Community Bankers Trust Corporation (ESXB) Q4 2020 Results Conference Call January 29, 2021 10:00 AM ET
Company Participants
Rex Smith - President and CEO
Bruce Thomas - CFO
Conference Call Participants
Casey Whitman - Piper Sandler
Stuart Lotz - KBW
John Rodis - Janney
Brody Preston - Stephens, Inc.
Operator
Good morning, and welcome to the Community Bankers Trust Corporation Fourth Quarter and Year 2020 Results Conference Call. All participants will be in the 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 Chief Executive Officer. Please go ahead.
Rex Smith
Good morning, and thank you for joining us today as we review the results of the fourth quarter and the full year of 2020 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 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.
On today’s call, I will give a quick overview of the quarter and the year, then Bruce Thomas, our Chief Financial Officer, will cover detailed financial highlights, and lastly, I will share our thoughts as we look forward to 2021.
I don’t think any of us would have remotely thought at this time last year what 2020 would bring. Certainly by the end of the first quarter, there was much concern and fear as to how the year would progress. Add to that the turmoil of the election, and we had a year with as many unprecedented challenges as I have seen in my 40 years of banking. Fortunately, we had a strong pandemic response plan and a devoted management team with the knowledge and experience to not only get through the turmoil but to make a positive impact on the customers and the communities that we serve. Through our selective participation in the Paycheck Protection Program and other COVID relief measures, we were able to play an integral part in preserving jobs and businesses throughout Virginia and Maryland. We are continuing our efforts today with providing relief through the Consolidated Appropriations Act 2021 and have taken over 100 applications amounting to $17 million for PPP round two, so far.
Given all the challenges, we are pleased with the results of the fourth quarter and for the year. Net income for the year 2020 was $15.5 million, only a slight decrease from the net income of 2019 of $15.7 million. This lower net income amount did reflect a large increase of $3.875 million in the allowance for loan loss provision over the prior year, driven by general credit uncertainties created during the pandemic. Net income was $5.5 million for the fourth quarter of 2020, compared with net income of $4.5 million in the third quarter of 2020, and net income of $4 million in the fourth quarter of 2019. This was driven by increases in both net interest income and noninterest income.
Loan growth exceeded our expectations for the year, and credit quality remained strong. Loans, excluding loans under the Paycheck Protection program, were $74.8 million for the year or 7.1% growth. We also worked diligently to manage the asset quality while giving our customers the appropriate relief measures. Total nonperforming assets decreased by $2.8 million or 26% for 2020.
Additionally, we continue to focus on growing core deposits, specifically transaction-based demand deposits to reduce our overall cost of funds. I am pleased to report that we had a good shift in our deposit mix, which significantly lowered deposit costs through the fourth quarter of the year. Total checking, money market and savings accounts grew $250.9 million during 2020, while certificates of deposits declined $15.6 million.
Noninterest-bearing demand deposits now represent 21.4% of total deposits, compared to 15.4% at year-end 2019. Noninterest income also improved, driven mainly by growth in mortgage origination fees and growth in income from the investment management group. In addition, noninterest expenses decreased for the year due to a decrease in salaries and benefits and the internal loan costs related to the origination of PPP loans. Additionally, the closure of two branch offices in 2019 have positively affected salaries, as well as other expense categories in 2020, namely occupancy and equipment expenses. All of these factors contributed to a return on average assets of 1.32% for the fourth quarter of 2020 and 0.99% for the year. Return on average equity was 12.64% for the fourth quarter and 9.58% for the year 2020.
Now, I will turn the call over to Bruce Thomas to discuss the details of the financial results for the fourth quarter and the year.
Bruce Thomas
Thank you, Rex. Good morning, and thank you for joining as we review the fourth quarter and year ended December 31, 2020.
As Rex reported, net income for 2020 was down only slightly $157,000 for the year and at $15.5 million, it resulted in earnings per share, both basic and fully diluted, that was only $0.01 per share less than in 2019. Common earnings per share for 2020 were $0.70 and fully diluted were $0.69 per share.
