Community Bankers Trust Corp (NASDAQ:ESXB)
Q4 2015 Earnings Conference Call
January 29, 2016 10:00 AM ET
Rex Smith - President & CEO
Bruce Thomas - EVP & CFO
Catherine Mealor - KBW
Austin Nicholas - Stephens Inc.
Welcome to the Community Bankers Trust Corporation Fourth Quarter and Full-Year 2015 Results Conference Call. [Operator Instructions]. I would now like to turn the conference over to Rex Smith, President and Chief Executive Officer. 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 2015 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, in 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 will give a quick overview of the past year. Bruce Thomas, our Chief Financial Officer, will cover selected financial highlights and then I will discuss some of our key initiatives and strategy for 2016.
We accomplished much in 2015 and even though we finished the year with a negative income number, it was the result of our previously planned termination of the shared loss agreement with the FDIC. The remaining core operating metrics of the bank are stronger than ever as we head into 2016.
Highlights for 2015 include new branch offices in both Virginia and Maryland, double-digit loan growth and most importantly a significant reduction in operating expenses going forward now that we do not have the amortization of the indemnification asset associated with the shared loss agreement. Net income for the fourth quarter was just over $2.2 million. This reduced the net loss for the full year to $2.5 million. At that rate, the payback period from the shared loss termination would be significantly faster than our original projection of approximately two years.
Loans excluding PCI loans grew almost $56 million for the quarter and over $88 million for the year or 13.4%. This is extremely positive as we start 2016. Meaningful improvement was also made in the nonperforming asset category as we managed a 33.5% decrease in nonperforming assets for 2015. This means that resolution of problem assets is no longer a major part of our strategy as the metrics are well within normal operating guidelines for a bank of our size.
We made a lot of progress in other areas that will build strong future value for the Company. In 2015, we opened new branch offices in Bowie, Maryland and in the Bon Air of Richmond, Virginia. Both offices are in our open architecture format, are less costly to operate than traditional branch and create new opportunities for loans and they have also done very well in gathering low-cost deposits.
We expect to open another office in Fairfax, Virginia in late February. This is one of the fastest growing markets in the United States and it's been a great loan office for the past 12 months. The new retail structure has helped us change our deposit mix as our noninterest-bearing deposits increased $11.7 million or almost 14% for the year. We're working to increase this trend in 2016 to increase our total core deposits without significant increases in our overall cost of funds.
We also continued our focus on holding operating expenses down. Noninterest expenses declined $14.8 million on a linked quarter basis. While the majority of the decrease was from the indemnification asset costs in the third quarter, credit expenses or EO expenses and salaries and benefits also declined from quarter to quarter.
With that, let me turn it over to Bruce with some details on the financial results for the fourth quarter and the year.
Thank you, Rex and good morning to everyone and thank you for joining us on this conference call. Last quarter we reported a net loss to you of $7.7 million in the third quarter which stated that ending the shared loss agreement with the FDIC would result in a very acceptable earn-back period and improve our results beginning in the fourth quarter of 2015.
I will now quantify actual results that will show to what degree we're more positively positioned for the future. Net income for the fourth quarter of 2015 was $2.2 million. Annualized, this translates into $8.8 million and a return on average assets of 0.76% and a return on average equity of 8.49%. If we were to average the last eight quarters of net income available to common shareholders excluding the one-time charge to write off the indemnification asset, the resulting average quarterly net income available to common shareholders would be $1.5 million.
The increase in the fourth quarter over this average is $709,000 or 47.1%. This is an increase in net income of $2.8 million on an annual basis. This would be a pick-up in ROA of 24 basis points. If you are to exclude the third quarter of 2015 altogether from consideration, you would still find that fourth quarter net income would be $616,000 greater than the average which is an increase of 38.5% and this would be a pickup in ROA of 21 basis points.
Earnings per common share were $0.10 in the fourth quarter and $0.40 annualized compared with $0.10 per share in the fourth quarter of 2014 and $0.33 per share for the year ended December 31, 2014.
Current quarterly earnings annualized is a $0.07 per share increase or 21.2% over 2014 earnings per share. Other significant income statement items on a linked quarter basis were an increase of $254,000 or 3.2% in interest and fees on loans excluding purchase credit impaired loans, a decrease in salaries and employee benefits of $366,000. If you exclude severance payments made in the third quarter, the decrease still would have been $205,000 in the fourth quarter versus the third quarter of 2015.
Net interest income was $10 million for the quarter ended December 31, 2015 compared with $9.8 million for the third quarter of 2015, representing an increase of $117,000 or 1.2%. The linked quarter increase was primarily due to interest and fees on loans which increased $254,000 or 3.2% as a result of increased loan volume in the fourth quarter of 2015. Interest and fees on PCI loans declined $76,000 on a linked quarter basis while securities income decreased $56,000.
