Q3 2019 Earnings Call
Welcome to chorus call leasehold and operator will be with you shortly.
Chorus call conference would you.
I would like to community bankers Trust.
Your name.
Well first name David.
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Yes.
Same brown.
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Your company.
Hi, Yara A.I.E.R.A.
When you and now thank you.
Hey, 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.
For furnishes to the Securities and Exchange Commission.
You can access all of these documents through our website at Www Dot CB Trustcorp dotcom.
Last year at this time I reported that net income year to date was higher than it has been since the formation of the company in 2008 and that was $10.3 million I'm excited to report that we have been that number for 2019 by over $1.3 million.
Net income for the first nine months of 2019 is $11.66 million. This equates to an annualize our ROA of 1.10%.
Annualized return on equity is 10.71%.
There were numerous positive factors that contributed to the success of the quarter and most of these trends are sustainable for the future.
Loan growth, excluding PCR loans increased $72 million or 7.5% year over year.
This is the first time in two years that we've seen this much growth at this point in the year.
And the growth was not from being aggressive on either rate or credit quality.
The yield on loans increased to 5.03% despite both the competitive nature of our markets and the change in loan mix to more adjustable rate loans.
Credit quality continues to be a strong focus for both new loans and the existing portfolio.
Total nonperforming loans or just over half of what they were at the beginning of the year.
This includes moving our largest and oldest nonperforming loan into Oreo to push for vinyl resolution.
Current credit quality metrics are among the top of our peer banks.
The bank also continue to increase its growth in demand deposits non interest bearing deposits grew $24.1 million or 15.2% year over year, representing 15.5% of total deposits compared to 14%. This time last year.
I believe this shows that we can continue at double digit growth in these accounts, which will continually decrease their cost of funds moving forward. We also continually focus on our efficiency and controlling costs as part of that we continually and analyze our branch system and alternative delivery channels.
All of our branches, particularly our new offices continue to grow and that has helped strengthen our deposit mix.
We're also realizing rapid expansion in the use of our digital platforms and the customer service Center.
All of these factors combined accomplished control overhead while expanding our market share.
How much progress has been made we're pushing a sense of urgency with our disciplined approach to cost controls to make further improvements.
Ill now turn the call over to Bruce to cover more financial highlights good morning, and we're very excited to present positive results for the third quarter and first nine months of 2019.
I'm going to open my comments this morning by looking at returns.
First book value of our common stock on September Thirtyth, 2019 was $6, an 83 cents per share.
This compares with $5.96 on September Thirtyth 2018.
This is an increase of 87 cents per share or 14.6% year over year.
No matter, where bank stocks trade in relation to book value and earnings annual growth of this nature over the long term will prove beneficial and should be unacceptable return to shareholders.
Additionally, in 2019, we resumed paying our shareholders our dividend.
Dividends paid year to date totaled nine cents per share the combination of book value growth and cash dividends to shareholders.
Compares favorably with our peers.
Net income was given a boost in the third quarter of 2019 by a $1.1 million payoff of of purchased credit impaired loan with a carrying value of zero.
This means that the entire payoff was booked to interest income as there was no principal balance remaining on this loan.
Payments of this type in future periods will be periodic but unpredictable, but we'll nonetheless, we are recurring income item.
The receipt of cash basis income on the PCI portfolio due to improved economic conditions. Subsequent to the acquisition date in 2009 has resulted in better than forecasted performance and may produce recurring but unpredictable income over the remaining life of these loans.
The two pools within the purchase credit impaired loan portfolio that have zero carrying values have over $5.8 million and potential revenue in future periods.
Due to your payments to these two loan pools will increase the projected yield of 13.1% on the PCIA portfolio.
Likewise, the other for pools within PCIA, which have carrying values totaling $34 million at September Thirtyth also have potential income of $5.1 million above the current forecasts that would if realized have a positive impact on the projected.
Yield.
When and if these payments are realized is unpredictable, but certainly beneficial and meaningful as pointed out in this mornings press release.
One other item of note that occurred during the third quarter of 2019 was the migration of a longstanding nonperforming loan into other real estate owned.
As a part of this transaction the bank paid delinquent real estate taxes, and the amount of $624000. Thus, having a negative impact on net income returns and earnings per share as the entire amount was expensed in the current quarter. However, we look forward to final rule.
