yes..

Yes, 18%..

All right.

And what about -- can you give us an idea of the outlook for the margin, excluding that FTE [ph] adjustment impact you discussed and what you’re assuming the rate hikes to get there?.

Yes. We’re going to take 4 basis points off our margins. So, we ran 372 in the fourth quarter. So, take 4 basis points away from that that is excluding the impact of any rate hikes. So, assuming rate hikes, then -- and some of that is going to depend on what happens to the yield curve, obviously as rate hikes.

So, if the rate hike occurs but all of the activity occurs on the short end, that’s a dynamic that we can’t totally project. But in that regard, I can tell you that 49% of our loan portfolio is adjustable rate in some form or fashion and 32% of that is tied to prime.

So, we should get more lift from rate hikes than we do from the pressure on the short end of the curve on the funding side..

Casey, we’ve basically budgeted a relatively flat margin for what we’re looking at. But for us, I think, the key is going to be as the rate hikes go up, we’re looking at what we think are some pretty high betas on deposit pricing right now because of the competitiveness of deposits.

So, for us, I think it’s imperative, as I said early, with these newer branches to really begin to utilize what we run through those and change that deposit mix. And if we can accomplish that, you will see that margin make some strides upward. And that’s -- I think it’s crucial for us as we go into 2018 with these rate hikes.

As Bruce said, the assets out of the balance sheet is well positioned, it’s going to be how we can fund it. And if we can fund it with the better mix and we’re going to get a significant jump in the margin. If we have to rely back on borrowings or CDs, it’s going to remain fairly flat..

Our next question is from John Rodis with FIG Partners. .

Rex, back to the question on loan growth. So, you put up -- you grew loans 12.6% this year, obviously the fourth quarter was strong. You grew core loans last year in ‘16, 11 to 12%.

Do you think you can continue to do low double-digit growth in ‘18 or do you think it’s probably more likely mid to high single digits?.

I’m looking at mid to high single digits, John, for the fact what I just mentioned with Casey, which is, I think how we fund that asset growth is imperative for 2018. And we talk about pricing discipline and structure discipline and I think that is key.

And growth for pure growth sake on transactional type things are going to be something we shy away from in 2018. So, I think, it’s possible we could hit back to 11% growth. But from what we’re looking at, we’re kind of looking at more like 9.

And I think, if I we do 9% and we do it the way we’re talking about and funding it with core deposits for the better mix, we’re going to make significantly better income and if we just chase transactional things. .

That makes a lot of sense, Rex. So, assuming loan growth comes down from the fourth quarter pace, I assume we should sort of think about provision expense, probably somewhere between the third and fourth quarter level.

Is that sort of the right way to think about it too?.

Yes, it is..

Okay. And then, just back to operating expenses.

So, for the year, you grew expenses of little bit over 4% versus 2017 versus 2016, do you think that’s sort of a low to mid single digit growth in ‘18? Is that still the right place to be?.

It better be. I’m looking at my team. And considering the three branches that were added on, and that does add a significant cost. So, it is not -- salaries and benefits are obviously the biggest one, and then data and data costs are the next biggest line, which includes running the phone lines and data lines into the new branches and things.

So, as we get into slowing up a little bit, I think, you’ll see that operating expense line flatten out..

So, I guess just thinking with the tax cut and so forth, so most of that lower tax rate should fall to the bottom line versus say increasing expenses for some other items that maybe you hadn’t planned for before?.

Correct..

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

I wanted to get back on the margin real quick.

Can you kind of give us a feel for where your funding costs are compared to peers? And I would think that it may be a little bit higher, especially on the CD side, just with some of the new branches coming on, but does that give you some flexibility with your comment about beta’s being higher?.

I think so. And it is a little higher than peer, and that is because if you look at the mix too that the peers got more non-interest bearing deposit accounts per total deposits than we do. But, the good news for us is I’ve got nine relatively new branches that are starting to really get some traction in their markets.

And I think that’s where the key for us is to be able to take those newer branches and really begin to grab market share on the non-interest bearing side..

And then, with your loan to deposit ratio, it looks like it went up a couple of hundred basis points this quarter.

Is that a kind of a targeted level or are you going to go higher?.

We don’t want to go whole lot higher. I think we’re comfortable right around 90%. It may go a little higher than that but we’re kind of in the sweet spot I think of that comfort range. And as I said earlier, we’re going to try to balance the loan growth with how we can fund it and that’s going to be key for us in 2018..

And if I could, just the fee income, any updated thoughts on the mortgage opportunity there, any other things that you guys are trying to do on the fee income side?.

We keep working on the mortgage side and we’ve had some good growth, we’ve added some loan officers that are doing well. It’s still relatively small comparatively to -- that category, but it’s gaining some traction, about 10%, 12% growth a year. And we obviously are looking at other opportunities constantly..

And then, finally on just capital plans, any updates with the lower tax rate, dividends, M&A, just any updates there?.

Always looking at M&A opportunities. As you know that it takes time. And I think for us, we’re relatively conservative on that front and are having lived through both sides of that in 30 years of banking, a bad M&A is one of the worst things you can ever do to the company.

But, we’re also working with our regulatory groups, because the concentration of real estate to risk-based capital is a big item with the regulators, and we want to make sure that they’re comfortable with our capital status. And obviously right now, we’re a couple of million dollars down from the write-down of deferred tax assets.

So, we’re just going to continually win. We do this basically monthly with the Board and internally, look at our capital position, look at what our uses can be and should be and at some point, if we don’t feel like an M&A is evident and we’re comfortable with where we’re on regulatory basis, we would look at a dividend situation..

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

I appreciate everybody participating this morning. And I would like to remind you that if you have any follow-up questions that Bruce and I are here today and available and always enjoy talking to our shareholders and give as much clarity to where we are as possible. So, thank you..

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