United Bankshares, Inc. (UBSI) Q4 2014 Earnings Report, Transcript and Summary

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.

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 the year. Net of USDA loans, real core loan growth for 2014 was over $84 million, an increase of 15.08%. Unfortunately while past dues were substantially down quarter over quarter and year over year, nonaccrual loans increased in the fourth quarter. The increase is isolated to two credits and management thought it’s prudent to classify these assets in nonaccrual status until such time as we review the workout strategy. We made a lot of progress in other areas that will build strong future values for the company. In 2014, we moved our headquarters and consolidated operations into our new space at 9954 Mayland Drive in Richmond, Virginia. We opened a new branch office in Annapolis last March, followed by a branch at our new corporate headquarters in April. Both offices are in our new open architecture format and are less cost to operate than the traditional branch and had done very well in gathering low cost deposits. We also purchased two existing branch sites. The first, in Bowie, Maryland, opened in late January and the second branch was purchased in the Bon Air neighborhood of Richmond, Virginia. We expect to open that office in May. We also repaid all of our outstanding TARP preferred stock investment from the United States Department of the Treasury and in June the company repurchased the associated TARP warrant, completely eliminating all obligations to Treasury without diluting our shareholders. In 2014, we also continued our focus on decreasing operating expenses. Non-interest expense declined $2.5 million or 6.29% from 2013 to 2014. Two of the biggest contributors of that decrease were declines in OREO expenses and also data processing fees. With that, let me turn it over to Bruce for some details on the financials for the fourth quarter and the year.

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 the fourth quarter of 2014 reflected an increase of $523,000 over the fourth quarter of 2013. This trend repeats itself in the 2014 versus 2013 yearly comparison. Total noninterest income increased $545,000 and total noninterest expense improved by $2.5 million. Other real estate expenses declined $1.5 million in 2014 and were $2 million in 2013 and $540,000 in 2014. Amortization of the FDIC indemnification asset declined $654,000 when comparing 2013 and 2014. Data processing fees declined $346,000 and the amortization of intangible assets declined $294,000. Total noninterest income improvement was evident in gains on securities transactions which increased $571,000 in 2014 as we took advantage of fluctuations in the bond market to fund loan growth and gains on sale of other loans, primarily previously purchased USDA loans, which improved $560,000 in 2014. Let’s now look at balance sheet activity for 2014. Total assets increased $66.2 million or 6.1% and ended the year at $1.156 billion. Total loans, covered and non-covered, of $727.5 million at December 31, 2014, were an 8.7% or $48 million increase from year end 2013. Of this growth, commercial real estate grew $36.1 million or 14.6% and residential real estate loans grew $24 million or 16.6%. Securities balances, excluding equity securities, grew $16.4 million and ended the year at $310.8 million. The largest category of growth was $22.3 million in tax-exempt state, county and municipal bonds that were designated as held to maturity with tax equivalent yields in excess of 4%. This designation will prevent the erosion of book value in a negative mark to other comprehensive income or OCI in a higher interest rate environment. Additional groundwork was laid in the event of higher rates as the company locked in five-year funding through the use of an interest rate swap for a total of $30 million at 1.69%. This locked in the positive spread on the municipals mentioned above for five years and the swap will reflect a positive mark to book value through OCI in a higher rate environment. In terms of core deposits, retail deposits grew $58.2 million or 7.4% in 2014. Of this total, $14.4 million or 20.6% were in noninterest bearing demand deposit accounts. Now, money market and savings deposits grew by $32.5 million in 2014. Lastly, as I’ve mentioned in virtually each earnings call, we are vitally interested in not only preserving, but in building lasting value for our shareholders. Common tangible book value was $4.07 per share at December 31, 2013 and grew $0.68 or 16.7% during 2014 to end the year at $4.75 per share. Our common tangible equity to assets is strong as well and was 9% at December 31, 2014. With that, I’ll turn it back to Rex.

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

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

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.

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

It’s commercial.

Commercial, okay. In your market, I assume?

Yeah.

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

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.

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?

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.

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?

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.

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...?

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.

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

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

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?

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.

Okay, sounds good.

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

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?

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.

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?

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.

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?

You’re on the commercial real estate site?

Yeah.

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.

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.

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.

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?

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.

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

Thank you, Jeremy.

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

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.

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