Civista Bancshares, Inc. Q4 FY2021 Earnings Call

Good day, and welcome to Civista Bancshares Incorporated 2021 Earnings Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd now like to turn the call over to Dennis Shaffer, CEO and President. Please go ahead.

Good afternoon. This is Dennis Shaffer, CEO and President of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter and full year 2021 earnings call. I’m joined today remotely by Rich Dutton, Senior Vice President of the company and Chief Operating Officer of the bank; Chuck Parcher, Senior Vice President of the company and Chief Lending Officer of the bank; and other members of our executive team. Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company’s SEC filings, which are available on the company’s website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures. We will record this call and make it available on Civista Bancshares’ website at www.civb.com. Again, welcome to Civista Bancshares fourth quarter and full year 2021 earnings call. I would like to begin by discussing our results, which were issued this morning. At the conclusion of my remarks, we will take any questions you may have. Let me start by noting several significant accomplishments and transactions that occurred during the fourth quarter. This morning, we reported earnings for the fourth quarter 2021 of nearly $11 million or $0.73 per diluted share, which represents an 8% increase over the prior year's fourth quarter. Net income totaled $40.5 million or $2.63 per diluted share for the full year ending December 31st, 2021, which is an increase of $8.4 million or 26% compared to 2020. Our pretax pre-provision earnings for 2021 were $48.4 million compared to $47.2 million for 2020 and represented the highest pretax pre-provision earnings our company has ever achieved. Our return on average assets was 1.47% for the quarter and 1.34% for the year, while our return on average equity was 12.49% for the quarter and 11.61% for the year. During the final quarter of 2021, our net loans exclusive of PPP grew by $33.1 million or at an annualized growth rate of 6.9%. This gave us $114.5 million in net loan growth, exclusive of PPP for the year and an annual growth rate of 6.2%. In November, we announced the completion of a private placement of $75 million of 3.25% subordinated notes due in 2031 with the proceeds being used for general corporate purposes. We did push a portion of the proceeds down to the bank, and we anticipate using some of these proceeds to fund the cash portion of our recently announced transaction with Comunibanc Corp. We were pleased to announce the recent signing of the definitive agreement to purchase Comunibanc Corp and its subsidiary, the Henry County Bank. We view this as a low-risk transaction with a significant upside that will open the door to business in Northwest Ohio and the Toledo MSA. And we look forward to welcoming our new employees and customers into the Civista family. We continued to be active in repurchasing common shares. During the fourth quarter, we repurchased 73,541 shares at an average price of $23.83 per share. During the year we repurchased 983,400 shares or approximately 6.2% of the outstanding shares at December 31st, 2020 at an average price of $22.59 per share. We view share repurchases as an integral part of our capital management strategy. As of December 31st, we have $9.3 million available from our repurchase authorization, which was approved by our Board of Directors last August. While we ceased repurchases since announcing the transaction with Comunibanc Corp, we expect to resume our repurchase program now that we have announced earnings. Now, let's turn our attention to our performance for the quarter and for the year. As I stated, we were extremely pleased with our loan growth for the quarter and the year. Excluding the impact of PPP loans, our loan portfolio grew by an annualized rate of 6.9% for the quarter and 6.2% for the year, despite having $93.8 million in loan payoffs during the quarter and $236.3 million in loan payoffs during the year. At year-end $43.2 million in PPP loans remained. All first round loans have been processed and all but seven of those loans totaling $622,900 were forgiven. Additionally, 67% of our second round loans have been forgiven. We have $1.8 million in PPP fees remaining at year-end, and we anticipate the forgiveness process to be essentially completed by the end of the second quarter. Net interest income for the quarter declined by $1.1 million or 4.5% compared to our linked quarter and was consistent with the prior year. Our margin for the quarter contracted 20 basis points from our linked quarter, primarily on less PPP fee accretion. Net interest income for the year increased $5.7 million or 6.4% compared to our prior year. The margin for the year