United Bankshares, Inc. (UBSI) Q3 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Community Bankers Trust Corporation Third Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Rex Smith, President and Chief Executive Officer.

Thank you for joining us today as we review the results of the third quarter and year-to-date of 2015 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 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. Following our usual format, I’ll give a quick overview of the quarter; then Bruce Thomas, our Chief Financial Officer, will cover the financial highlights; and lastly I’ll discuss some of our strategies as we complete 2015 and prepare for 2016. Obviously a lot happened in the third quarter and while we posted a significant loss, it was exactly as we have planned and previously discussed. The initiatives we completed in the quarter will add positive value as the company moves forward. For the sale of the shared-loss agreement back to the FDIC was one of our primary objectives for this year and it was accomplished. The write-off from the transaction was $13.1 million pretax but the amortization of the indemnification asset had been a significant part of our non-interest expense as the loans under the agreement were performing much better than we had anticipated. Eliminating the IAA expense as well as ancillary expenses associated with the management of the share-loss agreement should overcome the initial write-off in less than 24 months and drive significant income to our bottom line. Additionally, we wrote down the value of two branches as we are looking at potential sales and sale leasebacks which will lower our retail operating expense. With our focus now completely on core banking operations, we believe we can be in the top quartile of our peer banks in the mid-Atlantic. The company also continues to build franchise value through organic growth. Loan growth year-over-year is right at 8.5% in a very competitive environment. The yield on a non-covered portfolio dropped 35 basis points year-over-year but a lot of that change was from loan mix, not pricing reductions. As we grow in a small business in consumer loans the yields are slightly lower because they are just the right loans but we are seeing great opportunities for full relationships in the small business area. With these increased opportunities along with our expertise in both commercial real estate and C&I lending, the company is on a path to maintain steady growth without taking any undue credit risk. On the funding side, non-interest bearing deposits have grown almost 18% or $15 million year-to-date. A shift in our funding cost is crucial as we build our retail franchise and prepare for the inevitable interest rate increase whenever it occurs. Total funding cost should continue to remain fairly flat even as we replace our borrowings with core retail deposits. Non-interest income from core banking operations continue to increase as we grow our fee based business lines and add to our checking account base. Non-interest expense had significant increase from the activities previously mentioned but those expenses including salary and benefits cost will be reduced on a normalized basis. With that, let me turn it over to Bruce for some details on the financial results for the quarter.

