Community Bankers Trust Corporation (NASDAQ:ESXB) Q2 2016 Earnings Conference Call July 29, 2016 10:00 AM ET
Rex Smith - CEO
Bruce Thomas - CFO
Catherine Mealor - KBW
John Rodis - FIG Partners
Austin Nicholas - Stephens
Good day and welcome to the Community Bankers Trust Corporation's Second Quarter 2016 Earnings Conference Call and webcast. 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 second quarter of 2016 for Community Bankers Trust Corporation which is the holding company for Essex Bank. Let me begin 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 strategies 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 call format, I will give a quick overview of the quarter then Bruce Thomas, our Chief Financial Officer, will cover selective financial highlights and lastly I will discuss our initiatives and strategy going forward.
This quarter was very consistent with the first quarter, as we were able to continue encouraging trends and overall loan growth in non-interest bearing deposit growth and in net income. Net income for the second quarter was $2.3 million a slight decrease from the first quarter of 2016. The decrease in net income of a $102,000 on a linked quarter basis was due to a $200,000 provision for loan losses in the second quarter. The provision was the direct result of the positive loan growth of $19.5 million for the quarter. This was the first provision since the fourth quarter of 2012.
Net-interest income improved slightly up 1.2% on a linked quarter basis as did non-interest income which was up 5.6%. Earnings per share for the quarter was $0.11 which is what we budgeted for the period. Total loans excluding PCI loans ended the quarter at $785 million increasing 2.6% from the first quarter of 2016 and 15.5% year-over-year a majority of that growth was in adjustable rate loan types and was evenly spread both by loan type and by geography.
The bank is well below the concentration guidelines for commercial real estate loans to risk based capital and we continually monitor those ratios. On the liability side of the balance sheet, we continue to focus on increasing our non-interest bearing deposits. Demand deposits were up just over $12 million for the second quarter and $19.5 million or just over 20% for the first six months of 2016. We continue to see an increase in non-interest income, mainly from increased fee activity due to the increase number of checking accounts. We remain committed to holding non-interest expense stable, even as we look at expand their branch franchise overtime.
With that, let me turn it over to Bruce with some details on the financial results for the quarter.
Thank you, Rex. Net income was $2.3 million for the second quarter of 2016 compared with $2.4 million in the first quarter of 2016 and $1.7 million in the second quarter of 2015. Earnings per common share basic and fully diluted were $0.11, $0.11 and $0.08 for the quarters ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively. Net income decreased on a length quarter basis by 4.2% and increased year-over-year by $625,000 or 36.9%.
For the first six months of 2016, net income of $4.7 million is an increase of $1.7 million or 57.7% over net income of $3 million for the first six months of 2015. Earnings per common share for this respective comparison period were $0.22 and $0.14. As Rex stated, we are posting consistent results. In the fourth quarter of 2015, net income was $2.2 million followed by $2.4 million last quarter and $2.3 million this quarter. Accumulate these three quarters and plug-in one more at the $2.3 million average and you would reflect an annual net income of $9.2 million.
This gets us right at the target 80 basis points return on average asset, we have long targeted as our minimum acceptable performance level. This consistency and earnings has come about in a period of following rates and a flatter yield curve, which would imply our core bank has continue to improve during this timeframe. As a result of this consistency, I will take a few minutes to look at our year-over-year changes. All comments about loans and loan income will exclude PCI loans unless otherwise noted.
The increase in net income, when comparing the second quarter of 2016 with the same period in 2015 was a result of a number of factors including a $1.2 million decline in total non-interest expense. The 12.9% decline in total non-interest expense as primarily due to a reduction of $1.2 million in FDIC indemnification asset amortization.
In September, 2015, the company and the FDIC mutually terminated the share loss agreements which resulted in the elimination of this expense in future periods. Additionally, there was an improvement of $189,000, or 15.7% increase in non-interest income. Also improving year-over-year was a pick-up of $152,000 in other real estate, which was an expense of $137,000 in the prior period and income of $15,000 this quarter.
Other operating expenses declined $103,000 or 5.9% year-over-year. Offsetting this improvement was a decrease of $230,000 in net interest income, the result of margin pressure and lower security balances. Also affecting net income was an increase in the effective tax rate due to higher taxable income from 23.9% to 27.5% year-over-year. For the six months ended June 30, 2016 versus the six months ended June 30, 2015. The increase in net income of $1.7 million was the result of a decline of $2.7 million in non-interest expenses driven by the elimination of FDIC indemnification asset amortization which was zero for the first two quarters of 2016 and $2.4 million for the same period in 2015.
