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United Bankshares, Inc. (UBSI)

Q4 2014 Earnings Call· Fri, Jan 30, 2015

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Transcript

Operator

Operator

Good morning and welcome to the Community Bankers Trust Corporation’s Fourth Quarter and Full-Year 2014 Conference Call. [Operator Instructions] Thank you. I would now like to turn the conference over to Rex Smith, President and CEO. Please go ahead.

Rex Smith

Analyst

Good morning and thank you for joining us today as we review the results of the fourth quarter and the full year of 2014 for Community Bankers Trust Corporation, which is the holding company for Essex Bank. Let me begin with a reminder that during the course of our remarks today, we may make forward-looking statements, within the meaning of applicable Securities laws with respect to our operations, performance, future strategy and goals. I’ll remind everyone that our actual results may differ materially from those included in the forward-looking statements due to a number of factors. These factors and additional risks and uncertainties are included in our earnings release, our most recent Form 10-K and other reports 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’ll give a quick overview of the past year; Bruce Thomas, our Chief Financial Officer, will cover selective financial highlights; and then I’ll discuss some of our key initiatives and strategy for 2015. We accomplished much in 2014 and finished the year with strong results. We were able to grow the number of branch offices in both Virginia and Maryland, we had double digit loan growth, and most importantly, we grew our net income. Net income for the fourth quarter was just under $2.3 million, an increase of over $1 million year over year. Net income for the full year was over $7.5 million, an increase of 27% or $1.6 million over the prior year. While this is better than we originally projected, it is still not the level of core earnings we desire and management is committed to changing that in 2015. Non-covered loans, excluding PCI loans, grew over $64 million for…

Bruce Thomas

Analyst

Thank you, Rex. Fourth quarter 2014 net income and net income available to common shareholders of $2.3 million or $0.10 earnings per common share compares with net income available to common shareholders of $1.8 million or $0.80 earnings per common share in the third quarter of 2014, a linked quarter increase of 24.6% or $446,000. Year over year, fourth quarter 2014 net income available to common shareholders outperformed fourth quarter of 2013 net income available to common shareholders of $914,000 by 147.2% or $1.3 million. Earnings per common share improved by $0.06 in the current quarter, once again $0.10 per common share versus $0.04 per common share in the fourth quarter of 2013. For the full year ended December 31, 2014, net income available to common shareholders of $7.3 million or $0.33 earnings per common share is an improvement of 51.8% or $2.5 million over 2013 net income available to common shareholders of $4.8 million or $0.22 earnings per common share. On a linked quarter basis, results were driven by an increase in total non-interest income of $666,000 and a decrease in non-interest expenses of $795,000. More specifically, the largest linked quarter improvement was the improvement of $627,000 in expenses related to other real estate. Additionally, proactive management of our securities portfolio enabled us to realize $595,000 in gains during the quarter, a linked quarter increase of $480,000. Year over year fourth quarter performance was also fuelled by similar increases, $365,000 in total non-interest income and $1.6 million in lower non-interest expenses. The largest improvement was in the lower costs associated with problem assets. As other real estate expenses improved year over year by $1.1 million from $828,000 in the fourth quarter of 2013 to a credit of $235,000 in the fourth quarter of 2014. Securities gains of $595,000 in…

Rex Smith

Analyst

Thank you, Bruce. I’m proud of the earnings improvement as that has been our primary focus. We saw some margin compression in 2014 and I believe we will see more in 2015, but our goal is to more than account for it with our growth and firm control of expenses. As I stated in the earnings release, management is working to balance current earnings growth with long term value creation. We will open at least two new offices this year in our existing markets of Richmond and Southern Maryland. In addition, we will expand our presence in Northern Virginia and in Lynchburg, Virginia. We will also continue to look for other market opportunities where we can gain a quick competitive advantage either by de novo branching or by acquisition. Despite the current rate environment, management remains excited about the future. We have a strong commitment to enhance franchise value through core growth in the balance sheet and in our earnings per share. The strong growth in the fourth quarter gives us a lot of momentum as we start the New Year. In 2014, our stock price improved by over 17.5%. And I’m confident that we can continue this trend of improvement in 2015. I thank you all who participated in the call today and for your ongoing support of the company. With that, we will now open the call for any questions.

Operator

Operator

[Operator Instructions] And our first question comes from John Rodis at FIG Partners.

John Rodis

Analyst

Rex, can you provide any added detail on the increase in non-performers during the quarter?

