Good day and welcome to the Community Bankers Trust Corporation First Quarter 2018 Earnings Conference Call and Webcast. All participants are 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 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 first quarter of 2018 for Community Bankers Trust Corporation, which is the holding company for Essex Bank. Let me start with our 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 these documents through our website at www.cbtrustcorp.com. On today’s call, I will give a quick overview of the quarter. Bruce Thomas our Chief Financial Officer will cover selected financial highlights and then I will share thoughts on the rest of the year. As most of you know that winter quarter can be difficult due to the weather and the shorter timeframe. Despite an unusually cold winter and spring, the company had a respectable start to 2018. We continue to build the core earnings power of the company. Loans, excluding the purchased credit impaired portfolio grew $22.3 million for the quarter or 2.4%. For the 12 months ended March 31, 2018, loans grew a total of $112.1 million or 13.2%. We continue to diversify our loan types and the growth was geographically spread among our major markets. Part of that growth in the quarter was the purchase of a $9 million high-quality end-market consumer auto pool. The purchase occurred at quarter end and therefore did not contribute to income…

Thank you, Rex. And I would like to thank you all for joining us on this morning’s call. Net income of $2.6 million in the first quarter of 2018 was $0.12 per common share compared with $2.5 million in the first quarter of 2017 or $0.11 per common share. First I will identify specifics to our abnormally higher than usual group benefit costs. Our total group insurance cost were $792,000 in the first quarter of 2018 compared with $88,000 coincidentally in each of the fourth quarter of 2017 and the first quarter of 2017. This is an increase of $703,000 over each period. The bank was presented with an unusually higher than normal claims expense during the first quarter of 2018. We view this as an anomaly and not the runrate going forward. In fact, our total expense is capped and we believe we have already absorbed about 50% of the total allowable expense in this category for 2018. The impact on a linked quarter basis and year-over-year basis was 2.5 cents per share. Should you consider the comparison periods to be on normalized cost, then we would have come in for the quarter right at those estimated by our analysts and what we had budgeted. We anticipate this is simply front-end loading of the expense for the year and we should make up the charges in future quarters through lower group benefit costs. This is not viewed as a one-time hit to our earnings. There were some very positive developments in the quarter. First, our yield on earning assets increased from 4.52% in the fourth quarter of 2017 to 4.60% in the first quarter of 2018. Meanwhile, funding has become very competitive as well and our interest cost increased but by a lesser degree than the increase in yields.…

Thank you, Bruce. Our main goal has always been and will continue to be to increase shareholder value. Given the predicted rate environment, we believe that it is prudent to focus more on the funding side of the balance sheet than to focus solely on loan growth. Additionally, we are working to diversify our loan portfolio in terms of structure, types, geography and pricing. Ultimately, we focus on the long-term implications of the structure of the balance sheet and the most efficient and effective ways to achieve it. We believe this will lead to better earnings growth and asset growth, but we are not focused on growth for the sake of growth. While the spike in health benefits cost was disappointing, being self-insured at our size is the most cost-effective way to provide those benefits. But as we said, this was a timing issue, so I am not concerned about it going forward. We are in the three of the best markets in the Mid-Atlantic, which gives us the opportunity to grow earnings from controlled growth strategies. We are committed to enhancing franchise value and to grow earnings per share at a better than average level without taking undue risk. We remain excited about the future of the company. We will balance the growth of the franchise with increased earnings and continue to gain scale efficiencies for the company. We look forward to the rest of 2018. I thank all of you who participated in the call today and for your ongoing support of the company. With that, we will now open the call for questions.

[Operator Instructions] The first question comes from Austin Nicholas of Stephens. Please go ahead sir.

Hey guys. Good morning.

Good morning, Austin.

Hey, Austin.

Maybe on the auto loan pool that was purchased, could you maybe give us some background on that and maybe just in terms of the prime, non-prime nature of it, FICO scores generally and then maybe what kind of yields are coming on from that book?

So, it’s pretty much short-term in nature. FICO scores are 700 plus and it was geographically around our marketplace. It’s from a group that we’ve done some work with before and very familiar with and the yields are…

304

304, correct, and they are servicing it for us.

So in terms – a short amortization period, if rates go up, that’s going to be throwing a lot of cash flow back to us. Additionally, it will – and all banks are aware of this now. It puts some consumer lending in which dilutes the CRE concentrations on the portfolio and it’s got a good total return profile and rates up. And as I mentioned earlier, we were looking at $4 million of loan growth through February because of the weather and just everything that was going on and we started looking at this pool in early March and while we ended up having a great quarter for loan growth, $22.3 million, but only $4 million of that had been booked through February. So, everything point in the direction, this was a good asset and when you compare to security deals that were out there at the time, given the weighted average life of this is much more attractive than securities.