Thank you, Rex, and good morning to everyone and thank you for joining us on this conference call. Not often as a company pleased to announce a quarterly loss, however the third quarter results that we have reported include the write-off of an asset that will result in a very acceptable earn back period and improve our results beginning with the fourth quarter of this year. The quarterly loss of $7.7 million includes quarterly FDIC indemnification asset amortization expense of $13.8 million. This line item will have no further expense recording. This is significant of future profitability of the franchise. For the 12 month period from July 01, 2014 through June 30, 2015 there was $5.2 million of expense that was recorded as a result of this asset being amortized. The elimination of this expense which we estimate would have been $3 million net of tax for the next 12 months will give us a quick earn back of the loss and also reduce other soft [ph] cost associated with administering the share loss agreements such as personnel cost of administration related to filing reports, having audits performed, compliance cost et cetera. By excluding the indemnification asset charge-off, net income would have $853,000 for the quarter. I refer you to the table at the end of our quarterly press release for this calculation. There are also some significant charges for the quarter that while not extraordinary by any means should position us for better profitability in the coming quarters. First, we wrote down two bank building in held-for-sale by a total of $684,000. We expect to sell these locations and lease them back a significantly reduced cost in the near future. Additionally, we wrote down a parcel held in other real estate owned by $392,000. We have been carrying the cost associated with this non-performing asset for an extended period of time and this markdown we hope will enable us to remove this non-earning asset from our balance sheet in the near future without incurring significant cost. Lastly, our salary and employee benefit line includes $161,000 in severance payments in the third quarter. The results of position eliminations created by operational efficiencies, which also will improve profitability beginning in the fourth quarter of 2015. For the nine months ended September 30, 2015, net loss was $4.7 million. Eliminating the effects of the termination of the FDIC shared loss agreements, net income for the period would have been $3.7 million and once again I refer you to the last page of the press release for the calculation. Termination of the shared loss agreements for which we were paid $3.1 million, eliminates a $13.1 million non-earning asset from our balance sheet. Other significant balance sheet developments include the implementation of a program that significantly lowers our reserve requirement level. Please note that our interest baring bank balances in the cash and cash equivalents section decreased significantly at September 30, 2015, thus freeing up these assets to be deployed in a higher earning capacity. Cash and cash equivalents were $12.4 million at September 30, 2015, versus $22.4 million at year-end. Loans, excluding PCI loans of $693 million have grown $53.7 million or 8.4% year-over-year and as of this date our loan pipeline is robust. The allowance for loan losses for this portfolio at $9.7 million is at 1.4% and is 89.87% of nonaccrual loans. Other real estate owned of $5.9 million is 30.9% less than reported one year ago and we continue to lower the level of nonperforming assets. On the liability side, non-interest-bearing deposits have increased $15 million in its year end and $18 million or 22.1% year-over-year. This is a critical area of focus for management as we strive to change our deposit mix away from heavy reliance on high-cost certificates of deposits into stickier non-maturity deposits, thus lowering interest expense and customer acquisition costs in the long run. Our capital position remains strong. In 2014 and 2015, our strong capital base has enabled us to work with our regulators to pay back the U.S. Treasury $10.7 million in top preferred stock, as well as absorb the one-time FDIC charge, which resulted in a quarterly loss of $7.7 million. Our tier 1 leverage ratio at 9/30/2015 is 9.17%. Our tier 1 capital ratio is 12.38% and our total risk-based capital ratio is 13.53%. After a long period that has been spent repositioning the company’s balance sheet it is now one that more closely is aligned with our peers. Nonearning asset levels are down significantly through the purging of nonperforming assets and the elimination of a huge indemnification asset, most of which had been flowing through our income statement. Our core loan book is growing at an acceptable level in terms of rate and duration. We continue to grow our core deposit base in particular then non-interest-bearing accounts. These things have us excited about the upcoming quarters as we feel we narrow a position to profitably grow and report acceptable levels of returns to our shareholders.

Thank you, Bruce. This year we instituted a corporate wide campaign called growing to win. It is a top to bottom effort to clean up the balance sheet, increase our earnings and focus on building core franchise value. The third quarter saw the culmination of many of the priorities initiated by the campaign. The termination of the shared loss agreement was obviously the biggest, but we also opened a new branch in the Bon Air District of our headquarter City in Richmond, signed a letter of intent for our branch in Fairfax, Virginia to expand our existing loan production offices there, expanded our core operating system, and simplified our retail accounts for ease of sales and service to our customers. I am looking forward to the fourth quarter because we have other exciting changes, including a new website with enhanced online banking. I believe we will begin to show our future growth and earnings potential in the last quarter of this year and head into 2016 with a clean balance sheet and the ability to grow and value faster than ever before. I thank you all for participating today and for your support as we move forward.

[Operator Instructions] Our first question will come from Catherine Mealor from KBW. Please go ahead.

Thanks, good morning everyone.

Good morning, Catherine.

Good morning.

Mainly wanted to start with the expenses, so a lot of moving parts which Bruce you touched on, but if we think about, if you back out the FDIC has been severance to savings from the workforce reductions and some of the outside story of expenses, we are kind of getting to 8.39 expense base going into the fourth quarter. Can you talk about, does that feels appropriate and are there any other cost savings that you’ve had at your fingertips? And then on the other side of that how should we think about how some of these new branches coming online will grow, what kind of piece of growth we should see from that level going into 2016? Thanks.

All right. This is Bruce, I will speak to the expense levels and then Rex will speak to the branch situation, but 8.3 would be a good base to start with to the extent that you have OREO cost, they go up and down as you know quarter- to-quarter, but 8.3 is a good ramp, 8.3 to 8.4 that range, we also have some retirements that will begin and they will not come into effect until the first quarter of next year, but we’ll get a slight lift in the salary section off of that. So based on the fourth quarter number you can back off, basically the salary line is going to be in between and what we reported for the third quarter and the second quarter. So about 4.6, but in any event 8.3 to 8.4 is a good place for non-interest expenses to be.

