Q3 2020 Community Bankers Trust Corp Earnings Call
Good day and welcome to the community Bankers Trust Corporation third quarter 2020 earnings Conference call.
Today, all participants will be in a listen only mode should.
Should you need assistance during todays call. Please signal for a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
If you ask a question you May Press Star then one on your Touchtone phone.
You withdraw your question. Please press Star then too.
Please note that today's event is being recorded.
At this time I would 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 third quarter and year to date 2020 for community Bankers Trust Corporation, which is the holding company for Essex Bank.
I will start with our normal 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 the earnings release and.
In a 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 Dot C.B. Trust Corp. Dot com.
The results for the third quarter continued to show improvement. Despite some lingering effects of the COVID-19 pandemic.
As we move into the fourth quarter, we are seeing many positive trends.
But I believe we will not know the complete impact until the mid year of 2021.
But they finalized the extent of its participation in the paycheck protection program or P.P.P. lending this quarter originating in total over 795 loans amounting to $87.2 million.
Process for these loans to be fully forgiven by the United States Treasury, that's been difficult and time consuming which has extended the time, we have them on the balance sheet, but progress is being made.
So far through mid October we have 92, P.P.P. loans approved for payments.
Totaling just under $3 million.
We expect a meaningful amount of these loans to be forgiven by the end of the fourth quarter, which is when we get the remaining fees on those loans credited to the back.
We also continue to work with our loan customers to whom we granted some level of payment Lilly and we have seen a decrease in the level of payment relief from the previous quarter.
We granted relate to loans totaling $177 million.
<unk> represented a little over 14% of the total amount of net loans.
As of September Thirtyth 2020, approximately $75 million of these loans have resumed their normal payment with the majority of the remaining $101 million did was their normal payments in the fourth quarter of this year.
Despite the time involved by a loan production groups and PPP lending and working with bars on payment really loved growth without the PPP loans was 4.3% year to date annualized and 5.6% year over year.
Right a quality remain strong and there was no provision expense for the core EPS.
Delinquencies and total nonperforming assets continued to decline.
The allowance is coverage to total loans is 1.13% if you exclude the PPP lunch.
Even though the credit consequences of the pandemic have not been as dramatic as originally anticipated.
We continue to closely monitor the portfolio by loan type business.
Business segment exposure and guarantor strength to manage any potential problem areas in concentrations or high risk industries that might experience problems in the future.
Currently we feel cautiously optimistic about our exposure.
Deposit growth continues to be positive as total deposits grew $5.7 million for the quarter.
Being led by $28.5 million increase in checking savings and money market accounts.
That's allowed us to run off $22.8 million of high cost certificates of deposits during the quarter.
Year to date checking savings and money market deposits grew by $198.2 million.
Over the next two quarters, we will reprice over $300 million in certificates of deposit.
The repricing should reduce those rates by north of a 100 basis points.
This will have a significant change in our cost of funds going forward.
We continue to work on holding the margin despite asset repricing pressures.
The margin decreased slightly in the third quarter. We believe it is approaching the bottom and should slightly increase as we repriced the liability side.
The result, overall was an increase in net income, which was $4.5 million for the quarter ended September Thirtyth 2020, compared with net income of $4.2 million in the second quarter of 2001.
Now I would like to turn the call over to Bruce Thomas.
The financial results in more detail.
Thank you, Rob and good morning, everyone. Thanks.
Thank you for your continued interest in the performance of our company.
Rex touch briefly on our net income of $4.5 million for the third quarter compared with 4.2 million for the second quarter.
Let's look briefly at the nine month income up 2020, compared with 2019.
This will give us a sense of direction in which we are headed.
Net income of $10.1 million for the first nine months of 2020 reflects a decrease of $1.6 million versus the first nine months of 2019.
Those results are strongly influenced by the higher level of provision of $4.2 million that we have taken thus far in 2020 as the industry recognizes the heightened risks associated with the unprecedented cold at 19 pandemic.