Solution on this matter.
Basic earnings per share were 21 cents for the third quarter of 2019, compared with 16 cents in the second quarter of 2019.
Nine months EPS was 52 cents for 2019 and 47 cents for 2018 the year to date increase is 10.6%.
Annualized return on equity was 12.24% for the third quarter of 2019 versus 9.79% for the second quarter of 2019.
Annualized year to date Aro he was 10.71% for 2019 and 10.79% for 2018.
Annualized return on assets was 1.29% for the third quarter of 2019.
That is the highest ROI yet to be recorded by the company since the inception of its current structure in 2008.
This compared with our ROA of 1.01% in the second quarter of 2019 annualized nine month ROI of 1.10% for the first nine months of 2019 compared with 1.02% for the same period.
And the prior year.
The net interest margin clearly got a boost from the cash payment in the PC portfolio.
I will compare both with and without this payment. The prior periods. This is not to infer that the payment was a one off transaction, but that it had a meaningful impact on the net interest margin and has been and should be a recurring contributor to ongoing earnings I will separate the two.
To show the interest piece of the margin for the comparison periods.
The third quarter of 2019, net interest margin of 4.02% compared with a linked quarter net interest margin of 3.69%.
This is an increase of 33 basis points or 8.9%, excluding the cash payment to the PCIA portfolio. The margin would have been 3.70% in the third quarter of 2019, and an increase of one basis points compared with the second quarter of 2019.
For the nine months ended September Thirtyth 2019, compared with same period in 2018, the net interest margin was 3.84% compared with 3.76% an increase of eight basis points or 2.1%.
Excluding the cash payment to the PC portfolio. The margin would have been 3.73% a decrease of three basis points or eight tenths of 1%.
For the year over year quarterly comparison, the net interest margin of 4.02% in the third quarter of 2019 is a 25 basis point or 6.6% increase over the third quarter of 2018.
Excluding the cash payment to the PCR portfolio. The margin would have been 3.70% into third quarter of 2019, a decrease of seven basis points or 1.9% compared with the third quarter of 2018.
The net interest margin, excluding the cash PCR payment shows a slight increase on a linked quarter basis, and only a minimal decline on a year to date and year over year comparison with 2018.
This has been possible due to growth of our non interest bearing deposits and shareholders equity as well as loan rate floors in place the higher than peer yield on the securities portfolio and actions we've taken on the funding side to lock in the best funding available and our ability in future periods to.
Reprice, those quickly and a lower rate environment.
Non interest income was $1.5 million in the third quarter of 2019, an increase of $60000 on a linked quarter basis.
While securities gains declined by $188000 in the third quarter mortgage loan income increased by $76000 and was $176000 for the third quarter of 2019.
Service charges on deposit accounts also reflected a linked quarter increase of $51000 and were $758000 in the third quarter.
Also non interest income benefited in the current reporting period from $120000 in life insurance proceeds.
Non interest expenses totaled $9.2 million for the third quarter of 2019, which was a linked quarter increase of $239000.
This increase was precipitated by a net increase of $460000 in other real estate expenses, which included the payment of delinquent real estate taxes on a nonperforming loan that was moved to Oreo in the third quarter of 2019.
In summary, we look to remain nimble on the liability side and take advantage of shifts in the yield curve.
We're also looking to build momentum and loan balances to get 2020 off to a start where we are slightly more leverage than we are at the present time.
This will help our net interest margin as well continued emphasis on building non interest bearing deposit balances.
Lastly, we are emphasizing mortgage generation, which is reflected in our non interest income and also continuing to lower our efficiency ratio with that I'll turn the call back direct Smith.
Thank you Bruce as a management team. We are pleased that our hard work focus and attention to detail resulted in record earnings year to date.
Over the past several years air improvement has been substantial in all key areas and I see no reason why it cannot continue.
The balance sheet is flexible and slightly liability sensitive going into a predicted consistently lower rate environment. Additionally, we continue to see strong cash flow from the PCR portfolio and our model show that it will continue for a number of years.
Credit quality is better than it has been in quite some time.
That coupled with the delayed implementation of Cecil until 2023 will mean and provision expense should remain relatively low.
Our newer branch offices digital banking services and customer service center continue to gain market share and are contributing positively to our deposit mix cost structure and overall bottom line.