Pretax pre-provision income was $23.5 million for the year 2020 and is an increase of $3.9 million or 20.1% greater than pretax pre-provision income of $19.6 million for 2019. This increase in pretax pre-provision income was influenced by several factors. First, there was a decrease of $3.2 million in interest expense in 2020. Interest expense of $12.3 million for 2020 declined 20.6% from 2019. This was driven by a decrease in the rate paid on interest-bearing liabilities from 1.44% in 2019 to 1.08% in 2020.
This more than offset the decline of $1.8 million or 2.8% in interest income in 2020 compared with 2019. The net result was an increase of $1.4 million or 2.7% in net interest income in 2019 -- in 2020, I should say, over 2019. The changes to interest income and interest expense led to a decline in the net interest margin from 3.82% in 2019 to 3.52% for 2020. The interest spread also declined over this timeframe from 3.55% to 3.27% in 2020. PPP fees, totaling $1.8 million, were recognized in interest income in 2020. Excluding PPP loans from the net interest margin calculation, would have resulted in a margin of 3.49% for 2020 compared with the actual margin of 3.52%. The yield on the loan portfolio would have been 4.61%, excluding PPP loans versus the actual yield of 4.59% with PPP loans. And the yield on earning assets without PP loans did not change from the actual yield of 4.35% that included PPP loans.
Looking forward to 2021, there will be a $164.1 million in certificate of deposit decrease as they will mature or reprice in the first quarter at an average rate of 1.44%. If retained, these CDs should reprice at approximately 100 basis points lower, which is an annual expense reduction of about $1.6 million. On the income side, we anticipate a continued reduction in PPP loans, which were $49.3 million at December 31, 2020, and carry an interest rate of 1%. As these loans are forgiven by the SBA, the fees associated with these loans will be recognized in interest income, which in turn enhances the 1% yield.
At December 31, 2020, the amount of capitalized fees totaled $920,000. When comparing noninterest income on a 2020 versus 2019 basis, we see that noninterest income improved by 11.1% in 2020. Noninterest income of $5.9 million showed an increase in mortgage loan income of $630,000 year-over-year and totaled $1.1 million for 2020. This is an increase of 129.6% over 2019. Also improving in 2020 over 2019 was an increase of $190,000 in noninterest income, which was $1.3 million in 2020 and improved primarily from improved swap fee income.
Noninterest expense also reflected improvement in 2020 compared with 2019. Noninterest expenses were $33.7 million for the year ended December 31, 2020, a decrease of $2 million or 5.6% year-over-year. Salaries and employee benefits declined $1.3 million or 6%. In addition to the internal loan costs relating to the origination of PPP loans in 2020, which were $600,000, the closure of two branch offices in 2019 positively affected salaries as well as other expense categories in 2020, namely occupancy and equipment expenses. Occupancy expenses were $275,000 lower. Equipment expenses were $117,000 lower, and other operating expenses decreased $221,000. Other real estate expenses net were $152,000 for 2020 and decreased by $566,000 versus the same period in 2019. FDIC assessment was $639,000 for 2020 and increased $343,000 over 2019, mainly due to a $324,000 assessment credit received by the FDIC in 2019. Data processing fees were $2.5 million for 2020, an increase of $124,000 when compared with 2019.
Looking at the most recent reporting period, net income was $5.5 million for the fourth quarter of 2020 compared with net income of $4.5 million in the third quarter of 2020. Earnings per common share were $0.24 basic and fully diluted for the fourth quarter of 2020 and $0.20 basic and fully diluted for the third quarter of 2020.
Net interest income increased by $1.3 million in the fourth quarter compared with the third quarter of 2020. Net interest income was positively affected by both, interest income and interest expense. Interest income increased $822,000 on a linked-quarter basis, and interest expense decreased $464,000.
PPP fees increased $785,000 in the fourth quarter of 2020 and were $1.1 million. Additionally, noninterest income increased $53,000 on a linked-quarter basis, led by service charge income, which increased $164,000 and mortgage loan income, which increased $66,000.