Offsetting the increase in net income was an increase in the effective tax rate from 22.7% to 28.2%. To me this performance improvement is particularly impressive because we have overcome both the decrease in volume and yield on the PCI portfolio. The PCI portfolio is a loan portfolio that we purchase on the FDIC in 2009 which reflects a carrying value of $54.7 million at June 30, 2016. On a year-over-year basis interest income on PCI loans has declined $862,000 in the second quarter of 2015 on schedule cash payments of $475,000 were received on ADC loans related to pools, previously written down to a zero carrying value versus none in the second quarter of 2016. Meanwhile, interest on loans increased $856,000 or 10.7%.
For the six months ended June 30th comparison periods, the decline in PCI interest income of $1.3 million which includes the previously noted $475,000 boost in the second quarter of 2015 was offset by an increase in interest income on loans of $1.7 million. The reason I elaborate this point is to emphasize that because there has been no cash payments received this year and this income stream will be ever decreasing.
Given our current level of loan growth whose volume is overcoming with decrease in rate, we would compare very favorably in the future to our current levels. Net interest margin reflected stability in the second quarter of 2016 and was 3.82% versus 3.83% in the first quarter of 2016. For the first six months of 2016 the net interest margin was 3.82% versus 3.98% for the first six months of 2015. Also be mindful that the margin too received an additional boost in 2015 due to the aforementioned cash payments.
The net interest spread which is a difference between yield and cost was 3.71% in the second quarter of 2016 versus 3.72% in the first quarter of 2016. For the six months comparison period the spread was 3.71% for 2016 versus 3.90% for 2015. Discounting the cash payment list in 2015 our margin and spread are holding up remarkably well as we have been disciplined not to compromise too much on loan rates or security deals as well as not extending out curve further than our comfort level. Total loans were $785 million at June 30, 2016, compared with $748.7 million at year-end 2015 an increase of $36.3 million or 4.8%.
Since June 30, 2015, when loans were $679.8 million our gross is $105.3 million, or 15.5%. The allowance for loan losses equaled 80.9% of non-accrual loans at June 30, 2016, compared with 89.6% at December 31, 2015 and 93.7% at June 30, 2015. The ratio of the allowance for loan losses to total non-performing assets was 59.9% at June 30, 2016 compared with 62.2% at December 31, 2015 and 60.7% at June 30, 2015. The ratio of non-performing assets to loans and OREO was 2.1% at June 30, 2016, compared with 2.1% at year-end 2015 and 2.5% at June 30, 2015.
The quarterly figures reflect a stable level of allowance and non-performing assets while the year-over-year comparison is indicative of the lower level of non-performing asset. Common tangible book value increased 8.4% during the first six months of 2016 and the ratio of common tangible equity to common tangible assets is a strong 9.29% at June 30, 2016.
With that, I will turn it back to Rex.
Thank you, Bruce. The second quarter and year-to-date results clearly show the bank is on a path for posting consistently positive results going forward. We are getting market share in both loans and deposits without taking credit, pricing or extensions risks. We were able to absorb our first provision in ’13 quarters and still post the earnings desired in our budget and strategic plan. I believe that now Essex Bank is position to generate sustainable profitable growth that will put us on a category well above many of our peers. We have a solid team with the proven track record and we remain committed to exploring all opportunities to deliver superior results to our shareholders. Thank you all for your support this past four years.
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 Catherine Mealor with KBW. Please go ahead.
So wondering if -- maybe start first on the provision and Rex as you mentioned lot of the -- the reason you took the provision this quarter was because of the growth and necessarily credit. But do you think moving forward we've hit the inflection point where now you will, just given where there the reserve to loan ratio is we're going to start to see a modest provision to provide for growth and try to keep that reserve to loan ratio fairly flat, or do you think we may be we could return to a theory where we’ve got zero provisioning over the next couple of quarters? Thanks.
I think going forward the growth we see in the pipeline, you're going to see a provision to keep because we just don't want and looking at how our model works you just don't want that ratio the provision to total loans and certainly to drop below a certain level. And I think we're right at where we want to be. Once I’ve seen banks go down to 100 [ph], I have seen some at 130, I think for us we feel comfortable in the 115, 125 range and the model is predictive that way.