As far as the branches Catherine, the Bon Air branch was an old brands of my former bank and when it was shut down it had $48 million and a pretty good deposit mix. We opened it up on a soft opening in late August and had the grand opening a week ago. And we think that will probably grow in the $14 million or $16 million in the next 12 months. Fairfax - and we do like the model of having a loan production office first. And we’ve had the loan production office up in Fairfax. We’re getting a lot of traction up there and I think that was a former branch office also right across from the main part of the Fairfax Courthouse. And I think again that’s probably another where you will see somewhere between $15 million and $20 million of good deposit growth and probably 10% of that is going to be a non-interest-bearing account so that’s what we aim at.

Great. And so the Bon Air branch is already included in this quarter’s run rate probably.

Yes.

Yes.

Okay and the Fairfax will come online in the fourth or first quarter?

That will be first quarter.

First quarter, okay, great. And then on the margin, can you talk, first you talk a bit about the loan pipeline, Rex you mentioned that loan growth should be steady, so how should we think about that in terms of a growth rate, it’s kind of 5%, can you continue the 5% growth rate you think going into next year and then how is better volume being offset by these lower yielding small business loans that you are putting on the book and how should we think about the forecast of the margin moving into next year?

Yes, I think the margin, you will see the yield on loans drop a little bit and a lot of that is due to mix, I think we’ve reprised already this year what was going to happen on some of the bigger real estate things. Our focus right now is a lot of small business lending, we are picking up and ramping up some of the consumer lending and those seals, to start with are little low, but they are adjustable rates, which we like putting on the books in this interest rate environment. And I think we’re hitting a little over 8% growth year-over-year and I think going into next year we’ll probably sit right around 8%, it looks like the pipeline for right now could be somewhere around $20 million for the fourth quarter in loan growth and I think the yields on those are going to hold this fairly steady and I think we’ll probably see a little bit of the deal going into the year, but I think the growth at 8% more than offsets any yield degradation yet.

Okay great. And my last question is on profitability, can you talk about profitability growth as part of this growing to win campaign and what you’re targeting for your ROA to head as you get into a normalized run rate?

We have just finished a strategic session with the management team and in that session, on the growing to win theme we talked about the fact that we need to get to a point now in ROA and that we need to try to work on all the fronts whether from production side to the non-interest income business lines increases, to expense controls, salary controls and that is our goal to get to that point now and as rapidly as we can.

Great. All right thanks. Congrats on a great quarter.

All right, thank you.

Thank you.

Our next question comes from John Rodis from FIG Partners. Please go ahead.

Good morning guys.

Hi, John.

You guys are busy this quarter?

Yes we were.

Hey Bruce maybe a question for you on interest income, the interests and fees from PCI loans was obviously down some this quarter, but if you look at the sort of the five quarter average it’s around $2.2 million and I know that’s a hard number to predict, but do you think it sort of stays around this quarter’s level or does it migrate back towards $2 million give or take?

I would certainly think that the yield now of course that’s an ever increasing portfolio, but as far as the yield is concerned, I would consider that to be a floor and we have not seen because there are primarily 1 to 4 family mortgage loans. The balances don’t role of that rapidly, so I would certainly consider 10.97 to be a floor and for now 1700 a floor and slipping slightly.

Say that again Bruce.

1700 is the floor as we sit today, but as the balances decline the dollar amount will decline, but the yield basically a floor at 11%.

Okay, fair enough. And then the, what is, the tax rate has been low 20s, what sort of, what do you think is the best tax rate going forward?

For internal purposes and projecting forward, I would use – I personally use a 25% rate because sometimes we come in just a little bit under that, sometimes it’s a little bit over that depending on what we have going on. So given the level of tax-exempt municipals we have and boldly I would say that 25% is a good prognosticator.

Okay. And then Rex may be just a question for you. I guess there has been a few acquisitions announced in your market recently. Are you seeing any opportunities to hire some new lenders, any fallout from those deals?