Fourth quarter 2020 service charges and fees were boosted by a onetime payment of $102,000 received for account interchange fees. These increases to noninterest income were partially offset by a decrease in swap fee income of $117,000 in the fourth quarter of 2020 compared with the previous quarter. Offsetting these improvements to net income were an increase of $213,000 in noninterest expenses, which were impacted in the fourth quarter of 2020 by an increase of $291,000 in salaries and employee benefits, and an increase of $185,000 in income tax expense.
Salaries and employee benefits in the fourth quarter of 2020 were $5.3 million compared with $5 million in the third quarter of 2020. This was mainly due to a $161,000 increase in accrued vacation during the fourth quarter, reflecting lower vacation time taken by employees as a result of COVID-19. Offsetting these linked quarter increases was a decline of $57,000 in occupancy expenses, which were $758,000 in the fourth quarter of 2020. Data processing fees of $632,000 in the fourth quarter of 2020, reflects a decrease of $24,000 as does other real estate expenses net, which declined by the same amount. Equipment expenses of $320,000 reflects a linked-quarter decrease of $10,000.
With this detailed look at 2020 and a brief look at the fourth quarter of 2020 complete, I now turn the call back over to Rex Smith.
Rex Smith
Thank you, Bruce.
The events of 2020 have had a significant and in some cases, a lasting impact on the banking industry. The recognition of the value of a community bank like Essex, was shown in the strong growth of relationships that we experienced this year and the support of the communities that we serve. The trends we have seen in the past two quarters bode well for 2021. As we move forward, we will continue to manage the balance sheet for flexibility in multiple scenarios, keeping a cautious eye on the tendencies that may affect credit quality or interest rate risk. I am proud of our management team and our associates for what they have accomplished in 2020.
Originating 748 PPP loans in round one, granting payment relief for 248 customers, while growing loans at 12% and enhancing overall credit quality was no small feat. We have adapted to many new ways of enhanced customer solutions, creating stronger relationships with greater efficiency. What we have learned has helped us grow as a company and created new opportunities to add value for the future. We also increased our common stock dividend, and despite halting the program at the height of the pandemic, we repurchased over 330,000 shares of common stock in the last 12 months. We are currently working with our regulators to reaffirm the common stock buyback program for 2021.
We are far from through with the challenges of the pandemic, but both management and the Board are excited for the new year and are encouraged by all we were able to accomplish in these uncertain and trying times. We’ve worked hard to build a flexible balance sheet. So, no matter what comes our way, I believe our associates and the management team have proven that they can adapt and prevail.
I would like to thank all of you who participated in the call today for your ongoing support of the Company and ask that you follow up with Bruce or myself with any questions that you may have. Thank you. And we look forward to speaking with you again soon.
Question-and-Answer Session
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Casey Whitman of Piper Sandler. Please go ahead.
Casey Whitman
Good morning. I just wanted to make sure I’m understanding your disclosures around deferrals correctly. Bruce, do you have the balance remaining on deferral at year-end. And maybe with that, can you give us a little color on the deferrals that do remain? Can I assume that a lot of hotels, just any kind of color you can give us there?
Bruce Thomas
Okay. We, at 12/31, have $52.7 million in loans that are on extended payment relief. And I think Rex can probably offer some color on the types of credits that are in that $52.7 million. We did a total of $182.4 million, and regular payments resumed on $143.4 million, $8.4 million of those are within the PCI portfolio. But, payment relief still exists on 52.7% at year-end.
Rex Smith
Yes. And Casey, of the non-PCI loans, it’s right just under $51 million. It’s fairly diverse. There is one larger upscale restaurant group that has several stores in Maryland around Baltimore. And Baltimore City has been shut down for most of COVID. When they reopened, they did really well again. But it’s kind of hard to do take out with a high-end steak type franchise. We’ve got a couple of hotels, one being on the beltway over near the Andrews Air Force side, that’s about $5 million -- a little over $5 million. We’ve got another hotel that’s about $2.4 million. And then, it’s -- there’s a couple of things. There is an entertainment place, it’s a skating, bowling, whatever. We’ve got a couple of small businesses. We’ve got a food supplier, an office supply company. It’s spread fairly diverse. There’s couple -- there’s two child cares that are about $1 million each. So, it’s fairly diverse. And most of them are making -- they’re making some kind of payments, whether it’s interest-only or whether it’s reduced principal and interest. And of all of them, there is really only one that we had to kind of really work on restructuring, but we got additional cash collateral on that one. It was an entertainment group outside of Fredericksburg.
