Q4 2020 Community Bankers Trust Corp Earnings Call
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Good morning, and welcome to the community Bankers Trust Corporation fourth quarter and year 'twenty 'twenty results conference call.
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I would now like to turn the conference over to Rex Smith, President and Chief Executive Officer. Please go ahead.
Good morning, and thank you for joining us today as we review the results for 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 operation performance neutral 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 on additional risk and uncertainties are included in our earnings release on most recent form 10-K, and other reports that community Bankers Trust Corporation files with or furnishes to the Securities and Exchange Commission.
You can access all these documents through our website at Www C. B Trust Corp Dot 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 search.
By the end of the first quarter, there was much concern and fear as to how the year would progress.
I had two 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 have devoted management team with the knowledge and experience for not only get through the turmoil well have to make a positive impact on the customers and the community 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 to the consolidated Appropriations Act 2021.
And I've taken over 100 applications amounted to $17 million for P. P. P round two so far.
Given all the challenges we are pleased with the result for 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 up $15.7 million.
This lower net income on mountain did reflect a large increase.
3.8, $75 million and 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 non interest income.
Loan growth exceeded our expectations for the year and credit quality remains strong low.
Loans, excluding loans under the Paycheck protection program with $74 $8 million for the year or seven 1% gross.
We also work diligently to manage the asset quality, while giving our customers the appropriate relief measures.
Total nonperforming assets decreased by $2 $8 million or 26 per cent 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 shifting their deposit mix, which significantly lowered deposit costs through the fourth quarter of the year.
Total checking money market and savings accounts grew $259 million during 2020.
While certificates of deposits declined $15.6 million.
Non interest bearing demand deposits now represent 21, 4% of total deposits.
Compared to $15 four per cent 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, non interest expenses decreased for the year due to a decrease in salaries and benefits and the internal loan costs related to the origination of P. P. P 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 per cent for the fourth quarter of 2020 and point 99 per cent for the year.
Return on average equity was $12 64 per cent for the fourth quarter and 9.58 per cent 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.
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 $157000 for the year and debt $15 $5 million. It resulted in earnings per share both basic and fully diluted that was only one cents per share less than in 2019.
Come on earnings per share for 2020 or 70 cents.
Fully diluted were 69 cents per share.
Pretax pre provision income was $23 $5 million for the year 2020, and is an increase of $3 $9 million or 21% greater than pretax pre provision income of $19 6 million for two.
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 26% from 2019.
This was driven by a decrease in the rate paid on interest bearing liabilities from one point for 4% in 2019% to 1.08% in 2020.
This more than offset the decline of $1.8 million or two 8% in interest income in 2020 compared with 2019.
The net result was an increase of one $4 million or two 7% in net interest income in 2019, and 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 235, 2% for 2020.
The interest spread also decline over this timeframe from 355% for 3% to 7% in 2020 per.
P. P P 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 three point for.
For 9% for 2020.
Compared with the actual margin of 352%.
The yield on the loan portfolio would have been for six 1%, excluding PPP loans versus the actual yield of 4.59% with P. P. P loans and the yield on earning assets without P. P. Large did not change from the actual yield.
On a 4.35% that included P. B P lives.
Looking forward for 2021, there'll 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 one point for 4%.
If retained the C D should re price 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 P. P P 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 $920000.
When comparing noninterest income on a 2020 versus 2019 basis, we see that noninterest income improved by 11, 1% in 2020.
Non interest income of $5 $9 million showed an increase in mortgage loan income $630000 year over year and totaled $1 $1 million for 2020.
This is an increase of 129, 6% over 2019 on.
Also improving in 2020 over 2019 was an increase of $190000 in noninterest income, which was $1.3 million in 2020 and improved primarily from improved swap fee income.
Non interest expense also reflected improvement in 2020 compared with 2019 non.
Noninterest expenses were $33 $7 million for the year ended December 31, 2020, a decrease of $2 million or five 6% year over year salaries and employee benefits declined $1.3 million or 6%.
In addition to the internal low cost relating to the origination of P. P. P lives in 2020, which were $600000. 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 for $275000 lower equipment expenses were $117000 lower and other operating expenses decreased $221000.
Other real estate expenses net were $152000 for 2020 and decreased by $566000 versus the same period in 2019.
D I see yourself on what $639000 for 2020 and increased $343000 over 2019, mainly due to a $324000 assessment credit received by the FDIC in 2019.
Data processing fees were $2 $5 million for 2020, an increase of $124000 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 20 for basic and fully diluted for the fourth quarter of 2020, and 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 $822000 on a linked quarter basis and interest expense decreased $464000.