Rex Smith

Analyst

It’s really two particular credits and they were already classified as substandard and we’re working with the borrowers on some workout plans. They are older loans, they’ve been in the portfolio for a while, we’ve been watching them, we’ve had them classified and I feel like we’ll work through them at some point in the next six months.

John Rodis

Analyst

Is it commercial real estate or commercial or...?

Rex Smith

Analyst

It’s commercial.

John Rodis

Analyst

Commercial, okay. In your market, I assume?

Rex Smith

Analyst

Yeah.

John Rodis

Analyst

And as far as potential loss content, I mean I know it’s sort of hard to say, but?

RexSmith

Analyst

Yeah, at this point, we’ve put the appropriate mark on it and I don’t believe that we’ll see any hits to the income statement because of that.

John Rodis

Analyst

Fair enough. Maybe just another question and this might be for you, Bruce, the margin was obviously down pretty substantially linked quarter, and I know there were some items in the third quarter that didn’t reoccur in the fourth quarter, but you talked about maybe some added compression going forward. Could you maybe be a little bit more specific to the extent you came as far as your margin outlook?

Bruce Thomas

Analyst

Yes. We did have some things that had a negative impact on our margin in the fourth quarter. There was some interest associated with the loan that Rex mentioned, the credit that we placed on non-accrual that got peeled back in the fourth quarter. We also decided to go to a cash basis on late fees and we wrote off about $100,000 just to clean that up. And so that of course annualizes and we had some other smaller items. But all of those things put a negative downcast on the – trend is not as bad as it appeared in the fourth quarter because we did some cleanup to get things on the right foot going into 2015.

John Rodis

Analyst

So I guess all that being said, what do you think is sort of a core margin for the quarter then if you back out those clean up items and stuff?

Rex Smith

Analyst

Of course, new assets going on the books, there’s a lot of competition for assets and volume has to be strong based on the rates that we’re putting to the assets on. But with that being said, I would think for 2015 that the margin that we currently have would be pretty close to a go-forward margin, this 3.83 ballpark range. I really don’t look forward to it precipitously decline quarter after quarter in 2015.

John Rodis

Analyst

Okay. And then one other question to Bruce, the tax rate was a little bit lower this quarter, around 23%. I assume it moves back up going forward and maybe that was a function of the securities sales during the quarter or...?

Bruce Thomas

Analyst

No, we put on the municipal play, tax-exempt municipals and we also had our non-taxable income event under bank loan life insurance, the $400,000, so that was a non-recurring item. But we will see some positive effect of the municipal play that we’ve done, because – and we’ll continue that. I’m a big fan of tax-exempt municipals and to the degree that you can put them in your portfolio and not going to an alternative minimum tax position, they roll down the curve nicely and pick up value and of course, the swap play that we did, most of the purchases that we’ve done are put in held to maturities. So even in a rates up scenario, it would not have a negative impact on OCI. But the swap will actually have a positive impact. So that locked in in excess of 4% yield [indiscernible]. So we’re going to have a nice lift from that in 2015.

John Rodis

Analyst

Okay. So as far as an effective tax rate going forward, is it going to be closer to the 25%?

Bruce Thomas

Analyst

I would say 26%, 27% is probably pretty reasonable for tax rate going forward.

John Rodis

Analyst

Okay. And then, Rex, maybe just a final question and I’ve asked this before but, your tangible book continues to grow, your stock is trading below tangible book, tangible common equity continues to grow, it’s about 9%, maybe your thoughts on – you talked about potential acquisitions and stuff, but as far as share buybacks going forward?

RexSmith

Analyst

John, we’ve got three or four things we’re looking at right now, which span the spectrum of, from acquisitions to stock buybacks to couple of other things that would have a positive effect for our shareholders. And we’re just kind of weighing those things out right now, some of them take a little time to execute on strategy to get some answers on it, but I think you’ll see us make a more of sometime within the first probably six months of the year to better utilize that equity slot.

John Rodis

Analyst

Okay, sounds good.

Operator

Operator

The next question comes from Jeremy Hellman, Avenue T Fund.

Jeremy Hellman

Analyst

Just wanted to ask one more question on the spread topic, because that was where my head was too and I know Bruce you said you’re at kind of a go-forward level. Looking at your book and I can’t remember this has been covered before, how much of the book is of a variable rate nature, just kind of percentage basis, just looking forward to what if rates actually do go up?

