Prepared by Stephanie, Analyst at BAD BEAT Investing

Our coverage of regional banks continues today with another little-known bank that we received an inquiry into. This comes following a wave of coverage on this sector. There has been a lot of mixed performance in this sector in the most recent wave of reports. That said, Quad 7 Capital believes in taking a contrarian view and starting to build positions in beaten-down names, and there are some good opportunities in the financial sector, and specifically in smaller regional banks.

Today we take a look at Community Bankers Trust Corporation (ESXB). Like we have seen in other banks, low interest rates have weighed, and pressure on bond yields have kept these stocks down. Loan loss provisions are a concern, given the economic woes we are seeing right now impacting borrower’s ability to pay. In this column, we will look at the key metrics we look at for banks like ESXB. The bank has just reported earnings. The stock would be a tremendous buy under $5 in our opinion, though this is another relatively low volume stock so it is subject to big moves. Let us discuss the key metrics you should be looking at.

Revenues cooled off a bit

The bank’s operational results have followed a path similar to that of other regional and major banks. Frankly, we thought the quarter would be worse, though as we will see, EPS was hit but not too hard. Thanks to continued loan growth and deposit strength, the bank saw revenues continue to improve. However, a lower net interest margin weighed on revenues. With the present quarter’s revenues of $14.2 million, the company registered a 5% decrease in this metric year-over-year. Many other regional banks have seen flat to down revenues versus last year, while some are improving. It really is a mixed situation in the sector. The result was about $0.2 million beat against expectation. What is more, we saw great performance on earnings

Earnings performance solid

The decline in revenues year-over-year was offset by expenditures and loan loss provisions. Community Bankers Trust reported net income of $4.5 million, or $0.20 per share, which was a nice increase of $0.02, or 11%, from the same quarter of 2019. What investors need to decide is if there will be continued improvement or not. We believe that 2021 will be even better based on the trends we are seeing for banks. What is more, we see net interest margin improving. Loan quality and a huge change in loan loss provisions boosted performance. Margins should begin to rebound as the bank has seen significant repricing of its certificates of deposits for the next several quarters, which will bring decreases in cost of funds. That combined with the payoff of the low rate Paycheck Protection Program loans will have a positive impact on net interest margin going forward.

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Loans and deposits grow

We are pleased with the progress on loans and deposits. Growth in loans and deposits is key for any bank, small or large. That is how you make money as a bank. You take in deposits at a low interest rate, and lend at a higher one. This model has been working for centuries and will continue to do so well into the future. Loans, excluding purchased credit impaired loans, grew $12.4 million, or 1.1%, during the third quarter of 2020 and $119.4 million, or 11.3%, since year-end 2019.

Loans, net of fees, that the bank originated during the second quarter under the Paycheck Protection Program of the Small Business Administration were $85.1 million at September 30, 2020 and $83.5 million at June 30, 2020. Deposits grew $5.7 million during the third quarter of 2020 as checking, money market and savings accounts grew by $28.5 million and more costly certificates of deposit accounts declined by $22.8 million. Checking, money market and savings accounts grew $192.9 million during the first nine months of 2020 while certificates of deposit increased only $13.0 million. These results should be considered a strength. While the lower rates have impacted returns, as we have said, the main issue here is the loan loss provisions.

Asset quality

Loan growth is a strength, but only if they are quality loans. This quarter saw the loan loss provisions decline. This bank records a separate provision for loan losses for its loan portfolio, excluding credit impaired loans, and the credit impaired loan portfolio. There was no provision for loan losses on the loan portfolio, excluding credit impaired loans, in the third quarter of 2020. There was a provision of $900,000 recorded during the second quarter of 2020. There was no provision for loan losses for the third quarter of 2019. The provisions recorded in each of the first and second quarters of 2020 was due to the heightened risks associated with the loan portfolio that resulted from the economic impact of the rapidly evolving effects of the COVID-19 stay-at-home orders, business shut-downs and increased unemployment.

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Let us provide you some more color here. Lenders reviewed each loan within the portfolio during each period to identify those borrowers that management believed to be possibly impacted by the current state of the economy. Loans identified with increased risk were aggregated by loan type. This analysis indicated a risk grade migration in a number of loan categories that led to a heightened risk level in the loan portfolio. The impact of the loans’ risk grade migration was applied to the allowance for loan loss calculation, which led to the provision for loan losses for each of the first two quarters of 2020. The bank determined that no provision was necessary for the third quarter of 2020. This was a big reason for the earnings beat.

Nonperforming loans were $4.2 million at September 30, 2020, a decrease of $2.0 million from $6.2 million at December 31, 2019. Total non-performing assets totaled $8.6 million at September 30, 2020 compared with $10.8 million at December 31, 2019. This is a decrease of 19.8% during 2020. The allowance for loan losses equaled 292.6% of nonaccrual loans at September 30, 2020 compared with 289.7% at June 30, 2020, 159.3% at December 31, 2019 and 146.1% at September 30, 2019.

The ratio of nonperforming assets to loans and other real estate owned was 0.73% at September 30, 2020, 0.74% at June 30, 2020, 0.89% at March 31, 2020, 1.01% at December 31, 2019 and 1.01% at September 30, 2019. The allowance for loan losses to total loans was 1.05% at both September 30, 2020 and June 30, 2020 compared with 1.10% at March 31, 2020. Overall, this is a bit elevated, but the growth in nonperforming assets has ceased. That is a good sign.

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Bottom line

This was a good quarter. The company even boosted its dividend 20%. That is winning. When we look at loans, deposits, and loan loss provisions, it still looks like a mixed quarter, but followed the trend of some similar banks. Loans and deposits mostly grew. Net interest margin will improve. The elimination of loan loss provisions was healthy, as was the fact that nonperforming loans declined. All in all, investors looking for a small regional bank stock in their holdings can consider ESXB under $5.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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