Makes sense. Okay, that’s helpful. And maybe as you think about the value of core deposits, you mentioned that, Rex, are there any changes you are making on the incentive side of things to try and bring in more of those core deposits versus, call it loans?

Yes, next we start a feet on the street campaign in all our marketplaces which is going to increase that incentive comp to go out and get those demand deposits in the door and we’ve always had that as a part of loan officer incentives. So, everybody’s got that incentive and even at the top of the house, the total executive comp is built to include demand deposits and the growth we are getting there in that.

Got it. Okay, and then maybe just one last one. On the M&A, what’s your outlook there? And then, maybe what kind of scale would you ideally have the company get to, to optimize its profitability?

Every – right now, every little click makes a good difference for us, because we’ve built a scale that it’s become as easily scalable at this point. As you get close to $2 billion that’s a really good number and that starts putting some good optimization. And so, we are pushing to try to do that. And it has been quiet, the first quarter was very quiet on the M&A front. I think, there were some things going on in Southern Maryland, and Northern Virginia with the absorption of a few deals that been announced in 2017. But I think as we go into 2018, you still – you got some regulatory relief out there. But I think some of the small to mid-size community banks are really beginning to feel the cost of regulation and the cost of working in this environment and I think the interest rate changes are going to show some folks – and the aggressive nature of competition that we might have an opportunity.

Makes sense. Thanks for the questions guys.

The next question comes from John Rodis of FIG Partners. Please go ahead sir.

Good morning guys.

Hi, John.

Hey, John.

Let’s see. I guess, back to the auto loans for a second, do you guys have any plans to purchase any more loans later this year?

We don’t have anything definitive at this point, but we always look for opportunities and we talk to our friends in the business about it and we see some things that come in from time-to-time on both the home equity front, the auto pool front. We don’t do – we would not do anything that was not in our geographic footprint and that wasn’t sort of a prime underwritten deal. But we may see that opportunity.

Okay. On the expense side, you obviously highlighted the benefits cost. So, if you sort of normalize benefits this quarter, expenses were roughly – what, $8.7 million? So, is that $8.7 million just sort of some modest growth off that base going forward this year. Is that the right way to think about it?

I think – so, I think that, as we look at the benefits cost, the increase was about a penny a share for the quarter. So, take that down if it’s normalized.

2.5 cents.

Year-over-year.

Year-over-year and linked-quarter.

But based on what our expenses are going forward…

Right, right.

About a penny a share.

Right, because we are going to have a higher

Premium price.

Price going forward.

So, you said on the…

Not to that degree.

So, if it – if the benefits was $792,000 this quarter, you said you were here capped and you said you’ve already reached, what, 50%, is that what I heard?

We expected we are close to 50% of what our total cap would be.

So that would imply what, $1.6 million for the year? Am I thinking about that right?

That is what we think that it will be.

Yes.

Okay, okay. So, the difference over the next three quarters.

Correct.

Okay. And then, Bruce, maybe just on the margins, 376-ish, given your various deposit campaigns and pricing competition, do you think you can keep the margin around the 375 to 380 level?

Well, I guess, the answer to every question is, it depends. So, if we get the anticipated rate hikes that are projected in the swap curve, then the beta on the asset side should be higher than on the liability side. But I can tell you, there is lot of pressure on the bottom half of the balance sheet right now. Competition for deposits is pretty keen and I think it is lagging the wholesale market. But I just told Rex, I rolled over this morning a Federal Home Loan Bank advance, one month advance. It’s 23 basis points higher than it was one month ago. That’s going to catch-up on the retail side. So, I am hoping for that the swap curve is right and that we see the increases in rates. But if we don’t see a rate change, then the beta is going to be higher on the bottom half on the liability side. But, given that, we did see a rate increase from the fourth quarter to the first quarter and the change was greater on the asset side.

Okay. That makes sense. Okay, and then, Bruce, maybe just one final one on the tax rate. Is 17% to 18% going forward still a good number?

Yes. We are projecting 18% for our budgeting purposes.

Okay, okay. Thanks guys.

Yes, sir.

The next question comes from Stuart Lotz of KBW. Please go ahead sir.

Hey guys. Good morning.

Good morning.

Just a quick question on the NPAs this quarter. I know we saw a little bit of an uptick and criticized as well as the OREO. So I just want to get your color – a little bit more color on that if that’s could be an issue going forward or is that due to some seasonality from the quarter?

It’s not a concern going forward, Stuart. It’s – I’d answer as one particular deal that has an issue could make the number tick up a little bit. In this case, it was a liquidation of a corporation that was – we had accounts receivables and some inventory stuff and it was being pushed out the door and as we liquidate it we are going to get a hold on it. But there is nothing within that group that gave us any real hard part of concern.