Bruce Thomas

Analyst

Not too long ago we did an analysis on that and over 40% of our loans at that time – over 40% of our securities were variable rate. That securities figure has probably declined a little bit as some of the – as you know, as rates have continued to go down there’s been some velocity that’s occurred in amortizing tough product as people have prepaid and that would be true with our mortgage backed securities as well as our SBA floaters. But it’s still a sizeable position; it’d be well into the 30s. So we’ve done our internal modeling [indiscernible] modeling and we are well positioned in a rates up environment. The bank it’s pretty neutral under any rate scenario.

Jeremy Hellman

Analyst

Okay, that’s good. And then just peeling that on a little bit, with respect with those variable exposures, are any of those – do they have a floor, that are variously sitting on the floor where you’ve got to have rates move up certain amount before you actually get that positive delta?

Bruce Thomas

Analyst

That’s correct, Jeremy. Most of them have floors and we probably got to see 1.5%, 2% pop before we blow through most of those floors.

Jeremy Hellman

Analyst

Okay. And I’ll back it up by saying my own share is not based on interest rate moves because I think that you’re growing the franchise and creating value, so just backing that up. Looking at your commercial loan book, just peeling that onion a little bit, where maybe from an industry perspective or is there a way you can characterize the biggest buckets of where that exposure lies? I know just looking at it from my seat here in Richmond as well, there’s a lot of development going on out in the West broader corridor and even [indiscernible] that are going in that are going to anchor some developments, retail developments, so certainly a lot of positive stuff going on, just kind of wondering how connected to some of that you guys are?

Rex Smith

Analyst

You’re on the commercial real estate site?

Jeremy Hellman

Analyst

Yeah.

Rex Smith

Analyst

We’re participating in two projects right now that we just – one was in committee yesterday in that short pump corridor right at Broad Street going west and there’s a lot of activity there, lot of good [indiscernible] we’re there, our land is low down in this building, so we’re very close with Brian Conwell and that group and we’ve done a lot with Ryan Homes and so we stay really connected with it. It’s still though, we’re very selective on those A, B and C type deals. It’s pockets all over the place, even up in the Baltimore corridor, Washington D.C., you’ll see pockets where it’s a little better than the rest of the nation, but there’s still some places we’re very cautious about.

Jeremy Hellman

Analyst

Okay. And then one last one from me. Just any comments you might have just in terms of the competitive environment with your competitors specifically, any thoughts on people that seem to be dropping a little bit or getting more aggressive, just any kind of perspective there would be little bit helpful.

Rex Smith

Analyst

We saw at the beginning of last year, we saw few of the smaller players starting to pick up some competition there and actually I think some of them were trying to just blow up their balance sheet a little bit and get ready to sell. And I think we’ve got some players in the market right now, Franklin Federal is now part of Town Bank and I know when they really get a hold of franchises they’ll be competitive, but couple of the other players look like they are dropping off the spectrum. So I think, as Bruce said, it’s competitive for quality assets right now, but it’s nothing that we’ve seen that’s gone into the insane pricing. I think it’s still fairly stable pricing which is good. As we said, we’re not going to give up credit quality. We’ll let a couple of the ships that pass in the night if it starts getting that way. But so far, it’s been reasonable competition.

Jeremy Hellman

Analyst

Okay. And then in terms of the [indiscernible] you guys are the higher bankers to go out and just, grassroots, building the business, how is the market for human capital these days?

Rex Smith

Analyst

We’ve been very fortunate, we hired two lenders out of the small business group in Richmond at the end of last year and they’re really catching fire, we’ve got a new C&I lender that came out of BB&T in Lynchburg and we’ve got an LPO out there for a while. He is working with our lender up there and getting a lot of ground, we’re looking at adding another in Northern Virginia, and we’ve had a good team of C&I lenders came on board in Maryland and a lot of that growth in the fourth quarter. The $9 million jump in C&I lending was out of that Maryland group. So I think from the standpoint of where the company is now, people look over and they see our growth, they see our track record of what we’ve been able to accomplish and it’s an exciting place to look to come to work. And that’s helped us too and we’re able to get some good quality talent.

Jeremy Hellman

Analyst

That’s great to hear. Keep up the good work guys. Appreciate it.

Rex Smith

Analyst

Thank you, Jeremy.

Operator

Operator

I show no further questions at this time. Would you like to make any closing remarks?

Rex Smith

Analyst

I just want to thank everybody who participated this morning. And if there are any follow-up questions, Bruce and I are available all day and happy to talk if anybody has a follow-up.

Operator

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.