Update 11/6/11:

BTC came out with earnings in late October and managed to show continued improvement on the asset quality side with nonperforming assets declining 10% over the quarter ended 6/30/11. The company believes it should benefit marginally as a large percentage of its deposits reprice over the next six months. On the company's CC, management stated that they believed they were now in a position to try to grow the bank's balance sheet, stating that ideally it would be $300M larger then it is currently.

Overview:

Community Bankers Trust (BTC) is a community bank based in Virginia with 24 full service branches scattered across Virginia, Maryland and Georgia. The company has total deposits of $910M and assets of $1.06B. Community Bankers Trust’s history is unique in that the company came into existence as a SPAC and subsequently acquired numerous banks, the last two of which were bought from the FDIC. These deals, which brought the company new locations in Georgia and Maryland, did not work out nearly as well as the prior management team had planned, primarily as a result of substantial integration issues and trouble in the company’s core Virginia market. Nevertheless, the company is still benefiting from $104M in FDIC covered loans, which comprise a significant portion of the bank’s $605M loan portfolio. It is my opinion that Community Bankers Trust is likely the most attractive distressed bank in the country with total assets of $1B or less.

Community Bankers Trust is a poorly understood community bank whose “story” has been corrupted by recent acquisitions and poor leadership on the part of the bank’s past management. Nevertheless, the bank’s strong capital levels have allowed the company to survive far better then some of its less capitalized peers. When the bank’s strong loan loss provisions during 2010 and the first half of 2011 are coupled with its current portfolio of non-covered nonperforming assets, it is clear that Community Bankers Trust has likely reached an inflection point, as loan loss provisions should decline going forward. The resulting improvement in the company’s income statement, when coupled with a new CEO, improved internal controls and strong branch integration efforts going forward should help to unlock shareholder value. Trading at just over 30% of tangible book value, while substantially reserved, Community Bankers Trust offers significant upside to investors willing to own a well-capitalized community bank in a region that offers significant market opportunities for the banks that have survived the financial crisis.

Brad Golding of Christofferson, Robb and Co. has previously written up Community Bankers Trust on SumZero and I would recommended anyone interested in the name to give it a read.

Asset Quality:

The quarter ended 6/30/11 likely marked a significant turning point in the efforts by Community Bankers Trust to get a handle on its far-flung loan portfolio. This can be seen especially well when one compares the company’s most recent quarterly report to the company’s quarterly report for the period ending 3/31/11. For the quarter ended 6/30/11, the bank reported non-covered nonperforming assets of $50.1M ($12.3M of which was OREO) as compared to $49.6M ($7.3M of which was OREO) for the quarter ended 3/31/10, an increase of only $815K. While the 6/30/11 numbers are still significantly above the non-covered nonperforming asset numbers reported during the prior year period and the preceding quarter, it should be noted that the company has undertaken efforts to the standardize the company’s loan origination and risk management efforts – two areas that were clearly underinvested in during the company’s expansion efforts, which has likely been responsible for this recent spike in nonperforming assets. Given the bank’s new CEO and a slight recovery in the economy, I believe the company’s non-covered nonperforming asset numbers are likely to have peaked during the first half of 2011. While some may argue that a double dip could potentially have a dramatic impact on the company’s loan book I would argue that given the bank’s position in the “basket-case” states of Virginia, Maryland and Georgia that it has likely already experienced the majority of its impairments given how far asset values in these states has already fallen.

Community Bankers Trust’s non-performing assets are significantly reserved, particularly when one remembers how hard hit the bank’s key markets have been over the last 2-3 years. While property prices may fall further, the rate of decline has surely decreased dramatically. At the end of the 3/31/11 quarter, the company had $21.5M in loan loss allowances covering 50.8% of non-covered nonperforming loans and 43.4% of non-covered nonperforming assets. At the end of the 6/30/11 quarter, the company had $16.8M in loan loss allowances covering 44.5% of non-covered nonperforming loans and 33.5% of non-covered nonperforming assets. While these ratios may seem low, relative to what they were, it is important to note that according to the company’s 10-Q the bank had $11.0M in restructured loans on its books that appear to be performing as of 6/30/11 that are included in the non-covered nonperforming loan number. It is likely that the company’s reserve ratio is significantly higher then what it would appear when one takes into account the company’s restructured loans as well as the recovery that they will likely receive from the sale of properties in their OREO portfolio.

Regardless, the company’s pipeline of problem loans appears to be slowing. For the quarter ended 6/30/11 the company reported $8.2M in loans 30-89 days past due as compared to $14.6M in the 12/31/10 period – not all of which will fall into the nonperforming asset category. The slight improvement in this metric suggests that the bank’s management team has finally gotten its loan book under some measure of control.