That's provision level is $4.1 million greater than what was expensed in the first nine months of 2019.
On a pretax pre provision basis, we compare favorably to 2019 as the nine month total for 2020 and $16.7 million compared with $14.5 million for the same period in 2019.
This reflects an increase of $2.3 million or 15.8%.
What I will do next is examined the reasons behind the improvement in earnings on the pretax pre provision basis.
First net interest income for the first nine months of 2020 compared with 2019 has declined very slightly.
0.62% or $233000.
However, there are headwinds that point to an uptick in coming quarters.
The first is a linked quarter look.
[noise] reflects an increase of 2.9% in net interest income driven by a decline of $555000 or 16.4% in interest expense.
This decrease in interest expense was $353000 greater than the decrease in the linked quarter interest income of $202000.
The decline in interest expense was driven by a decline in rates paid namely on certificates of deposit.
The cost of Cds on a linked quarter basis declined from 1.78% in the second quarter of 2022, 1.46% in the third quarter of 2020.
Additionally, upcoming in the fourth quarter of 2020, there'll be maturities of $147.3 million in certificates with a weighted average rate of 1.52%.
That is 24% of all CD balances at September Thirtyth 2020.
To get a sense of where these deposits may reprice.
Our current six month CD is 0.20% annual percentage yield.
The 12 month CD is that 0.35% a P y.
The 60 month, its price that 0.75% a P y.
This won't give also left once again and the cost of funds, which declined from 1.19% in the second quarter of 2020% to 0.97% in the third quarter.
Our most recent data indicates a retention rate of these deposits is approximately 80% of maturing certificates.
Also $462.9 million of our variable rate loans contained a floor rate currently at a weighted average rate of 4.43%.
Oh that total 81% are already at the current board right.
Another 30% of our portfolio is comprised of fixed rate loans out of yield of 4.76%.
As a result of the combination of these two dynamics on both sides of the balance sheet, we look for an improvement to our margin beginning in the fourth quarter of 2020 look.
Looking at noninterest income for the first nine months of 2020, compared with 2019, we see a lower level of service charges.
12.4% driven by a decline in transaction volumes.
Industry data suggest our results are in line with our parents.
On a positive note our mortgage loan income of $822000 is up $484000 or 143.2% year over year.
Rates are still near historic lows and continue to favor the real estate market.
Other non interest income is up $230000 or 30.9% year over year and was $974000 for the first nine months for 2020.
The increase was driven by a $261000 increase in swap fee income.
The low rate environment has rate made us an attractive feature for both our borrowers and our lenders and the pickup in fee income is attractive when loan yields are at current levels.
Non interest expenses have declined $2.1 million or 7.6% year over year.
Through nine months due to the P.P.P. loan volume the internal loan origination costs have accounted for $552000 of this total decline.
However, it is important to note that excluding this item our non interest expenses are still lower year over year by 5.3% or $1.5 million.
You May wonder what drove this and is it sustainable Eric.
Our employee benefits are $568000 or 15.9% down from the first nine months of 2019.
We have worked hard to obtain the best Bang for our bought in this area and the changes made when shopping for 2020 employee benefit now shows.
Occupancy expenses are down $242000 or 9.1% equipment expenses are down $105000 or 9.1%.
Advertising costs are lower by $150000.
And credit expenses are lower by $120000 or 22.6%.
The only brought expense category that we measure internally that is all over $100000 year over year is FDIC assessment, which is calculated by formula and is up $139000.
We expect the current expense levels and employee benefits occupancy equipment expenses and advertising <unk> only increased nominally in 2021.
Non interest expenses, most likely wildcard for the near future seem to be any arena of credit and Oreo expenses.
However, we continue to see a decline in our level of nonperforming assets and many of our borrowers as noted by racks that received payment relief earlier in 2020 have returned to or are expected to return to regular payments by year end.
Nonperforming assets to loans and other real estate are 0.73% at September Thirtyth 2020, and are down from 1.01% one year earlier.