contracted 23 basis points to 3.47% compared to the prior year. As we have shared on previous calls, the increased liquidity we experienced as a result of the federal government stimulus program and our tax processing program both continue to have a negative impact on our year-to-date margin. Our non-interest income remains strong, increasing $385,000 over the linked quarter. While the quarter included $187,400 gain from life insurance proceeds related to a policy acquired through one of our acquisitions, increases in service charges and increases in wealth management fees more than compensated for a decline in our gains on the sale of mortgage loans. We can be pleased with the strength and diversity of our non-interest income streams. Similarly, if we back out the impact of the $1.8 million gain on the sale of our VISA B stock that occurred in the second quarter, our non-interest income still increased $1.5 million or 5.3% year-over-year, as we experienced increases in all nine non-interest income categories, except for anticipated declines in our gain on sale of mortgage loans and swap fees. Fourth quarter gains on the sale of mortgage loans totaled $1.5 million or 9% less than the linked quarter and $1.6 million or 52.1% less than the fourth quarter of the previous year. Although production has slowed, mortgage banking was our largest driver of non-interest income during the year. The year-to-date gain on the sale of mortgage loans was $8 million compared to $8.6 million the previous year. During the quarter we sold $54.8 million in residential mortgage loans at an average premium of 268 basis points compared to $56.9 million in the linked quarter and $91.8 million in the prior year. Year-to-date, we sold $260.3 million in mortgages compared to $304 million in the previous year. As we head into 2022, our mortgage pipelines remain solid. Service charges continued to be a strong contributor to income, increasing $294,000 compared to the linked quarter and $617,000 over 2020. Interchange revenue remained consistent with our linked quarter and increased $866,000 or 21.8% compared to the prior year, as consumers seem to be maintaining their cashless buying habits that began during the economic shutdown. Our Wealth Management group continues its strong contribution to non-interest income. While Wealth Management fees were consistent with the linked quarter, they increased $876,000 or 22% when compared to the prior year. We continue to bring in new accounts and benefited from strong financial markets, ending the year with $683 million in assets under management on our trust and brokerage platforms combined. As we discussed during our call last quarter, the year-over-year reduction in swap fees is the result of our decision earlier this year to book select five-and-seven-year fixed-rate commercial loans on our balance sheet. Non-interest expense declined $2.3 million or 11.7% in comparison to the linked quarter. Our compensation expense was down $1.3 million on lower commissions as mortgage production declined. After adjusting for the $3.8 million federal home loan bank prepayment penalty we incurred during the second quarter, non-interest expense would have increased $4.1 million or 5.8% year-over-year. The increase is primarily attributable to a $2.2 million or 5.2% increase in compensation expense and a $922,000 increase in software maintenance, which was primarily the result of the digital banking platform we implemented earlier this year. Our efficiency ratio for the year was a very respectable 59% after adjusting for the prepayment penalty compared to 59.1% for the prior year. Turning our focus to the balance sheet. Year-to-date, our total loans declined by $59.6 million. However, excluding the impact of PPP loans, our loan portfolio increased $33.1 million during fourth quarter and $114.5 million for the year. That equates to an annualized growth rate of 6.9% and 6.2%, respectively. We are pleased with our loan production, which occurred in every market across our footprint. Our loan pipelines remain solid, and we have $108.7 million in approved undrawn construction loans at December 31st. While we continue to battle loan payoffs on completed projects, reduced outstandings on operating lines of credit and increased liquidity of our customers, we continue to expect that we will grow our loan portfolio at a similar pace in 2022. On the funding side, we experienced growth in every category except time deposits. Total deposits increased $227.3 million or 10.4% since the beginning of the year. Non-interest bearing demand accounts, which made up 32.6% of our total deposits at December 31st, grew by $68.1 million compared to December 31st, 2020. $36.3 million of this growth came from the non-interest bearing business accounts and $23.6 million from public entities. We also