P. P. P fees increased $785000 in the fourth quarter of 2020 and were $1.1 million. Additionally, noninterest income increased $53000 on a linked quarter basis led by service charge income, which increased 160.
$4000 and mortgage loan income, which increased $66000.
Fourth quarter 2000, Twenty's service charges and fees were boosted by a onetime payment of $102000 received for accounts interchange fees.
These increases to noninterest income were partially offset by a decrease in swap fee income of $117000 in the fourth quarter of 2020 compared with the previous quarter.
Offsetting these improvements to net income or an increase of $213000 and noninterest expenses, which were impacted in the fourth quarter of 2020 by an increase of $291000 in salaries and employee benefits and an increase of 100.
$85000 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 $161000 increase in accrued vacation during the fourth quarter, reflecting the lower vacation time taken by employees as a result of COVID-19.
Offsetting these linked quarter increases was a decline of $57000 and occupancy expenses, which were $758000 in the fourth quarter of 2020 data processing fees of $632000 in the fourth quarter of 2020 reflects a.
Decrease of $24000 as does other real estate expenses, net which declined by the same amount of equipment.
Equipment expenses of $320000 reflects a linked quarter decrease of $10000.
With this detailed look at 2020 and brief look at the fourth quarter of 2020 complete I'll now turn the call back over direct Smith.
Thank you Bruce.
Yeah. That's a 2020 have had a significant and in some cases, a lasting impact on the banking industry.
The recognition of the value of our community Bank like ethics was shown in the strong growth of relationships that we experienced this year and the support on the community that we serve.
The trends we have seen in the past few 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 tendency 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 P. P P loans and round one branding payment relief for 248 customers, while growing loans at 12 per cent 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 debt common stock dividend and despite halting the program at the height of the pandemic, we repurchased over 330000 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 for 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speaker phone please pick up your handset before pressing the keys.
But any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Casey Whitman of Piper Sandler. Please go ahead.
Hey, good morning.
Good morning Casey.
Morning weighted.
I just wanted to make sure I'm understanding the disclosures around deferrals correctly.
Bruce do you have the balance for meeting on deferral at year end and maybe with that can you give us a little color on the deferrals that do remain on can I, we assume that a lot of hotels, just any kind of color you can give us there. Thank you.
Okay. We are at 12 31 have $52.7 million.
In loans debt.
Our on extended payment relief.
And I think Rex can proudly offer some color on the type.
Credit that are in that $52 $7 million.
We did.
Did a total of 182 point for us.
And regular payments for zoomed on 143 point for them.
Paid for it for all of those are within the PCI portfolio.
Payment relief still exists on a 52.7 at year end.
And in case, you have the of the the non PCI loans, it's right just under $51 million.
It's fairly diverse there's there was one larger upscale restaurant group that has several.
Several stores in Maryland around Baltimore.
And Baltimore City has been shut down for most of Covid.
When they reopened they they did really well again, but it's kind of hard to do take out you know where the high end steak type franchise. We've got a couple of hotels, one being on the beltway over near the Andrews Air Force said that.
That's about <unk> five.
5 million little over $5 million, we've got another hotel that's about two point for and then it's a you know there's a couple of things there's a it's in it.
Entertainment place its a skating bowling whatever we've got a couple of small businesses.
We've got a we've got a food supplier.
And office supply company.
Yeah.
It's spread fairly diverse coupled to childcare center about a million dollars each so its 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 in <unk>.
Of all of them, there's really only one debt.
We'd have to kind of really work on restructuring, but we got additional cash collateral on that one it was an entertainment group outside.
Outside of Fredericksburg.
So I feel good.
I'm fairly comfortable with the with what we've got extended right now and hopefully you know the vaccines Virginia's and won a should be going into what would be our hope fairly quickly.
It's a little bit ahead of us, but I think as things open up.
<unk> been pretty good shape on it we're keeping a very very close eye on it.
Mhm.
Got it and you guys. If I recall were pretty quick to move a lot of these things is the classified category. So we are there I guess any notable migrations are within the risk rating this quarter that we should know about.
Nothing going you know going into the special mention or sub standard categories. Most of the migration was either go on the other way to go on some special mentioned backup into into pads grade.
But nothing big on going going south.
Got it I'll just ask one more on a different topic just for Rex can you maybe fill us in on how you're viewing the branch footprint at this point and the.
On the opportunities you might have on the expense side to drive efficiencies higher.
So you know.
I've I've seen a lot of what my competitors are doing and I notice you know like Atlantic Union closed a lot I think the good news for us because we never had a really expansive branch franchise.