This is important as we continue to strengthen our efficiency, while expanding the balance sheet.
The community Bank model is working quite effectively and we are grateful for the support and enthusiasm from our diverse markets and the shareholders that live in them.
That support is evident in our ability to grow loans and deposits in our markets, while holding our net interest margins steady.
The household and small businesses, we have the pleasure working with every day makeup a large part of our shareholder base and we appreciate all the support they give us and our communities.
Our goal has always been to consistently enhance the franchise and therefore shareholder value.
And I believe that we're accomplishing that goal.
Certainly the overall metrics in trends would point to success and I hope that you are investors feel the same way.
I look forward through the rest of 2019 and more progress in 2020.
I. Thank all of you who participated in the call today and for your ongoing support of the company.
We will now open the call for any questions.
Thank you we will now begin question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Using speakerphone, please pick up your handset before parsing the keys to withdraw your question.
Star then queue at this time, we will pause momentarily to assemble a roster.
Thanks question today comes from Casey Whitman of Sandler O'neil. Please go ahead.
Good morning Maxim group.
Good morning, I think.
So we saw non PCI loan yields actually come up this quarter and around 5% can you give us an indication of linear new loans are coming on and do you see any pressure on loan yields with another.
Potentially.
This month or anything you can keep putting loan yields at around 5%.
I think we're going to see some pressure downward on the casing.
It's well we've already felt some pressure early in September we match at close out where we were in the pipeline, but what's in the pipeline right now is a little bit little bit south of that which is okay. Because we're looking at some repricing on the liability side that though.
Got a catch it up so overall I think the margins got to remain relatively stable, but we are going to see some downward pressure on that on that loan yield.
Okay.
Okay, and then you talked about the change in loan mix to more adjustable rate loans I guess can you remind us just how much of the loan book is adjustable versus six right now.
I have that.
It's it's almost a 50 50 split I'm going to give you the exact numbers here.
Just a minute but.
It's fairly fairly representative here we go.
Thanks.
200, and while our SEC.
Yes.
So Paul I'll get back to you on that Casey I have that here, yes, Harry gas.
It's a it's closed its fairly close to 50 50 here okay.
Okay, great. Thank you and then.
It sounds like with deposit costs coming up pretty modest in this quarter, but it sounds like.
And we'll probably reached the peak in for deposit costs, the assuming rates keep keep going down is that accurate.
Yes that is accurate case Parago Casey.
Okay.
Total loan portfolio, which includes the PCI portfolio and let's go with balances because that's really more meaningful Dan.
The count, but count wise.
50.7%, our variable 49.3% fix but.
Whereas the rubber hits the road is imbalances I would assume so variable rate is 60.2% and fixed rate is 39.8.
If you exclude the PCR portfolio.
It's a little higher variable, it's 62.6% variable and 37.4% fixed.
Sorry took me amended to get to that I've got so much paper in here because I want to be able to answer every question and I can't give my hands on a great.
No. Thank thank you for the for the color I'll just ask one more in let somebody else jump on but maybe can you just remind us.
Our strategy for branch closures or openings next year.
Yes, where we're we look at it constantly we've got a couple of potential. So I think anything we're looking at right now are in existing markets, where we just feel like there is some some fill in need but it's not.
I think we've probably looking at net net gain of one new branch at best but probably.
It's going to be about the same number.
We've we've been pretty pretty aggressive on closing the ones that have been around level longer that just haven't made the gray, but the ones. We have got right. Now all showed good progress are all showing good good gains in deposits and some consumer loan mix. So right now it looks like the core base is doing doing very.
Well.
Great. Thank you for taking my questions and nice quarter.
Okay. Thanks Casey.
Again, if you have a question. Please press Star then one.
Your next question today comes from John Rodis with Janney Montgomery Scott. Please go ahead.
Hey, guys good morning.
Morning, John Hi, John .
Big Baseball game Tonight.
[laughter].
Yes, and the cheapest ticket as we're standing room only ticket for 1000 Bucks if you want to gap.
And these news will they were loans right. We were little torn last two nights ago, because verlander schrum right outside of Richmond, Virginia and of course Zimmerman diverse basement for the nationals as an old Universal Virginia, guys, and we had to Virginia guys face in each other off and it actually played in college Verlander had pitch for old Dominion unit.