experienced $127.4 million increase in our interest bearing demand accounts driven by a $60.1 million increase in consumer savings and $28.2 million in consumer MMDAs. While we were talking about deposits, I would like to note that we successfully implemented online account opening through our digital banking service in December. This was the next in a series of initiatives we set out to accomplish when we introduced our new digital banking platform earlier this year. These initiatives are focused on improving efficiency and ultimately to provide a better customer experience for our retail and business customers. During the pandemic, we automatically downgraded commercial loans that requested concessions beyond the initial 90-day modification period. Our total criticized loan portfolio, which includes all classified and substandard loans, declined from $148.1 million at December 31st, 2020 to $78 million at December 31st, 2021. The segment with the largest number of criticized loans remains hotels and lodging, totaling $49.2 million at the end of the year. Many of these operators have experienced increased occupancy from leisure travel during 2021. Despite the lingering effects of COVID on travel, we anticipate increased demand going forward, resulting in further reduction in our criticized portfolio. While uncertainties continue to be associated with the economy, there is improvement throughout our footprint in our customers' financial positions. In addition, we realized $782,000 in net recoveries during 2021. As a result, it was not necessary to record a provision during the quarter. The ratio of our allowance for loan losses to loans increased to 1.33% at year-end 2021 from 1.22% at year-end 2020. Exclusive of the PPP loans, the 2021 ratio would have been 1.36%. Our allowance for loan losses to non-performing loans also increased to 496.1% at the end of the year from 343.05% at the end of 2020. As a reminder, we did meet the guidelines for the delayed implementation of CECL and will not be required to adopt it until 2023. We ended the quarter with a tangible common equity ratio of 9.33% compared to 9.98% at December 31st, 2020. We successfully completed the private placement of $75 million in 3.25% subordinated notes that will be due in November, 2031. We pushed $50 million of the proceeds down to the bank, which lowered our risk-based capital ratio to 291.5% at December 31st, 2021. In addition to raising sub debt, we continue to create capital through earnings. Our overall goal is to have adequate capital to support our organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be dividend payments and share repurchases. We continue to believe our stock is a value and remained active in repurchasing our shares until just prior to announcing the transaction with Comunibanc Corp. Now that we have announced earnings, we will be free to resume our repurchase program. During the quarter we repurchased 73,541 shares of our stock at an average price of $23.83 per share. Year-to-date, we repurchased 983,400 shares at an average price of $22.59 per share. This represented the repurchase of 6.2% of the shares that were outstanding at December 31st, 2020. We have approximately $9.3 million remaining to be repurchased under the current repurchase program. We have shared our desire to grow through acquisition on past calls, and we were pleased to announce the definitive agreement with Comunibanc Corp., the parent company of Henry County Bank headquartered in Napoleon, Ohio. At September 30th, Comunibanc Bank had total assets of $329 million with total loans of $165 million and $276 million in low cost deposits. The transaction adds seven branches in Henry and Wood Counties in Northwest Ohio. The acquisition significantly accelerates our presence in Northwest Ohio and will put us well on our way to having a significant presence in each of Ohio's top five MSAs. Their strong core customer base fits well with our relationship banking philosophy and their nearly 60% loan to deposit ratio will provide liquidity to accelerate our loan growth throughout Northwest Ohio and the greater Toledo area. We anticipate closing the transaction during the second quarter and converting their core banking systems during the fourth quarter. In summary, we are pleased with another quarter and year-end of solid earnings, continued loan growth and solid credit quality. While the economy improved during 2021, labor shortages, supply chain issues, and inflationary pressures are affecting many of our customers. Despite these challenges, we remain optimistic. Our loan pipelines are solid, and we are looking forward to the successful integration of the Henry County Bank into the Civista family. Thank you for your attention this afternoon and now we'll be happy to address any questions that you may have.