And 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 you know we will be looking at but I think more importantly, Casey what we're seeing is our customer service center, which is handling all the you know.
On a handle the online helps online and does all the 800 calls their growth in new accounts, it's just been through the roof.
So I think long term, we're looking at how the mobile and in the tech side, it's going to expand that 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 lot as I said you know, we we don't have an expansive franchise considering the footprint we cover.
Yeah.
Understood. Thank you.
Thank you.
The next question comes from Stuart Lotz of K B W. Please go ahead.
Hey, guys good morning.
And Stuart.
Well first the first off you guys are doing a great job on the on the deposit side.
You've got the last couple of quarters.
As we see.
Cd's repricing lower you're going to really.
Nice dropped on your total deposit costs.
You know maybe what for us.
And the 2021 Rex how are you and Bruce how are you guys thinking about that coordination.
Backing out the PCI and and PPP fees that we are.
I expect it to flow through in the first quarter.
Certainly anticipated that question would come up.
So I I look back and in the.
Second quarter, we had 132 million and Cds reprice at around 2% a.
146 million in the third quarter at about 185 145 million in the fourth quarter at about 155 now of course, the rate is dropping but the number.
C d's debt are going to mature and reprice in the first quarter is a much larger its a $164 million.
And it's at 144. So then then looking at the reduction in interest expense in the second quarter. It was and this was on deposits.
237000 in the third quarter was 568000 in the fourth quarter 463000, now of course day the rate is declining.
But you Wouldnt put 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.
Our weighted average in the middle of the 160 for that re prices. That's that's another pickup of.
Around $200000.
So once again in the first quarter.
We should see a meaningful decrease in interest on deposits interest expense.
The balances that mature thereafter.
Do go down its a right at 91 million at 89 basis points in the.
Second quarter, its right out of 100 million at 79 basis points from the third quarter.
105 million at 66 basis points.
In the fourth quarter. So all of that is $460 million at 1.01 per cent 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 in 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 and stabilize unless we can change in deposit mix and then looking up at the on top.
Top of the house.
With regard to <unk>.
Interest income.
If you back out the P. P P fees.
In 2020, our interest income was 15 point for.
For Milligan in the second quarter 15.2 in the third quarter.
And $15 three in the fourth quarter and the point of that exercise is to show that that.
That number is fairly stable.
So from a.
But there is pressure in the pipeline.
In that regard.
I.
I do think in the first quarter, we're going to see a larger decrease in interest expense.
That may leak over debt than in interest income larger decrease in interest expense and interest income and and that.
It's 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 the pure dollars N D day.
Net interest income.
That's very helpful color.
So it sounds like you know your anticipation right now I mean, you're down there what at 82% kind of loan to deposit ratio how much of the Cds repricing in the first quarter.
Do you think youll retain or you know you have wiggle room to kind of run some of those off so just curious how you're thinking about that you're wanting to deposit ratio weighted.
We go through the year right, we do monitor that CD retention rate.
Fairly closely.
And I would anticipate debt.
Somewhere in the 85% to 90% of those Cds that mature will be retained.
I'm not so certain debt at this point.
Point in the rate cycle debt there is a.
A bit of.
Ambivalence and indifference on the part of depositors I mean, so they they rate shop and they go from 40 basis points on a CD to 45, so I think debt.
When rates are much higher the difference between a low payer on a high payer is much greater at the deposit rates are clustered fairly closely now so I think we're going to retain a fairly high majority of those are we do anticipate at some point this.
<unk>.
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.
Loan to deposit ratio.
Throughout the course of the year.
Given that we can keep that pipeline.
Plenish replenished.
And as Bruce said, Stuart we've been running off anywhere from $12 million to $14 million a month.
DS in 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 on most most of the folks who are going on somewhere between six months to 18 months.
And we keep that spread out fairly evenly months a month now but.
You know there there will be you know.
There'll be some more run off in the short run as Bruce said.
Got it.
Oh.
Sure.
One more for me if you don't mind turning.
Turning to capital. It does look like you guys reengage the buyback this quarter.
My is my math correct here it looks like.
You bought about 184000 shares I'm just curious how you guys are thinking about capital deployment.
In 2021, as we are with.
10, 3% TCE.
On the credit environment continues to improve.
Yeah and on obviously, we work very closely with our regulators on that issue because as we said you know regulators take the exact opposite approach of management and investors with capital you know more is better but.
We're working with there but for 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 net.