Okay. Yes, and it’s pretty much my only question. Everything else has been asked.

Okay.

[Operator Instructions] The next question comes from Blair Brantley of Brean Capital. Please go ahead sir.

Good morning, everyone.

Hey, Blair.

Just to go back on that asset quality question, so that increased in the special mentioned lines, is that where that was showing or is that credit you talk about, was that in the NPLs?

That was in the NPLs. The special credit was – special mention was one other credit. And those are – we have encouraged our loan officers to be for providing us anything that starts to look a little funny. Go ahead that’s with the special mention category is for. That’s where we put it in there in the short-term category. We put it in there and that’s where we put it under the microscope and it’s really going to migrate back up as we make some work on or it’s going to become one where it becomes a workout situation. And as I said, nothing I saw in the quarter will gave me any real concern that this is a – that’s going to be there is any issue out there.

And that was a $10 million credit then, that one credit?

No.

Okay, because I mean, because you went from about $9.5 million to $19.5 million in special mentioned loan. That’s a kind of the big jump.

I have to – that have to get a little further into it, Blair, but I don’t – there wasn’t anything particularly – particularly in one or two deals. It was one larger deal we were - as we said we were working through and that is on the way to be cured right now and that was about $4 million in total.

All right. Circling back on the expenses, so, Bruce you said this was not a one-time thing. So it was just more of a timing, but you are working off of a higher base. Is that how you are trying to explain it?

Yes, the premium that we anticipate is higher than it was last year. So, the benefit cost will be higher than they were last year. However, this quarter is not the anticipated runrate. I mean, it’s lower than that and we anticipate that we’ve hit 50% of what the total could be for the year, around 50%.

Okay. So, as we look out into 2019, because that’d be a summer situation or is it just be more just off of an elevated base?

Well, we go into the negotiation process on our benefits starting in September and beat up vendors as much as we can to get the best package and cost for our employees. So, I don’t know at this point what 2019 holds for us. This is the fourth year we’ve been self-insured, Blair, and it does go up as the number of employees increase, that’s automatic. But it’s also, for the last couple of years, we’ve been able to hold that percentage of increase down to like, 3%, 4%, 5%. This year, it was about an 8% increase and we are – the company eats part of it, the associates have to eat part of it. But, as you know, healthcare cost for – when we look back for the just the increases, we’ve had to stomaching the last four years, it’s been a lot cheaper than a lot of other companies are same.

And here, we are out of thought we are self-insuring is better than paying premiums, lower cost, but premiums would be smoother on a quarterly basis, but more expensive and were not quite large enough that the law of large numbers can mitigate some of the claims that come in, in the timing of them and so forth. So, it’s a bit of a catch to 2022, but we are definitely better off overall with the self-insured route.

Okay. I know, obviously with the loan growth this quarter, I sort of see loan growth was pretty strong. Can you just give us some updated comments around pricing and what you are seeing on – in terms of fixed rate stuff versus the variable rate in treads, just a raw view of what you are seeing out there?

We’ve been concentrating as I said on the variable rate loans and trying to get our mix more in that line and that’s what we saw in the quarter. Fixed rate is – there is some irrational pricing out there. There is some guys that are trying to buy market share, specifically in Central Virginia there is some new players in town that are smaller community banks and they are extending out the curve and they are doing a lot of fixed rate commercial real estate stuff and they have added because, it’s – it’s some of the term sheets we’ve seen just reminds me of like 2006, 2007 where people were starting to drop guarantors off and starting to go to 30 year amortizations. They are starting to fix rates, stood at five years, that linked to seven, eight, nine, ten years. There is some things out there that just are not going to make sense going forward, but, that’s always, that tends to be short-term. As I said, we build the budget around a 9% growth rate. So, I am not – I’ll let him have added it.

Okay. And then finally, just in terms of deposit growth, this quarter was a little bit slower. Is that seasonal for you guys or?

Oh, yes. That’s the worst quarter, because it is – we usually have a lift in December specifically. I mean, it’s above these, because they’ve got their tax receipts in that will happen again most of the municipalities that are with us have two times a year for tax receipts. So they are starting to pick up again and it is – it’s a time a year where everybody just sort of got to - the tax payments went out to the government, holiday bills are being paid. It’s a winter month. So it is a from a balance standpoint, we tend to have our lower balances in that first quarter. But it is – it’s a huge emphasis for us. As we’ve said, we’ve built about three branches a year and we are really laying in on those branches now to step up and get the growth rates that we think they are capable of.

So, is the goal to match loan growth?

Absolutely.

Yes.

All right. Thanks guys.

Yes, sir.

There are no more questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Rex Smith for any closing remarks.

I would like to thank everybody for participating this morning and remind you that Bruce and I are available today, if you have any follow-up questions, we are happy to discuss them with you. So, thank you all.

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