Total interest expense remained relatively unchanged and was $1.9 million in both the third and fourth quarters of 2015. The increase in loan volume coupled with securities yields that remain fairly constant and interest expense that reflects similar characteristics has resulted in a stabilization of the net interest margin. The yield on earning assets was 4.45% for both the third and fourth quarters of 2015. The yield on loans excluding PCI loans was 4.59% and 4.64% for the third and fourth quarters respectively.
The yield on PCI loans also was unchanged and was 10.97% for each of the third and fourth quarters of 2015. Securities yields were 2.96% on a tax equivalent basis for the fourth quarter of 2015 and 2.97% on a tax equivalent basis for the third quarter of 2015.
Interest expense increased only $6000 or 0.3% in the fourth quarter of 2015 compared with the third quarter of 2015. Average interest-bearing liabilities increased $6.2 million during the quarter and the cost of total interest-bearing liabilities was 0.79% each quarter.
Federal Home Loan Bank and other borrowings increased $8 million during the fourth quarter of 2015 and averaged $100 million at a rate of 1.11%, down from 1.19% in the third quarter of 2015. The interest spread was 3.66% in both the third and fourth quarters of 2015. The yield on earning assets was 4.45% for both the third and fourth quarters of 2015. The cost of interest-bearing liabilities also remain constant on a linked quarter basis and was 0.79% each period. This resulted in a net interest margin on a tax equivalent basis of 3.75% in both the third quarter and fourth quarter of 2015.
Significant balance sheet developments include an increase in total assets during the fourth quarter of 2015 of $30.2 million or 2.6%. Total loans excluding PCI loans were $748.7 million at December 31, 2015, an increase of $88.7 million or 13.4% since year-end 2014.
Commercial mortgage loans exhibited the largest dollar volume increase year-over-year and were up $35.8 million or 12.7% and ended the year at $318 million. This is also the largest category of loans in the portfolio.
Residential one- to four-family mortgage loans increased $27.4 million or 16.4% over this timeframe and were $194.6 million at December 31, 2015. Multifamily loans increased $11.6 million or 34.2% and were $45.4 million at December 31, 2015. Construction and land development loans of $67.4 million at December 31, 2015 reflected an increase of 18.2% or $10.4 million since year-end 2014.
Commercial loans $102.5 million at December 31, 2015 was an increase of $2.7 million over the balance of December 31, 2014. And lastly, PCI loans were $59 million at December 31, 2015, $8.5 million lower than at year-end 2014.
Interest-bearing deposits were $849.3 million at December 31, 2015, an increase of $14.9 million since year-end 2014. However, there's been a change in the composition of the deposit mix. Time deposits less than or equal to $250,000 declined $7.5 million during 2015 while NOW, money market and savings accounts increased collectively in a greater amount, $17.7 million. Time deposits over $250,000 increased $4.8 million during 2015.
Nonaccrual loans were $10.7 million at December 31, 2015 compared with $16.6 million at December 31, 2014. This is a reduction of $5.9 million or 35.6%. Other measurements of asset quality showed improvement starting in 2015 as internally designated classified loans declined $8.7 million during 2015 from $22.2 million at December 31, 2014 to $13.5 million at December 31, 2015. Other real estate owned declined $7.7 million at December 31 to $5.5 million at year-end 2015.
My takeaways from December 31, 2015 include the repositioning of the Company's balance sheet as it is now more closely aligned with our peers. We still have work to do in terms of loan and deposit growth as well as the mix. However, non-earning asset levels are down significantly through the purging of nonperforming assets and the elimination of a huge indemnification asset.
Our core loan book is growing at an acceptable level in terms of rate and duration. We continue to grow our core deposit base in particular the noninterest-bearing deposit accounts. Our net interest margin has stabilized and growth factors in the loan portfolio are enabling volume to overcome any decline in rate. These things have us excited about the upcoming quarters as we feel we now are positioned to profitably grow and report acceptable levels of return to our shareholders. Rex?
Thank you, Bruce. In 2015, we had a primary goal of exiting the shared loss agreement knowing that the indemnification asset expense was hurting our true earnings potential and creating a burden on our reporting. We also wanted to continue on a path of solid growth in the core areas of the bank so that we would build franchise value.
As I look back at the year, all of this was accomplished and the bank now has a positive operating momentum going into 2016. Management has worked hard to create a healthy balance sheet with strong capital, solid asset quality and liquidity. All of this was done in a competitive environment with tremendous rate uncertainty.
The fourth quarter shows the earnings and growth power of the Company now that all the distractions have been removed. We will open our newest branch office in February in Fairfax, Virginia and we will continue to look at other market opportunities where we can gain a quick competitive advantage either by do Novo branching or by acquisition.
Management has a strong commitment to enhance franchise value through core growth in the balance sheet and in our earnings per share. The strong growth in the fourth quarter gives us a lot of momentum as we start the New Year and management is excited by the trends we see for 2016.