Next month or so two to start engaging because we do we do need to utilize that capital was on it we constantly look at the dividend rate. We look at the buyback where are we going to be so we can keep that return on equity.
Up in a good zone.
And.
When we look at if there's any you know small M&A activity to look at for Us of course.
It's dead right, now where everybody's because everybody's paper's been so so knocked around but you know we're going to look at ways to utilize that capital to make sure that we get the return we need for them for our investors.
Great.
Sorry can you just remind us how much you have remaining in that authorization or.
If you'd be exhausted at this point, how large of an authorization do you anticipate.
Yes.
Announcing in 2021.
Well, we can't say, how much right now because we're still talking to the regulators about it but we have we have exhausted what we originally announced for 2020, we burnt that up over a couple of days in January So we're looking at the second round of it and.
And that's you know, we're just going back you know working with our regulators on on what's the right number for that.
Very helpful. Great well, thanks for taking my questions guys.
Alright, thank you.
The next question comes from John Rowan of Janney. Please go ahead.
Good morning, guys.
Hi, John.
John.
Hope you guys are doing well.
Bruce maybe just or I'm, sorry, Rex maybe if you could just talk a little bit about you know.
Your outlook for loan growth. This year, obviously, the fourth quarter. You ended that 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.
Yeah, I think we're looking for 'twenty 'twenty, one to be around 8% gross seven to eight per cent certainly.
Think.
I think it's very possible given where we are and looking at what you know, possibly is going to happen with with things opening up again.
We've got a good group of lenders, we got a good pipeline. We've got obviously very good markets that we're in so that's what where we're aiming at and I think it's very achievable to get to that 8% number.
So somewhere certainly seven day.
And Rex just to be clear that excludes any impact of P. P. P correct.
Correct, Yeah that that's just the core portfolio, that's taking out P. P. P.
Okay.
And Bruce maybe a question for you on the fee income 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.
There was a and it's noted in the press release, there was a one time fee that we were paid.
On interchange fee.
$102000 debt.
We received.
Visa related fee, so that did boost the.
Service charges.
For the fourth quarter so.
You wanted to.
Take 102 out of that then Youre 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.
He is going to go back to something similar to the third quarter level going forward.
Okay, and then Bruce maybe just one more question for you the securities portfolio you guys increase debt. So can you talk about.
How we should model the securities portfolio going forward.
Right well.
Hum.
<unk>.
A bit of a challenge.
But.
The cash and do balances that we experienced throughout.
2020 for 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 wait.
And <unk> to deploy those deposits.
And the form of Securities, which you saw.
Partly in the fourth quarter.
So we will see some gross in the securities levels and 'twenty 'twenty one.
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 debt will give us zero percent risk weighted assets.
And would be floating rate in nature with some type of rapper around them.
Such as SBA on.
For.
Student loan pools that have a 97% government guarantee.
Okay. Okay. All right is there any sort of target as far as maybe per cent of assets or anything you wanted to get the securities portfolio to or I'm sure. It's dependent on deposit growth too yeah, I think it's more over than that our level of assets. Although we do have a target and I don't know.
Now that we've ever been below 15% on total assets and secured its mainly trying to efficiently utilize our what's in cash our cash and do it.
Because if you have <unk>.
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 five basis points.
You certainly are better off.
Even if you only get 1%.
That's on 95 basis point pick up on.
On a large amount of assets.
Makes sense, okay. Thank you guys.
Again do you have a question.
Apologies again, if you have a question. Please press Star then one on a touchtone phone.
The next question comes from Brody Preston of Stephens, Inc. Please go ahead.
Hey, good morning, guys.
Right.
Yeah. Most of the questions that I had have been answered I just didn't have one left though on the on the PCI portfolio.
It looks like you know eight to 10 million Bucks on run off this year I was just wondering if we might expect a similar pace of run offs in in 'twenty and 'twenty one.
Oh, yes.
That that Ams down.
Typically about a seven and a half million dollars a year.
So of course, you have some payoffs that come in.
Over top of that but that would be what we would be modeling here.
Okay, and so it sounds like.
It sounds like if you're if you have some extra pay downs like you did this year by the time, we get to the end of 'twenty to 'twenty two that portfolio will be you know.
Gone to low single millions I guess it is.
If I'm thinking about it correctly.
Yes.
Okay, great. Thank you very much for taking my question around Okay sitting right at $23 million at year end I think in.
So you know that's at Amsterdam.
Awesome. Thank you guys I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Rex Smith for any closing remarks.
I'd just like to thank everybody for their support during what was obviously, a very trying year for for everyone and remind you that Bruce on our 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Okay.
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