Our coverage ratio of allowance for loan losses to non accrual loans is also strong and stands at 292.55% at September Thirtyth 2020.
We're looking forward to the fourth quarter results and hope to head into 2021 with the momentum on our balance sheet and performance drivers on upward trends with that I turn the call back over to Rex for closing comments.
Thank you Bruce.
Third quarter continued to show progress from the beginning of the year as more businesses are open and doing better than we all originally anticipated.
We're keeping a close watch on our credit trends and credit quality as we navigate forward, while supporting our customers and our associates and our communities.
We're also mindful of the shifting pace of customer trends and channel usage as we maintain high service quality standards, while remaining cost efficient.
As I mentioned last quarter, our growth rates in online account opening for the customer service center and in mobile banking usage or well exceeding our expectations.
We're not done with all the effects of this pandemic, but we're very encouraged about where we are and where we're headed going into 2021.
Net interest margin should begin to rebound as we have significant repricing of extra tickets of deposits for the next several quarters and that combined with the pay off of the low P.P.T. loans will have a positive impact.
We have also reinstated our share buyback program as well as increased their dividend from five cents a quarter to six cents a quarter starting with the next scheduled dividends.
We have made these moves to better leverage our capital and to continue to enhance shareholder value.
We hope that you were pleased with the positive trends in the company and we thank each of you for your ongoing support.
I will now open the call for any questions.
We will now begin the question and answer session.
Alaska question, You May Press Star then one on your Touchtone phone.
If you're using a speaker phone please pick up your handset before pressing the keys [noise].
If at any time. Your question has been addressed and you would like to withdraw it.
Please press Star then too.
At this time, we will pause momentarily to assemble.
Today's first question comes from Casey Whitman with Piper Sandler. Please proceed.
Good morning.
Good morning, Jason.
Okay.
First I just wanted to be clear on the NIM guide for improvement does that include PPP loan forgiveness, because I think you said, you're thinking that that might come in fourth quarter says that.
It includes some of those accelerated fees that you might get from that or are we just sort of looking at the core margin, excluding that which would have been running you know like around 340 this quarter.
Oh without.
You want me to take that right.
Yeah Casey.
Casey I I think the core margin.
And then the other itself with the PPP loans should see an uptick in the fourth quarter.
You know we had a 500, we had a $600000.
Roughly pick up in interest expense on time deposits on a linked quarter basis.
And I would anticipate something similar in the fourth quarter.
And.
No that that resulted in a 22 basis point.
Reduction and a 23 basis point reduction and.
22, excuse me in the cost of bonds, we should experience.
[noise] something similar in the fourth quarter in terms of the dollars that are I'm going to go down in interest expense.
And with a 409 in the third quarter on the yield on earning assets or even with the PPP.
There shouldn't be a tremendous amount of degradation.
Got to that number certainly there will be some just given where the rate environment as new loans and.
Decrease securities yields and so forth, but but not to the degree that we should reflect the pick up on the liabilities side now if the PPP do exit the balance sheet and.
We replace that.
What's a better yield or can let higher cost phones.
Leave the balance sheet on the other side then that's an add an added bonus and would add even more pop to the market.
Understood. Thank you for clarifying that.
It doesn't move the credit I, just want to make sure I understand the deferral commentary correctly. So.
You in total had done $177 million worth of deferral sounds like 75 million. It was down payment. So that mean, you've got 102 million or so left under federal so.
I guess first you know if you've got 34 million that has three extended its.
Does that mean that you actually had 110 million or so that had reached candidate for health care into your Redefault rates at this point is maybe around 30%.
And then maybe Rex to be helpful. If you could just give us an idea of how much you expect to have rolling off and you know between October and November and I think you mentioned you know the big portion should be coming off in the fourth quarter. So maybe if you had that that'd be helpful. Thanks.
[noise] yeah.
So we we did have a few loans that were you know were on I'd say about 15% of that original 176 were on three month deferrals.