Oversee against Zimmerman when he was that you fee.
It's a lot of local color there.
Should be upon weekend should be upon weakening.
Bruce Bruce maybe just back to your comment.
During your prepared remarks about entering 2020 with more leverage could you maybe just give a little little more detail on those loans.
Yes.
Yeah.
We have.
You know the conservative thing to do in banking as you go to anticipate and grab your funding and then you send alone guys out.
Talent to make some loans while.
To some degree we have a reverse.
Process going on and we have.
Cotton conservative on our certificate pricing, we're okay if.
Some of the certificates that we have exit if they're not.
Customers with a total relationship with us if their rate chasers.
Thats okay.
And we want to and job because we have a huge.
In relation to the total balance sheet.
Up very ample liquid securities portfolio, where we're okay with entering the loan to deposit ratio up.
Higher than it currently is.
In that regard in the next 12 months, we're going to have $448 million from October one of this year to September Thirtyth of next year.
$448 million of Cds.
That.
We will have an opportunity to reprice in net blended.
Cost on those is probably somewhere are very close to 210.
We look to drive that cost down as Brexit talked about the pressure on.
The long pricing I think.
In recent quarters, the beta has been higher on the liability side.
I think.
In a good way if rates go down the beta.
It's still going to be high on the liability side, we're going to be able to reprice.
We'll see a.
More of a drop on the liability side in terms of cost down we will see a drop in yield on the asset side.
Okay.
As far as the loan deposit ratio. So you ended the quarter at about 91%, how how high would you be comfortable taking that.
Bruce and I have a debate about that he gets a little apoplectic went out when I say numbers, but we're probably going to be sitting around like 90 to 93.
And.
Well above that we started to get a little.
More conservative I think but that's that's probably where we'd be where we.
So you're not going above 100% or anything.
Now we will not do that we were going to be in the mid ninetys. It at that worst case scenario.
And then on expenses, obviously, a little bit of noise with the real estate taxes, and then the I guess, the FDIC credit, but if you if you back those two.
Sorted net those two line items and back them out using round.
By my calculation expenses of around 8.7 billion for the quarter and that was sort of inline with what you said last quarter is sort of 8.7 still a good number going forward on expense yes.
I think thats the right number John .
Okay, and then and then Bruce one final one for you just the tax rate.
Inched up a little bit and I think you said it could do that if you sold some of your Muni Securities. So is 19% a better rate going forward I think so I anticipate that question.
Not only.
Did I sell some.
And there are embedded gains unrealized gains and.
Virtually every municipal bond, our whole because of supply and demand.
Metrics on those are favorable for people that own season paper.
But I have in my 30, plus year career I've never seen municipal market as efficient with regard to calls as it is now if you have on municipal bonds and its callable youre going to get your cash back.
Yes.
So that being said it is not a my opinion not the most.
Fortuitous time to purchase.
BQ paper.
And because it's getting call.
Just by nature.
The percentage to the total portfolio is going to go down and to total revenues. So yes, the tax rate.
Well in Chuck.
Okay. Thanks, guys. Good luck Tonight. Thanks, John .
Hi, Ken Starr loan to ask a question.
Your next question today comes from Stewart lot of KBW. Please go ahead.
Hi, guys. Good morning, Martha Stewart Stewart.
The color on the margin, so far and I know Bruce talked about last quarter.
I'd repricing and that you had about I think it was half of the current CD book.
Be repricing by year end.
Just curious where the Cds are shaking out.
And where where her experience in about a 90% retention rate and muttering and repricing Cds.
And they're coming on the books.
The current currently.
About the same rate that they're maturing for but over the next.
As we get into especially next year current rates hold.
They're going to be maturing and repricing.
As much is 25 to 30 basis points lower than they are now.
Okay and that's with.
Summing the October cod.
Got it down probably 180 190 range.
Yeah. Thanks.
Well, I think where they're coming in November and December we're going to get.
We're going to get 15 basis points, just where we are right now before the October cut.
So.
Bruce said.
Where we were at the beginning of October into September was pretty much almost equal for the what was coming off and then going back on but as we get into November and December it's 10, or 15 basis points difference on the goods.
Got it.
And then on money markets I think so far from from other peers, we've seen this quarter.