So, I feel fairly comfortable with what we’ve got extended right now. And hopefully, the vaccines, Virginia’s in1a, should be going into 1b, I hope, fairly quickly. Maryland is a little bit ahead of us. But, I think as things open up, we should be in pretty good shape on it. We’re keeping a very, very close eye on it.
Casey Whitman
Got it. And you guys, if I recall, were pretty quick to move a lot of these things into the classified category. So, were there, I guess, any notable migrations within the risk ratings this quarter that we should know about?
Rex Smith
Nothing going into the special mention or substandard categories. Most of the migration was either -- is going the other way, going through special mention back up into a pass grade, but nothing big going south.
Casey Whitman
Got it. I’ll just ask one more on a different topic. I guess, Rex, can you maybe fill us in on how you’re viewing the branch footprint at this point and the opportunities you might have on the expense side to drive efficiencies higher?
Rex Smith
So, I’ve seen a lot of what my competitors are doing, and I noticed like Atlantic Union closed a lot. I think, the good news for us was we never had a really expansive branch franchise in any one of our marketplaces. So, it wasn’t like we had a lot of expense tied up for the market share we’ve got. I think, we’ve probably got one or two outliers that we’ll be looking at. But, I think more importantly, Casey, what we’re seeing is our customer service center, which is handling all the handles online helps online and does all the 800 calls, their growth in new accounts has just been through the roof. So, I think long term, we’re looking at how just the mobile and the tech side is going to expand our business versus the bricks and mortar, and we’re really spending some time and effort on that. And I think that is paying off. So, there may be some small tweaks to expense reduction, but I don’t expect a whole life. As I said, we don’t have an expansive franchise considering the footprint we cover.
Operator
The next question comes from Stuart Lotz of KBW. Please go ahead.
Stuart Lotz
Well, first off, you guys are doing a great job on the deposit side. And I think, you’ve guided the last couple of quarters as we see CDs repricing lower. You’re going to really nice drop in your total deposit costs. Maybe looking into 2021, Rex, how -- and Bruce, how are you guys thinking about that core NIM kind of backing out the PCI and PPP fees that we expect to flow through in the first quarter?
Bruce Thomas
Certainly anticipated that question would come up. So, I look back. And in the second quarter, we had $132 million in CDs reprice at around 2%, $146 million in the third quarter at about 1.85%, $145 million, in the fourth quarter at about 1.55%. Now, of course, the rate is dropping, but the number of CDs that are going to mature and reprice in the first quarter, is much larger. It’s $164 million and it’s at $144 million. So, then, looking at the reduction in interest expense, in the second quarter, it was -- and this is on deposits, $237,000; in the third quarter it was $568,000; in the fourth quarter, $463,000. Now, of course, the rate is declining, but you would anticipate what matured in the fourth quarter. Now, we’re going to get a full quarter’s advantage of that repricing in the first quarter. And if you assume a weighted average in the middle of the 164 that reprices, that’s another pickup of around $200,000.
So, once again, in the first quarter, we should see a meaningful decrease in interest on deposit interest expense. The balances that mature thereafter do go down. It’s right at $91 million at 89 basis points in the second quarter. It’s right at $100 million at 79 basis points in the third quarter, and $105 million at 66 basis points in the fourth quarter. So, all that is $460 million at 1.01%.
The point of going through that exercise is to show that this is the last huge quarter that we’re going to see the 100 basis-point decline and the number is bigger. So, some of that juice will spill over into the second quarter. And then, we’re probably going to see that’s when our cost of funds is going to bottom out and stabilize, unless we can change the deposit mix.