We do still have though one large non-accrual loan that has been written down significantly on the books that we think we might get resolution to and if we do there is a possibility that that would flow back through the allowance and that even would keep us from probably doing any provision for quite some time, it's better than depending on how it is resolved it could possibly led to a negative provision at some time. But that's a little bit off, but it's getting closer and closer it's a piece of property right in the middle of Chesterfield, Virginia that is getting a lot of traction right now.
So that one event could change it, but if everything else being equal you will see just a modest provision going forward based upon on the growth rate.
And I would like to add, so we've not put it in there. The provision we took this time kept our coverage ratios in line with where they’ve been. Given the fact that non-performing assets, non-performing loans are pretty flat now, baseline, but for example the non-performing assets to loans and OREO was 2.1% this time as well as at year end and the coverage ratio of allowance to non-accrual loans is pretty consistent with where it’s been as well.
Okay. That's very helpful. Thanks guys. And moving over to the margin and the balance sheet. As we think moving forward do you expect that you will continue to let securities run off to fund loan growth like you did this quarter or we're at a level where the securities book is probably going to level out and you'll see that it either kind of stay flat or even grow a little bit and then fund your loan growth risk with more of deposit growth?
I think we're going to level out Catherine and part of where we were with this, it really had to with where interest rates had been and banging around the way they have been. But we're in the process, we've got a couple of new branches on the horizon, we're seeing some really good growth on the demand deposit side, the NAV account side which will fund the machine.
So I think which you will see is the securities portfolio at least staying stable and then total loans growing and then as we get some market share and some of these other prices you may have seen the securities actually go up a little bit. But certainly we believe they are going to stay stable we're not going to try to liquidate securities to fund. But it just didn't make the sense right now to borrow any more with broker funds to try to put into the market where the interest rates where they have been behaving.
Its yield curve dependent and in this quarter what the yield curve gave us, just the risk return freight off of getting wholesale funding to keep securities balances up as opposed to liquidating them, taking the gain and getting the higher yield on the loan, it just make a lot of sense. And I think, we’ve got a comfort level as far as Home Loan Bank advances and wholesale funding is concern.
So we have a big emphasis on the liability side to get core funding and that’s going to take some time. But we took advantage of what the yield curve gave us in the second quarter.
Thanks. All right. Great. Thank you very much.
The next question comes from Austin Nicholas with Stephens. Please go ahead. Pardon me. The next question is from John Rodis with FIG Partners. Please go ahead.
Rex may be could you just talk a little bit about your markets today and the help to the market, so sort of just what you’re seeing from economic standpoint?
Yes. So Central Virginia market is doing well, it’s not like crazy good, but it has portions of the markets that really strong and then there is a few prices where it’s a little more moderate. But overall the growth in Richmond is above the national average and that extends over into the Western part where we are, what we cover to the leasing into Lynchburg. Those markets are relatively strong compared to a lot of what’s going on in the Mid-Atlantic and of course everything we’ve got Maryland, because we are just South of Baltimore, what kind of run the Beltway around Washington over across the [indiscernible] into Fairfax. And the growth rates up there are always exceeding the national average.
So in that whole area, it depending on the quarter, it’s either one or two Indonesian as far as total growth. Richmond and Central Virginia will follow in anywhere from six to four in the national average. So market growth is strong where we’re operating and we don’t see anything, we’re not like military dependent in these markets. We don’t see a whole lot, it’s going to slow it down. So we feel good about the overall economy.
Okay, good. And then maybe just one other question sort of on capital management. Tangible comments north of 9% and your stock still trading at a modest premium, the tangible book and you talk about opening some new locations in the stuff. How are you thinking about deploy in capital going forward?
Cap question is always -- obviously there is so many things that pull on capital. If you talk about our primary regulators than we are adequately, I mean they call it well, but they don’t think like we’re over flowing in capital. And for us, we’re not going to burn up a lot of capital. We certainly we’ll burn it up with the denovo stuff. And what we’re trying to do is balance, we want to get that book, that market value and a good premier book. And I do believe that overtime, we are going to see acquisition opportunities, I think looking at what Scott Custer did at the Yadkin, where I think he just got so tired in the regulatory environment and other things and I think, they’re going to be certainly -- he’s a pretty sizeable bank.