We will now begin the question-and-answer session. Our first question comes from Terry McEvoy from Stephens. Please go ahead.

Hi. Good afternoon, guys.

Hi, Terry.

There was the step down in operating expenses in the fourth quarter, which I think you addressed in the press release. Anything beyond what was said there? And then maybe looking ahead, could you help us maybe understand what your thoughts are about expense growth, given inflation and all the things we're hearing on that topic? Thank you.

Yeah. And Terry, I think like we talked about in the earnings release, the primary reduction in non-interest expense was in compensation expense related to commissions on mortgage banking. I think there was also an accrual adjustment related to health insurance that reduced our health insurance expense in the fourth quarter. So, now we're starting a new year in the first quarter. So we're going to ramp up the accrual again for health insurance. You'll recall, we don't give merit increases until April 1st. So when we look at Q1 non-interest expense, probably a $19.6 million number is a good number. And then post that, it’s probably a $20.7 million or $20.8 million non-interest expense number is what we've modeled for the rest of the year. I don't know in terms of inflation. Again, I think we kind of modeled in what we think is going to happen for merit increases and whatnot. But I suppose the farther we get into the year, the less confident I am in those numbers.

Great. Thank you, Rich. And then as a follow-up, there's a lot of buzz on the new Intel factory outside of Columbus. Maybe just remind me what's your current footprint in and around Columbus. And do you think you can capitalize on what that factory could do to the economy down there?

Sure. I think our footprint — in fact, we had right before that announcement actually bought a branch from a credit union. That's about a mile and a half from the site that they'll be developing. It's 3,200 acres that they're developing, and they're bringing 3,000 initial jobs, pretty well paying jobs; the average salary is going to be somewhere around $138,000. But there's 7,000 construction jobs. There's talk that they may build additional plants and it could be close to 10,000 employees that they'll be bringing. I think the opportunities are going to be great. Our boutique banking model fits in very well. We have a presence in Dublin, Ohio. We also have a presence right outside of Dublin, Ohio, in Plain City, and we will have this branch there. But I think it'll also benefit the entire state, Terry. I think there are 150 Intel suppliers in the state of Ohio. And there's talk that some of those suppliers are already seeing increased sales and that's really throughout our footprint, because our footprint covers most of Ohio. So, we think that there's going to be tremendous opportunity to capitalize on that investment into central Ohio and we believe it will benefit the whole state.

Good stuff. Thanks. Thanks, Dennis.

The next question comes from Bryce Rowe from Hovde Group. Please go ahead.

Thanks. Maybe just a quick cleanup question there from Terry's questioning. Rich, the $20.7 million, $20.8 million kind of guide, so to speak for the rest of the year. Does that include the — is that on a standalone basis or does that also include what you're kind of expecting with Henry County?

That's standalone. Yeah. We've not modeled any Henry County stuff in that number yet. That's a good cleanup question.

All right. Good. All right. That's helpful. And then maybe you guys could speak to how you're thinking about the rate picture. Maybe just some background around your asset sensitivity at this point. And then what kind of deposit betas you're baking into the asset sensitivity analysis that you project in your Qs in case.

Rich, I'll have you go ahead and answer that.

I'll answer it in reverse order. We've modeled two rate increases, both in 2022, 25 basis points each, which I think is pretty standard with what I've heard others doing. Again, we're very asset sensitive, like you pointed out. So, rate increases help us. The deposit beta we're using is a blended beta for all non-maturing accounts. The beta is 12 basis points, and that's held pretty steady for the last two cycles. It's not changed much. About 3% of our deposits are non-bearing at all. And I should point out, about a third of our loans reprice every 30 days and another roughly 6% reprices within one year, so about 39% of our loan portfolio will reprice within a year.

Right. Okay. All right. I'll step back out and let somebody else take it away.

The next question comes from Tim Switzer from KBW. Please go ahead.

Hi. Thanks for taking my question. You guys mentioned in your press release you had about $100 million of excess liquidity you wanted to redeploy into the investment portfolio. I was curious how much of that you already did in Q4, and what's kind of the run rate and what you expect for Q1, and then how much excess liquidity you'll still have after that, if any, once factoring in the bank deal.

Tim, at the end of the year we had done about $80 million of that $100 million, so we had roughly $20 million left to redeploy. We hadn't purchased all of the municipals we were targeting yet. Also keep in mind we're entering tax season; sometime mid to late February we'll start to process income tax refunds and we'll generate on average about $300 million in extra cash that'll be on balance sheet for the first half of the year. That creates some pressure on the margin, though it doesn't impact net interest income. Given that dynamic, and given our desire to make loans where possible, we may sit and wait a bit on redeploying every last dollar into securities and prefer to deploy into loans as opportunities arise.

Okay. Thank you. And along with the excess capital that you guys have right now, even with the Comunibanc deal once that closes, you still have pretty solid capital ratios. Do you have a target tangible common equity ratio or anything like that? That would help us put some parameters around what kind of share buyback we could see for 2022.

Yeah. We generally target somewhere in that 9% to 9.25% range for tangible common equity. We think we'll continue to create excess capital through earnings, and the repurchase program is a good way to deploy some of that excess capital. So that nine and a quarter percent tangible common equity ratio is a reasonable target.

All right. Awesome. Thank you, guys.