And.
About 50 million of that.
Got another three months, so we roll that in so.
So its.
Most of these are going to come due.
In November and I'd say between November and December were going to have about 90 of about 101 million.
That should resume payments.
And we really you know last time I think I talked about there was about 17 million we were kinda concerned about as I look at it now that's moved down to about 10 million, there's about five and a half million in hotels about two and a half in restaurants.
And there's about a little bit the rest of that kind of scattered between some some business lending that we're keeping a close eye on for whether or not you know they can resume or whether they would roll into a workout issue but.
Overall, it's been very positive we've gotten a lot of good feedback and I think you know.
It's a better situation than what we thought certainly last quarter.
Let me add a if.
You don't mind that.
It's later in the press release, when you may have missed it from the bullet point, but.
Oh, no 176.9 million that originally sought a payment relief.
12.8 million of those were in the P.T.I. portfolio. So the non <unk> portfolio.
Total deferrals were 164.1 million.
Of the 74.8 million that resumed payment on 931.7 million was P.C. I.
So non P.T.I. deferrals at September Thirtyth were 91 million MPCI were 11.2 and that gets you to 102.1 and the reason why that's an important distinction is because the the P.T.I. loans.
All right cool and whatnot, a reach troubled debt restructurings data.
[music].
I think that that should be helpful. Information of course, we wanted to tell the world.
The total for every one that we gave some some relief to but looking down the road its important to segregate piece.
That's helpful. Thanks, guys I didn't realize that I'll, let somebody else hop on.
Thanks Casey.
Thanks Casey.
The next question comes from Brody Preston with Stephens. Please go ahead [laughter].
Hi, good morning, everyone.
Hey, rowdy.
I actually wanted to just circle back real quick on the provision.
I had to hop on a little bit late I'm, sorry, if you if you touched on it.
So I understand you know net recoveries this quarter, you know and the and the risk ratings remained relatively stable and so I guess it just sounds like maybe you you had sort of pushed the qualitative factors as far as you, possibly could in the in the model and you know until we see some actual.
Degradation in the loan portfolio is it fair to assume you're not gonna be provisioning Oh heck of a lot moving forward.
Oh that that would be correct, we have an incurred loss model.
And of course.
Rich Grays and migration and deterioration in credit and charge offs and the like.
Weighed more heavily than subjective factors.
So you are correct in that until we see some migration in the other direction.
You know it would be based on loan growth more than.
Subject to factors.
Right right and you all had pretty decent loan growth. This this quarter just given everything that's happening with the economy.
Just wanted to get a sense for what the the CRT pipeline looks like moving forward and if you sort of expect similar gross.
Go ahead.
Yeah, I think we do right it looks you know.
And normally the fourth quarter for us because you know well stay does tend to have a lot of trades go on.
For tax implications and other reasons.
Close to year end.
It's not I will say, it's not as robust as it's been in the past in the pipeline, but it is still you know on exactly what we what we're considering it looks pretty good.
I think it's going to be a decent fourth quarter core originations.
Okay.
Great and then with the with the Cds that you all have repricing just just given the deposit growth you've gotten another other categories or this year and potentially moving forward. It would you envision continuing a lot more of those run off like you did this quarter or do you think you'll need to keep those on and off and replace them at the the thirtyth.
Basis points or so.
Yeah, I think it's going to it's going to shift a little bit too probably less of it running off on a natural course, because you know what the first it goes out the door just the raid shoppers the folks that came in because we tend to pay a little higher than somebody down the street or you know now we're getting into sort of more the core where people may have otherwise.
Relationships with us or the convenience factor is important for them. So I.
I think we'll we'll definitely see some run off and as we talk about things you know what we're just we just looked at the repricing that's a big deal, but you know, we'll see run off I don't know that it will be you know as dramatic a from a percentage of total maturities as it has been but you know we're going to be very disciplined in our pricing that's for sure.