And money markets been kind of wanted for one of the highest paid is on the way down.
Are you guys make any except from these pricing right now and how.
In terms of growing that.
Part of the deposit base.
The outlook there.
Well, we never raise the money markets up very much. So we don't have a whole lot of downward Ron in those money markets, they're relatively stable and we don't have we don't have a whole lot of.
Outlook as far as that being a big big push on deposit side. It's we've kept those relatively stable and I think thats, where they're gonna be.
Okay.
Yeah.
And then I guess, one more on the asset side.
Appreciate the color on the loan yields in where new pricing.
Coming in.
So if you back out the PCIA income from this quarter.
That kind of stick your core NIM was still up one or two basis points.
And Bruce you talked about some decent amex of that PCR portfolio and how revenue we could see similar quarters to what we got this quarter I'm coming up is that.
What lead you to believe that.
Is that you know another 1 million in the fourth quarter from piece you guys that.
We expect that and now now that the law that was one of the larger loans, maybe the largest loan and.
Either of the two pools that had a zero carrying value.
The other lines within those two pools are more granular.
In fact, most all of the loans.
Would be smaller than that particular alone.
It just so happens that the largest loan in.
I think the largest loan in a zero carrying value portfolio.
Paid off so.
The dollars are out there if it performs it's just more granular nature.
Okay, and it's as we said stood at its sort of it's unpredictable. It's it can be lumpy, but it is there and that's how we've seen in the past we've seen some some of the analysts sort of discount the PC I'm kind of going to add but you know that portfolio. At 30. Some may is it's going to have a minimum.
Yield of 13, something and then every little extra payment that comes in pushes that you are way up so.
It's a very positive piece of the balance sheet.
$34 million of carrying value and.
$10.9 million.
Our non accretable yield, which is potential income above the projected yield of 13.1% and now that's over all along life.
Okay.
Okay.
Okay. So.
Putting that on well sorry, sorry above the that back gave you a mixed bag, it's actually 6.7 million.
Above.
The projection of 13.1, but in any event.
So we can expect that run rate together I think it's been averaging about one.
1.2 to 1.4 million for the last.
You know.
And quarters that kind of what we can expect in fourth quarter and the point warning.
Yes, Paul if you just put it puts a 13% yield against that portfolio balance and.
Probably six 7 million running off for a year.
That's a that's the master.
Okay.
And our goal, but just the first number I gave you was correct above.
The projections as I've stated in my comments that totals 10.9 million so.
That is potential revenue overall, a long life still remaining on those loans, but.
Well as good news half right and it's a little hard to predict because these loans has been around for a while as if rates continue to dropdown and values hold.
No not these folks come into re fire do certain things will move that yield certainly upward. So we know it's at 13, plus and whether or not it goes up from there just depends on how it reacts to in this and this rate environment and if values still.
Richard color.
Sorry last one from me.
Turning the growth.
You guys are up well on your way to hitting the 6%.
Loan growth target for this year.
Just curious where your outlook is for next year going into an election year.
Are you seeing anything the market and that gives you a pause for burn or you still feeling pretty comfortable with.
6% growth rate in 2020 beyond.
I am comfortable that growth rate and I think we can do a little bit better actually because right now we're sitting at seven and a half and as I said last two years I think two years ago, we had negative growth rate through the third quarter and the other years like 2% sort of et cetera, and a half and going into a fourth quarter, where we always do relative.
Well as people try to get tax exchanged deals close and other stuff close but by year end, we'll see good growth and I think going into even with an election year. Yeah. We've got very strong market. So we play in and they always tend to do fairly well so I'm pretty excited about it we've also.
Got you know, there's going to be a big merger closed here.
Sometime.
By the fourth quarter is what we're hearing with BNP Suntrust steel and that's going to put a little turmoil in the marketplace and we're seeing a little bit of that right now and I think thats going to that's going to help us to.
Awesome.
Thanks for your time into guys and congrats on nice quarter.
Thank you.
As there are no further questions. This concludes our question and answer session I would like to turn the conference back over to Rick Smith for any closing remarks.
I'd like to thank everybody, who participated today and just remind you that we are available on note. There were a lot of questions today, they're good questions. If anyone has any follow ups. Please feel free to give Bruce and I call. It and we thank you for your time this morning.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.