Absolutely, we are seeing all kinds of opportunities and I think it’s going to be an interesting fourth quarter and first quarter as these new banks try to figure out the Richmond marketplace. I think when that happen, that does give us lots of opportunities to get some new business in from some of these other folks and to get some quality people too.

Okay. And then Rex just back to the ROE target 0.9%, you said as rapidly as possible but realistically is that a year or is that under a year, over a year what do you sort of think?

I’m hoping when we get to the end of next year that we are looking at the fact that we may a number that hits 0.9% for the whole year for 2016. So that goal is to be able to say that by the time 2016 hits and we run the numbers out that you’re looking at after-tax number that is somewhere in the 10 plus range that gets you that number.

And did you think you need to - at least on the expense side, do you think you need to make any other big adjustments I guess to get to that level? Or is it that basic?

Yeah, I think if we can get that 8% growth in our loan portfolio and hold the yields where we predicted that will come about, but that was based on a fairly flat rate scenario, so depending on what as everyone [ph] does with interest rates and competitive factor that all weighs in. But again we have the flexibility if you don’t get on one side of the income statement, you always hit the other but our goal is to do it from growth as we said at mid-Atlantic, the oil campaign is growing to win.

Okay, makes sense. Thanks guys.

Thanks.

Our next question comes from Jeremy Hellman from Avenue T Fund. Please go ahead.

Hi, good morning guys.

Good morning.

I wanted to ask about – I noticed in the supplement actually that on prior quarters, but particularly given some of your comments early on and some variable rate loans out there, if you kind of look may be in aggregate how much of a rate rise do we need to see in the markets before your portfolio - for your book or portfolio gets above any flow rates?

1 to 1.25.

Yeah.

We get 100 basis points to 125 basis points, we will start breaking through most of those forward.

Okay, sounds good. And then - sorry, go ahead.

We have some different floor levels, batches of loans and where we put them in the rate cycle. So they won’t all kick in at one time but 1 to 1.25 is a good range.

Okay, thanks. I just wanted to get a broad sense of that. And then secondly talking about your ROA goals and the like, the thought on my head was more along the lines of what sort of top level strategic goals you have for next year or may be three years now? Is there anything that you have in mind besides just really grassroots execution?

The M&A front is always out there and I think again that is one that you saw plan four as a secondary measure. You can’t count on it obviously but I would hope that as we gain in strength and value the multiple of a tangible book makes our paper very valuable. I do believe Jeremy the more I am out and talking to some of my competitors and small institutions they are starting to feel the pressure and the expense that is coming with complying with Dodd-Frank, complying with Cecil [ph] I think the boards and some of those management teams are starting to realize it’s just – it’s a very difficult proposition to give the shareholders any real return unless you get some size and some scale. And so I do believe there will be some opportunities for us to partner up with some smaller banks in these markets, where we are trying to expand and that obviously propels it forward significantly and we keep our eye up on that.

Okay. One last one from me and this is something that is more an item for outside of this call, but I wanted to know if specialty loan programs are something you would look to develop more particularly in terms of solar color financing where you’ve got homeowners in the Richmond area that might be looking to do residential solar in particular I’m in touch with an entity that’s looking for a financing partner. Is that a conversation we’re pursuing?

Those are always tough things. We had a conversation yesterday with some guys that were trying to do rural expansions for helocs saying some of the rural markets are now being served and it’s the such specialty in certain areas that by the time you can get somebody in that’s specialized in and then you got somebody that understands it on the servicing front, it’s hard to get the yields out of those. I think if we looked at anything from a specialty standpoint going forward, the first thing we would do is probably explore the SBA type loans.

Okay thanks for that color. Appreciate it. Good luck guys.

Thank you, Jeremy.

Thank you.

[Operator Instructions] I’m having no further questions. This will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Rex Smith for any closing remarks.

I like to thank everybody again for participating today and for your ongoing support. As we said, we look forward to finishing up the year in style and getting ready for a great 2016. Bruce and I will be available for the rest of today and next week. If any of you have questions as you get into the press release and some of the numbers, we are always happy to discuss it with you and thank you again.

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