And then, looking up at the top of the house with regard to interest income, if you back out the PPP fees in 2020, interest income was $15.4 million in the second quarter, $15.2 million in the third quarter and $15.3 million in the fourth quarter. And the point of that exercise is to show that that number is fairly stable. So from a -- but there is pressure in the pipeline in that regard.
So, I do think, in the first quarter, we’re going to see a larger decrease in interest expense. That may leak over than in interest income -- larger decrease in interest expense than interest income. And that is going to stabilize in the second quarter. And then, we’re going to have some pressure, I would think, in the third and fourth quarter with regard to the pure dollars in the net interest income.
Stuart Lotz
That’s very helpful color. So, it sounds like your anticipation right now, I mean, you’re down to, what, an 82% kind of loan-to-deposit ratio. How much of the CDs were pricing in the first quarter? Do you think you’ll retain or -- you have liver room to kind of run some of those off. So, I’m just curious how you’re thinking about that your loan-to-deposit ratio if get through the year?
Bruce Thomas
Right. We do monitor that CD retention rate fairly closely. And I would anticipate that somewhere in the 85% to 90% of those CDs that mature will be retained. I’m not so certain that at this point in the rate cycle that there is a bit of ambivalence and indifference on the part of depositors. I mean, -- so, they rate shop and they go from 40 basis points on a CD to 45. So, I think that when rates are much higher, the difference between a low payer and a high payer is much greater. Deposit rates are clustered fairly closely now. So, I think we’re going to retain a fairly high majority of those. We do anticipate, at some point, this influx of cash that’s been received and parked on our balance sheet, some of that is going to start migrating out. So, with that being said, we do look for a higher loan-to-deposit ratio throughout the course of the year, given that we can keep that pipeline replenished.
Rex Smith
Yes. And as Bruce said, Stuart, we’ve been running off anywhere from $12 million to $14 million a month in CDs. And we’re trying to sort of throttle that back a little bit, so we can retain more. And obviously, we’re looking at where the maturities are. And most of the folks are going somewhere between 6 months to 18 months. And we keep that spread out fairly evenly month-to-month now. But, there will be some more runoff in the short run, as Bruce said.
Stuart Lotz
Got it. Awesome. So, one more for me, if you don’t mind. Turning to capital. It does look like you guys reengaged the buyback this quarter. Is my math correct there? It looks like you bought about 184,000 shares. Just curious how you guys are thinking about capital deployment in 2021 as we -- with 10.3% TCE, and if the credit environment continues to improve?
Rex Smith
Yes. And obviously, we work very closely with our regulators on that issue because, as we said, regulators take the exact opposite approach of management and investors with capital, more is better. But, we’re working with our folks right now to talk about how much we want to rebuy and pull back in, in 2021. And we should hopefully have an announcement on that in the next month or so to start engaging because we do need to utilize that capital. We’re going to -- we constantly look at the dividend rate. We look at the buyback and where we’re going to be, so we can keep that return on equity up in a good zone. And we all -- we look if there’s any small M&A activity to look at for us, of course, it’s dead right now or everybody -- because everybody’s paper has been so knocked around. But we’re going to look at ways to utilize that capital to make sure that we get the return we need for our investors.
Stuart Lotz
Great. Sorry, can you just remind us how much you have remaining in that authorization, or if you’ve exhausted at this point, how large of an authorization do you anticipate announcing in 2021?
Rex Smith
We can’t say how much right now because we’re still talking to the regulators about it. But we have exhausted what we originally announced for 2020, we burnt that up in the first couple of days of January. So, we’re looking at the second round of it. And that’s -- we’re just going back, working with our regulators on what’s the right number for that.
Operator
The next question comes from John Rodis of Janney. Please go ahead.
John Rodis
Bruce, maybe just -- or I’m sorry, Rex, maybe if you could just talk a little bit about your outlook for loan growth this year. Obviously, the fourth quarter, you ended the year with some pretty strong growth. And I know you’ve talked about sort of what mid-single-digit growth in prior quarters. If you could just give us an update there.