Our next question comes from Russell Gunther from D.A. Davidson. Please go ahead.

Hey, good afternoon, guys.

Hey, Russell.

Hello, Russell.

Hey, guys. I want to follow up on the margin discussion if I could. Maybe get a sense for where you expect the margin to trend near term, given some of the balance sheet dynamics just discussed. And then if you could help size for us how you're thinking about what each 25 basis point move in fed funds means to you guys.

Russell, the way we modeled it was for each 25 basis point increase in fed funds, we think that's probably seven basis points of expansion in our margin. Regarding near-term trend, tax season cash and excess liquidity provide downward pressure on margin, while remaining PPP fee accretion—about $1.5 million left to accrete—provides some lift. Overall, the margin could float a few basis points up or down in the near term, but as an asset-sensitive bank, rate increases would be helpful to us.

Understood. No, that's very helpful guys. And then just my last question would go back to the loan growth discussion. You guys put out an order of magnitude similar to what you were able to do this year on a core basis and it would just be helpful to get a sense in terms of what you think the drivers of that'll be from a mix, asset class perspective, as well as the growth this year—you called out it was very broad based geographically—just wonder if that would sustain well or any pockets of strength there.

Russell, we feel like that projection of mid to high single digits looking forward is pretty reasonable. One of the secrets behind this year was we grew $117 million, but at the bank we track payoffs over $75,000 for the year. In 2021, we had $236 million of payoffs in that category. To give you an idea, the three previous years averaged $119 million in payoffs. So we felt like we had a really successful year against those headwinds of all those payoffs. As we get bigger, we are doing larger deals and a lot of development deals, but we believe some of that payoff number will fall back in 2022. Those payoffs are not bad payoffs; they're the result of very successful projects being completed and moving on to the permanent market. In terms of mix, we are heavily a commercial real estate bank, but we've hired some additional C&I people with a commercial and industrial focus. We do think we'll work to grow the C&I portion of the book, and with investments we have made—Dennis referenced investment in treasury capabilities—we believe we now have the products and services necessary to bring more middle market companies on board.

That's great. Well, that's it for me guys. Thanks for taking my questions.

I would just add, as we grow the bank, we constantly look at our lending limits and growth does help us make larger loans and that will help us deploy some of the excess liquidity on the balance sheet as well.

Our next question comes from Daniel Cardenas from Boenning & Scattergood. Please go ahead.

Hi. Good afternoon, guys.

Good afternoon.

Good afternoon.

Just a couple of housekeeping questions here. How should we be thinking about your tax rate on a go-forward basis? It was a little bit lower than what I was looking for this quarter, but can you give us maybe a directional guidance as to how we should be looking at it?

We've been bouncing around at about a 15% effective tax rate and I don't see anything that's changed in the tax preference items or the make-up of the balance sheet that's going to change that at least over the next number of quarters, Daniel. So I think 15% is a good number to use going forward.

Okay. Great. And then on the fee income side, absent contributions from the tax business—what's kind of the $6.8 million that we saw this quarter— is that kind of a good run rate to build off of?

I would say yes. We modeled a little slowdown in mortgage fee income, but we also expect some pickup in loan swap fee income to help offset that. Our treasury management momentum should continue to be a bright spot, and Wealth Management was a strong generator of fee income last year. So, ex the tax business, fourth quarter should be a decent proxy for the first quarter in terms of non-interest income, assuming markets are reasonably steady.

And the tax inflows come in similar timing to last year; some in the first quarter and some in the second, so you can model in the same cash flow pattern we had last year.

Good. Thank you. And then, just quickly, what was your CRE to total risk-based capital ratio at the end of the year?

It was 291.5%. We pushed down about $50 million of that $75 million we raised to the bank and then we had a little bit of growth and ended up at 291.5% at year-end. The Comunibanc acquisition will slightly lower that ratio without significant change; maybe a small downward movement, but not drastic without additional growth.

All right. I'll step back for now. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Well, in closing, I just want to thank everyone for listening and thank those that participated on the call. Again, while we are pleased with the results of our fourth quarter and the year, we think that 2022 will be full of new challenges for us. So, we look forward to meeting those challenges and look forward to talking to you all again in a few months to share our first quarter results. So, thank you for your time today.

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