The largest problem area for Community Bankers Trust has been related to constructions and land development loans, the company had $20.7M in non-covered nonperforming loans in this category as of 6/30/11. The company’s non-covered loan portfolio breaks down as follows:

Loan Type ______________Amount (M)______% of Total Portfolio

Residential______________$131.21________26.18% 

Construction/Land______$85.02__________16.96% 

Commercial Real Estate__$197.89________39.49% 

Second Mortgages_______$8.31__________1.66%
Multifamily______________$13.39_________2.67%
Agriculture______________$2.56__________0.51%
Commercial_____________$51.51_________10.28% 

Consumer Finance_______$9.60__________1.92% 

Other___________________$1.71 __________0.33%

Total Loan Value:______$501.19

Valuation:

At $1.10 a share, Community Bankers Trust has a market capitalization of $24M and trades at a large discount to its fair value. This can be seen in the company’s most recent quarterly report, which shows shareholders equity of $109M and a tangible book value of $76M, after backing out intangibles and the company’s TARP investment, giving the Community Bankers Trust a price to tangible book of just over 30%.

As discussed earlier, the bank has already endured three long years in regards to its efforts to get a handle on its loan portfolio, when this is coupled with the inflection point seen in the bank’s amount of loans 30-89 past due totals, particularly when coupled with the bank’s loan loss allowances, one can place some faith in the view that the pressure on the company’s income statement should ease going forward. This view is further supported by the fact that the company generated $247K in net income for the quarter ended 6/30/11, the banks first positive net income figure in years.

On a tangible price to book basis, excluding the company’s TARP investment and intangibles, Community Bankers Trust could potentially be valued as follows, once valuations return to more normal levels, which I believe will be driven by the current management teams efforts to right size the bank’s structure so as to generate an acceptable ROA:

Price to Tangible Book____1.0x TBV_______1.5x TBV  

Share Price_______________$3.57__________$5.35  
Return @ $1.10___________224%___________386%      

On an income basis, Community Bankers Trust is likely trading at a significant discount to its likely normalized earnings ratio. Figuring out what the bank’s normalized earnings are is a rather imprecise art, particularly in the case of Community Bankers Trust as the company has taken on enormous short term expenses related to its acquisitions, while at the same time expensing numerous bad loans through the company’s books. In the short term, it is likely that the bank will continue to shrink its balance sheet, further reducing the bank’s earnings potential, nevertheless, one should be able to easily get to a post-tax, post-provision, normalized net income figure, that excludes the various intangible amortizations, FDIC charges, etc., of somewhere between $5-10M, although this number certainly depends a great deal on the company’s ability to keep/build a healthy loan portfolio. If one were to assign a multiple of 10-15 on these earnings, one could value the company at between $2.32 - $6.98 a share. Should Community Bankers Trust generate a track record that shows the new CEO’s ability to control loan losses and expenses, it is entirely possible that the company’s stock will be “revalued” in a manner that would generate a significant rate of return for investors. Until this happens one has a tremendous margin of safety given the company’s current price to tangible book.

Catalyst:

Community Bankers Trust has likely reached an inflection point in its battle against loan losses as evident from the declining nature of the company’s pipeline of nonperforming loans that are 30-89 days past due as well as its various nonperforming asset figures. The decline in the company’s loan loss provisions going forward will significantly improve the company’s income statement, particularly given the decline in the company’s noninterest expenses that will likely occur in addition as a result of the bank likely not making any additional acquisitions in 2011. Given the company’s recent quarterly results, the process of returning to normalized earnings has likely begun to occur. As such, investing in Community Bankers Trust likely makes good sense for those willing to expose their personal account to a small community bank. While one waits for the company to get its cost structure sorted out, investors will have a significant margin of safety as a result of the company’s current discount relative to its tangible book value.

In terms of insider purchases, nearly every insider has purchased shares in Community Bankers Trust during the last six months amounting to over 130K shares – all at current prices – showing that they are attracted to the company’s common stock at its current valuation.

The one significant overhang that does exist for the company revolves around its Written Agreement with the Federal Reserve Bank of Richmond. Most of the points raised by the agreement revolve around issues that Community Bankers Trust has already begun to resolve through its new management team and by its efforts to improve its internal monitoring procedures and its loan book in general

I expect the stock to be at 3 within two years.

At its current price, BTC is priced as if it is going to fail - I believe that this is not going to happen. The margin of safety needed to invest in BTC exists as a result of it being priced at 30% of tangible book value with ample loan loss reserves and a fixed income portfolio that is only going up in value.