Rex Smith
Yes. I think, we’re looking for 2021 to be around 8% growth, 7% to 8%, certainly. I think, it’s very possible, given where we are and looking at what possibly is going to happen with things opening up again. We’ve got a good group of lenders. We’ve got a good pipeline. We’ve got, obviously, very good markets that we’re in. So, that’s what we’re aiming at. I think it’s very achievable to get to that 8% number. So, somewhere certainly 7% to 8%.
John Rodis
And Rex, just to be clear, that excludes any impact of PPP, correct?
Rex Smith
Correct. Yes. That’s just the core portfolio. That’s taking out PPP.
John Rodis
Okay. And Bruce, maybe a question for you on the fee income line item. You saw a nice sort of linked quarter increase in service charges. Was there anything unusual there, or is it just kind of rebounding back to a more normal level?
Bruce Thomas
There was a -- and it’s noted in the press release, there was a onetime fee that we were paid on interchange fee of $102,000 that we received, visa-related fee. So, that did boost the service charges for the fourth quarter. So, if you wanted to take $102 million out of that, then you’re still looking at a bit of an increase, but the fourth quarter is usually a higher quarter, the highest during the course of the year. But, I would think that the service charges and fees income is going to go back to something similar to the third quarter level going forward.
John Rodis
Okay. And then, Bruce, maybe just one more question for you. The securities portfolio, you guys increased that. So, can you talk about how we should model the securities portfolio going forward?
Bruce Thomas
Right. Well, it is a bit of a challenge. But, the cash and due balances that we experienced throughout 2020 were much higher than what we’re accustomed to. And once those balances and deposits have been somewhat to our surprise and industry-wide sticking, we’re endeavoring to deploy those deposits in the form of securities which you saw partly in the fourth quarter. So, we will see some growth in the securities levels in 2021, and it’s going to be conservative. There will be some yield give up, although that’s hard to believe, 2% on a municipal now is hard to find, unless you go way out the curve. But, we’re going to probably deploy those in securities that will give us 0% risk-weighted assets, and would be floating rate in nature with some type of wrapper around them, such as SBA or student loan pools that have a 97% government guarantee.
John Rodis
Is there any sort of target as far as maybe percent of assets or anything you want to get to securities portfolio to, or -- I’m sure it’s dependent on deposit growth too.
Bruce Thomas
Yes. I think it’s more over than that level of assets, although we do have a target. And I don’t know that we’ve ever been below 15% of total assets in securities. It’s mainly trying to efficiently utilize what’s in cash, cash and due. Because if you have money at the Federal Reserve, or in our case, Community Bankers Bank or it’s not earning anything, so to speak, it’s less than 10 basis points. So, if you can take $50 million, that’s earning 5 basis points, you’re certainly better off even if you only get 1%, that’s a 95 basis-point pickup on a large amount of assets.
Operator
[Operator Instructions] The next question comes from Brody Preston of Stephens Inc. Please go ahead.
Brody Preston
Most of the questions that I had have been answered. I just did have one left, though, on the PCI portfolio. It looks like $8 million to $10 million in runoff this year. I was just wondering if we might expect a similar pace of runoff in 2021.
Bruce Thomas
Yes. That amps down typically about $7.5 million a year. So, of course, you’ll have some payoffs that come in over top of that. But that would be what we would be modeling here.
Brody Preston
Okay. And so, it sounds like -- it sounds like if you have some extra pay downs like you did this year, by the time we get to the end of 2022, that portfolio will be gone to low single millions, I guess, if I’m thinking about it correctly.
Bruce Thomas
Yes. Thank you very much for taking…
Rex Smith
It will sit around $23 [ph] million at year-end, I think -- as it amps down,
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.
Rex Smith
I’d just like to thank everybody for their support during what was obviously a very trying year for everyone. And remind you that Bruce and I are available if there are any follow-up questions, please feel free to reach out and contact us. And thank you so much for your ongoing support.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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