Okay, great. Thank you off taking my questions I appreciate it.
Thanks, Brett.
The next question comes from Stuart loss with KBW. Please proceed.
Hey, guys good morning.
Oh sure good morning.
Oh, it's nice to see the you know the buyback announcement last night I'm kind of prior to earnings Rex just curious what your appetite is for you putting out to work in the fourth quarter.
I remember you guys were pretty active kind of read before the pandemic could we see.
Similar type level to that or are you do you plan on using that kind of four authorization.
You know, where we were authorized to do it and I think we're going to be I don't think we might be quite as aggressive as we were right before but we will be you know we'll be looking at buying it back. We still think you know when you're trading at at that discount below tangible book, It's it's it's the right thing.
To do.
And then I think we're going to reload. It you know as we look toward year end. That's when we get into January that was what our original approval was that regulators was through January 2021, I think at that point in time, we will have a pretty good sense about where things are you know what's going on with the pandemic you know whether its lingering what's gone on with the election.
And so we'll look then to reload it again and and continue unless we see something that you know that changes their mind as far as the economic outlooks or whatnot, but yeah. We we still think it's a good thing and when we're trading at this discount.
<unk>.
That's helpful.
And I guess, just starting to expenses.
[music].
Yeah. So we had kind of a more normalized run rate with the Fas 91 back are coming back in.
And it sounds like in the fourth quarter, when we might see a slight up tick in the salary benefits [noise] Bruce.
Bruce how are you thinking about a run rate from a quarterly standpoint in the fourth quarter should we see kind of.
Low single digit inflation.
Just trying to take you know.
Yes, Uh huh.
I don't Uh huh.
In the fourth quarter and into early next year I think that the run rate that we have on our expenses.
It's pretty close.
And you would think you know certainly some inflation and higher prices et cetera, there's there's going to be some increased once again I think the wild card in the and that area is going to be related to credit quality, if legal fees in Oreo cost and credit.
<unk> expenses.
Start to drift up.
Sometimes that can that can be meaningful, but <unk>. There really was a very little noise in the non interest expenses action this quarter.
So I think that you know it was a pretty good pretty good level.
Got it and maybe one more from me if you guys don't mind.
Yeah. The out it sounds like you know the swap fees are becoming a more meaningful driver well see revenue for you.
You know, what's the I guess, how can we think about that on a quarterly basis, you know going in that going into 2021.
And I guess, maybe bigger picture, what's your what's your outlook for a minute supporting feet fee revenue next year.
You know that that is a and rex can weigh into a fairly he sets and a senior credit committee, where they talk about this quite a bit that is.
One of those items that is a blessing and a curse because if you get it that's great and it had really helps with your noninterest income in your core.
But then it it's a it's an income hole from a competitive point of view that needs to be filled the next quarter or or whatever quarter. You are comparing to last year over year all linked quarter.
But I think our loan officers have gotten I'm more comfortable taking.
Swaps to our borrowers are borrowers have gotten more comfortable.
With swaps.
And it's become a pretty steady source of income for us So I would hope.
That it would continue.
Yeah, I would say that probably as we look good.
A deal sizes, we get up above like 2 million $3 million in deal size.
Probably about 50% of those borrowers looking swap.
Because that just tends to be a better situation for them and they have the sophistication and ability to understand it and see what it does to their balance sheet. So it's it's you know as Bruce said, its becoming very popular items, our loan officers, we're comfortable with it now so I think on the larger deals you're going to see it yeah.
About 50% of the time.
Okay.
Awesome.
Sorry, Chris just one more.
That he did.
[laughter] I didn't see it in the release studies disclose your your turtle PPP related.
Fee income this quarter or do you have that handy.
I mean, I do not have that handy or.
Right now, but I can I can send you an email or.
Disclose that.
I'll see if I can grab it before the call in.
Okay, because I think it was about 304000 last quarter I mean that was was kind of a half quarter fees no forgiveness of debt.
If they stay on the line I'll try to find it before the calls over with.