I think these smaller banks when they start looking at the CRE concentration limits and what’s going to happen to them in Dodd-Frank and what that’s doing. And then [indiscernible] going to bang into their provision. I think a lot of the smaller folks are going to say, it’s just, we don’t have the size and the scale to make it and we certainly want to be able to have our power dry for that event to take place.
But as we keep pushing that value up we're going to look at do we pay a common dividend. What do we need to do to make sure that we're staying on top of our shareholders and making sure we've given them the best return, so we keep all those things in mind?
Okay. Good. And Bruce may be just a quick question for you on the margin it sounds like you said you sort of margin to sort of be stable going forward did I hear that correctly?
Yeah, certainly if we exhibit this type of loan growth going forward then I think we're going to see margin stabilization. Certainly our cost to funds on the liability side has been pretty flat for last year now, we haven't seen any increase in it and i.e. pressure to fund loans and of course the big hurdle is and if you look at our income statement replacing the PCI income because that's coming all of it such high rate. But that's going to be a less important factor going forward and also since we've got no cash payments this year as compared with last year that's not going to be as a big a factor as well.
But based on what Rex what said of higher loan pipeline I think our margins it will bump down may be a couple of basis points a quarter, but it's pretty well floored out and went down 1 basis point this past quarter.
Okay. Sounds good guys. Thanks.
The next question is from Austin Nicholas with Stephens. Please go ahead.
I was just wondering when you look at your Richmond market are you seeing any opportunities given the disruption there from some banks pulling out and being acquired and then also on some of the supermarkets coming to town, I know Wegmans was coming in. There were some acquisitions as well amongst some larger chain. I was just wondering if you guys are seeing any opportunity to add teams or may be moving to a new space.
Absolutely and in fact we're exploring, Wegmans is going to make a big change in that marketplace and they have already opened on the south side of the city and created a lot of traffic over there. And they are going to put a branch in the Westin, it's not far from our headquarters that we're keeping an eye on and that along with the Martin/Food [ph] line thing which of course Union Banks got a lot of branches in those old Martins that some will stay with the public, which the public is going to take, some will be closed. There is terminal there, there is terminal certainly with the old gateway branches which was part of [indiscernible] that's going into Zenith.
And we see a little of a change going on with some of the normal banks that have been in here for a while Fulton and M&T and of course we picked up recently three of the small business wonders from M&T franchise. We also picked up a team, it was actually almost two years ago from First Community. And so we're seeing some opportunities out there. We've picked up a lender from First Capital after they sold out to Park Sterling.
So I think there are going to be some opportunities and we keep that ears and eyes open to them, I think we'll see them in the next year.
Okay. Thanks that's helpful. And then just on expenses. How should we think about that line item kind of over the next, the second half or are there going to be any more branches kind of coming out of the run rate. Are you adding any employees up in your new branches, in the Fairfax branch or anything like that?
You’ll see, I think we’ll get a branch going in the second half for the year certainly. We’ll see some modest expense for that. I think the biggest thing that’s going to move, it is going to be the new DOL change. We’ve got some employees that are going to be affected by the Department of Labor change on the minimum rate and where they’ve goes and what happens with those thing. So something by the fourth quarter that’s going to bump our salary and administrative expense line a little bit.
That’s probably the bigger of the changes. We usually factor the branches and the loan officer growth rates in their budgets. And I don’t think it will be anything tremendous, but you’ll see a little bit of a blip in there. But we manage that is obviously the biggest line item and we manage that pretty tight. And so far, we’ve been within 2%, 3% variance in their budget. So we’re going to keep an eye on it.
Okay. Great. Thanks Bruce. Thanks Rex. I’ll hop out of the queue.
[Operator Instructions]. We have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.
As I said earlier, we feel very positive about where we’ve been. As I look back on the history of the company, this is the best six months that the company ever posted since it was formed back in 2008 by far. And I think it gives an example of what we’ve been able to accomplish and certainly what we can accomplish in the future.
o we’re very excited about that and certainly indicate, it’s a quarter of everyone investors we’ve been with us to the long and bumpy road and I think now we’re going to see some pretty good results for everybody. And Bruce and I are available the rest of the day, if anybody has a follow-up questions please feel free to give us a call directly and thank you for listening this morning.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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