I thank all of you who participated in the call today and for your ongoing support of our Company. With that, we will now open the call for any questions.
[Operator Instructions]. The first question comes from Catherine Mealor of KBW. Please go ahead.
I wanted first to talk a little bit about the growth. The growth this quarter was fantastic. Can you talk a little bit about some color around what drove the growth? I can see most of it - it feels pretty balanced with maybe a little bit more of it coming from the commercial book. So were there any large credits that drove the high growth this quarter? And then can you talk a little bit about your pipeline going into 2016? Thanks.
Yes, the good news for us is a lot of that growth ended up being booked in December so the quarter doesn't show all of the full quarter of the interest that's coming from those. And it was - Catherine it was split up between Maryland and Virginia between commercial real estate, small business and the C&I group with the bulk in the C&I group. We did have one relationship that we had been working on in that commercial group that's probably about $8 million or $9 million of that growth and more to come. It's a really nice relationship, comes with deposits and we've been working on that one and that one's probably the largest credit in there. But the rest are all fairly diversified.
And the pipeline going into 2016 is fairly strong and we experienced that. Usually the fourth quarter, first quarter are fairly strong, second quarter, third quarter gets a little weaker. We're trying to anticipate that this year and overcome it. We had a lot of payoffs last year. I look at it - we had almost $60 million of paydowns and payoffs that hit us in the second and third quarter last year. So we've got our loan officers up on front of that right now making sure that we're staying with our borrowers and making sure we try to keep that from happening this year. So I anticipate a pretty good year.
Can you talk about the pricing for new credit and maybe how that plays into your outlook for the margin going forward? Your loan yields held in pretty nicely this quarter. The core loans yields held in nicely but I'm assuming that we've still got some downward pressure on the loan yields moving forward.
Yes, it is competitive out there. The good news is that we're trying to balance off and again I think I've said this before, we're lucky because we have so many different markets and diverse markets we're in and with three very different business lines between small business, C&I and real estate, that we can work on keeping the yields where we want them to be.
But we'll see some pressure because we do want to get some more of the small business and C&I and I think those are going to be variable-rate deals so they are going to be a little lower but the trade-off is that they are adjustable. But I don't think we're going to see dramatic pressure on pricing. I think we've built into our budget going forward probably 20 basis points difference in the margin year-over-year and I think that's a very conservative approach to it.
[Operator Instructions]. The next question comes from Austin Nicholas of Stephens Inc. Please go ahead.
I was just looking at the expense line and as I look out to 2016 and think about any new hires you guys are looking at or in that Fairfax branch, what sort of numbers would maybe come out of both of those?
All but one person from Fairfax were already in that number for the fourth quarter. We're looking for actually one more FSA in the Fairfax location. So I don't anticipate a whole lot of salary changes. We do have a new call center that's coming on line and we'll have some hires in that probably four or five FSA salary sized folks in that. But that's also going to be a sales and service center. So it's a way to generate leads also. So we're going to work pretty hard to keep that salary line where it needs to be but if we get the opportunity to hire lenders and producers, we stay open to that.
And just one question on your securities book. I know it's been declining a little bit. Could you talk about how you look at that out through 2016 and maybe how we should think about that versus your loan growth?
Yes, when we compiled our budget, we're going to try to keep the dollars flowing through the income statement fairly consistent on a monthly basis in 2016 regardless of what the balance is but obviously you have to increase the yield if the balance goes down. So I'm going to monitor that very carefully and I'm also monitoring interest rates very carefully and like a day like today, the 10-year is at 194 this morning.
Well, there's a selling opportunity on loan growth. So you take your lower performing securities and you flip out of them and of course the treasury management in a bank over $1 billion is kind of like an accordion effect. The coffers fill up with cash and then they empty out either through loans or securities and I'll keep monitoring the pipeline. And if the coffers are full, the treasury is full, then I will go for securities and we've been booking higher-yielding securities. About three years ago and I don't want to go too long, but in anticipation of higher rates, we got the insurance policy of $100 million in SBA floaters paid premiums for them and rates have not gone up. And at this juncture with the economic data I'm looking at, I don't see a big increase in rates coming. So we're flipping out of those and we're going into securities that have more predictable yields.
And then just one quick question on the tax rate, I noticed it was a little bit lower than I was expecting at 24%. Is 26% kind of a good number to think about going forward or is that a little high?
No I think 26% is fine for 2016. Of course we had the one-time charge that impacted us and lowered taxable income. But for 2016, I think 26% - 26%, 27% was what I was playing around with in the budget so that's a good place to be.
[Operator Instructions]. This concludes our question-and-answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.
I would just like to thank everybody for listening today and I appreciate your support for the past year. As I said, we're very excited about where the bank is headed for 2016. Bruce and I will be around all day today if anybody has any follow-up questions. You're welcome to give us a call and thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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