Got it all right well thanks for taking my questions Sean.
<unk>.
As a reminder, if you do have a question. Please press Star then one.
The next question comes from John Rodis with F.I.G. Partners. Please proceed.
Hey, good morning, guys.
Hi, John.
How you doing Rex.
Pretty good.
Good good I'm.
Just Rex back to your comments on on on on loan growth. If you will you know you said the pipelines sounds like pretty solid, but maybe down from the last quarter.
What do you what do you sort of thinking about you know loan growth excluding P. P. P for next year.
Oh, we're looking at like 6%.
And I think that's probably a very reasonable.
Conservative viewpoint on that and as I said, we've kind of built a machine to be very profitable when we hit you know above 4%.
But.
But it may you know, maybe a little better than that I am you know.
I'm very optimistic about next year I think they are going to be some things as we begin to reopen I hope you will will start to reopen of a vaccine comes along I think we can do much better than that.
But I think we are going to it's going to take us a quarter maybe too.
To figure out what it really is that the final effect of the pandemic. So I think we're going to see some slow growth in those first two quarters and then I think it would sell right up but we're looking at like 6% you know.
And I do think there may be some possibility to pick up a couple of lenders out of these mergers that have been announced because there's always some dissatisfaction.
When those things come about and.
So you know that that may be an opportunity for us in that.
In the first couple of quarters next year too.
And from and from a competitive standpoint, you know is this competition still pretty pretty fierce or what are you seeing on the lending side.
Yeah, it's it's not.
It's not as crazy as it was pricing wise, but it. It is I think very fierce I think there's some gas it from time to time moving into central Virginia that that try to buy up some of the marketplace, but on the deals. We're looking at you know we're still we're still able to on a lot of those.
CRT deals Ah stay just north of 4%, we have dipped down in the in the.
Below that yet, but it is you know it is competitive in both Virginia, and Maryland right now.
Okay. Okay. Thanks, and then eight Bruce maybe just a question for you on the tax rate, it's been hovering around 20% should we be using 20% going forward into next year too.
Unfortunately, I must freelance I've been trying to say that it was going to stay in the 18 and 19 range and [noise].
The calls on municipal bonds.
Our very efficient now and went off a municipal bank qualified municipal.
Oh has a call date it gets going away.
And as a result, the municipal income.
It's becoming a lesser percentage of total income.
And I relate it to myself now.
To that end own self be true right <unk> I would say, 20% I just can't replace it I mean, even if I go and buy another BQ to replace the one that's rolling off the <unk>.
The variance in the yield.
So I'd say that the dollar still decline pretty significantly so yes, I would say, 20% is probably the new run rate for taxes.
Okay and just.
If you know depending on what happens next next week with the election, if we were to see an increase in tax rates are there you know if rates go up you know, they're talking about sub seven percentage points would you be able to offset any of that or does your 20 go to sort of 27% or pretty close.
Yeah.
Yeah, well what are you, saying the tax rate would go to back to 34% or.
Well go to 27.
Yeah, I'm just talking about overall, if they increase the rate I think what we're talking about seven percentage points would that ER. So it's for you yeah.
Yeah, it's probably six point something so I guess it depends on where it round two.
Thanks to my controller I sent an email and she was probably what the response [noise].
The the PPP loans are the amortization of the fee is $110000 a month. So that's 330 for the third quarter, a and we have $2 million.
Net that is on amortized as up 930, so thanks to Lorraine for getting me that information quickly.
Thanks, guys.
Thanks, John Thanks, John.
[noise] [noise] at this time there are no further questioners in the queue and this concludes our question and answer session.
I would now like to turn the conference back over to Rex Smith for any closing remarks.
I want to thank everybody again for joining us this morning and for supporting the company. We hope you stay healthy and safe and we remind you that we are available. If there are any follow up questions. Please feel free to reach out to Bruce or myself and we're always happy to have conversations with you. So thank you all very much.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
[music].