Earnings Call Transcript
CIVISTA BANCSHARES, INC. (CIVB)
Earnings Call Transcript - CIVB Q4 2022
Operator, Operator
Good day, and welcome to the Civista Bancshares year-end 2022 Earnings Conference Call. Before we begin, I would like to remind you that this conference call may contain forward-looking statements regarding the future performance and financial conditions of Civista Bancshares, Inc. that involve risks and uncertainties. Various factors could cause actual results to differ significantly 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 replace the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on the Civista Bancshares website at www.civb.com. At the end of Mr. Shaffer's remarks today, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Please go ahead, sir.
Dennis Shaffer, President and CEO
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter 2022 earnings call. I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Charles Parcher, SVP of the company and Chief Lending Officer of the bank; and other members of our executive team. Let me start by noting several significant accomplishments or transactions that occurred during the fourth quarter. This morning, we reported earnings for the fourth quarter 2022 of $12.1 million or $0.77 per diluted share, which represents a 5% increase over the prior year's fourth quarter. Our full year results were net income of $39.4 million or $2.60 per diluted share for the year ended December 31, 2022, which is consistent with our prior year net income of $40.5 million. During the year, we completed 2 acquisitions, expanded in Central Ohio, had record organic loan growth and achieved near-record profits. I want to take this opportunity to thank all of our employees for their commitment to the organization and for their good work in helping us achieve these accomplishments. Our return on average assets was 1.41% for the quarter and 1.21% for the year, while our return on average equity was 16.09% for the quarter and 12.47% for the year. If we adjust for the $2.9 million in nonrecurring expenses associated with the acquisition of Comunibanc Corp, which closed on July 1, and the $814,000 in nonrecurring expenses associated with the acquisition of Vision Financial Group Inc., which closed on October 1, our earnings per share would have been $0.88 for the fourth quarter and $2.80 for the year. During the quarter, loans and leases grew by $218.3 million or an annualized growth rate of 37.5%. Excluding loans and leases from our BFG acquisition, which occurred during the quarter, net loans grew by $150.9 million or an annualized rate of 25.7%. While we are pleased with VFG's contribution, it was our strong loan growth that drove our quarterly earnings. Excluding the addition of loans and leases that came to us through Comunibanc and Vision Financial and adding back the repayment of $46 million in PPP loans, we experienced $356.8 million in organic loan growth for the year, which is an annual growth rate of 18.3%. Our net interest margin expanded by 11 basis points compared to the linked quarter and by 72 basis points when compared to the prior year quarter. For the year, our net interest margin expanded 28 basis points when compared to the previous year to 3.75%. This is a reflection of our strong core deposit franchise and the disciplined approach we take in managing our deposit rates. In early October, we announced and closed on the acquisition of Vision Financial Group, a small equipment leasing and finance company based in Pittsburgh, Pennsylvania that originates leases and loans nationally. Small equipment leasing represents a new line of business for us. We were looking for other revenue sources to help diversify our income and leasing, which is a natural extension of our lending products, will help us do that. Also in October, we successfully completed the system conversions of Comunibanc and now have them operating on our legacy systems, which will allow us to offer our standard suite of products to customers in Northwest Ohio and the Toledo MSA. Now let's turn our attention to our performance for the quarter and for the year. Net interest income increased $2.1 million or 7% over the linked quarter and $9.2 million or 39.6% over the same quarter in the prior year. Our net interest income for the year increased $14.8 million or 15.5% compared to 2021. The increase was primarily the result of strong organic loan growth across our footprint, a rising interest rate environment, our disciplined approach to managing deposit rates and the addition of Comunibanc Corp and Vision Financial in the latter half of the year. Our net interest margin was 4.14% for the quarter and 3.75% for the year. Both measures reflect expansion over the comparable 2021 period. Similarly, our margin expanded by 11 basis points over the linked quarter from 4.03% to 4.14%. Our yield on earning assets increased by 118 basis points compared to the prior year quarter and by 51 basis points over the linked quarter as our team originated new loans and existing loans on our books continue to reprice at higher rates. Our yield on earning assets for 2022 grew by 43 basis points compared to the same period in 2021, even though our 2021 loan yields were augmented by the accretion of $11.5 million in PPP interest and fees. Funding costs for the linked quarter increased by 41 basis points, while our year-over-year funding cost increased by 15 basis points. We have always and continue to negotiate rates with our large depositors. We are starting to feel some deposit rate pressure in mid-December. To remain competitive, we increased our offering rates on higher pure money market accounts and select time deposits in conjunction with the Fed's most recent move. Our noninterest income remained solid, increasing $4.3 million over the linked quarter. While the quarter included $3.9 million in revenue from our leasing company, we also experienced increases in virtually every noninterest income category over our linked quarter as we continue to focus on diversifying and strengthening our noninterest income stream. 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 of 2021, our noninterest income for the year of $29.1 million was comparable to that of the previous year, as the increases in service charges and leasing revenue offset declines in our gain on sale of mortgage loans. Service charges continue to be a strong contributor, increasing $185,000 compared to the linked quarter and $1.2 million over 2021. Noninterest expenses increased $4.2 million or 18.4% in comparison to the linked quarter. The increase was primarily the result of $637,000 in nonrecurring expenses associated with the acquisition of Vision Financial Group and $1.5 million in nonrecurring expenses associated with the conversion of Comunibanc systems and severance payments to former Comunibanc employees during the quarter. Excluding these onetime expenses, noninterest expenses would have increased by 8.8%, primarily on additional compensation expense related to our new employees. Noninterest expense increased $12.8 million or 16.5% year-over-year as the $3.7 million prior year balance sheet restructuring costs were replaced by increases in compensation expense, occupancy expense, software maintenance expense, professional fees and other nonrecurring expenses related to our Comunibanc and Vision Financial Group transactions. Excluding nonrecurring expenses, noninterest expenses for the year would have increased by 11.7%, primarily on additional compensation and occupancy expenses related to our new employees and additional facilities. Total expenses related to Comunibanc and Vision Financial transactions were in line with expectations and totaled $3.8 million for the year. Our efficiency ratio was 63.2% and 64% year-to-date. If we had adjusted for onetime deal costs, our efficiency ratio for each of those periods would have been 58.2% and 61.4%, respectively. Turning to the balance sheet. Year-to-date, our total loans increased by $548.8 million, which includes the addition of $167.5 million of loans from Comunibanc, $67.5 million in loans and leases from Vision Financial Group and a $42.6 million repayment in PPP loans. Excluding the Comunibanc, Vision Financial Group and PPP loans, our loan portfolio grew by $356.8 million or on an annualized basis of 18.3%. Making the same adjustments for our fourth quarter organic loan growth was $158.6 million or 29.2% on an annualized basis. This growth was attributable to strong commercial loan demand in virtually every one of our markets. Along with our strong year-to-date loan production, we continue to have commercial construction projects at various stages of completion. Our unfunded construction lines remain near record high, and we were at $162 million at December 31, 2022. While we believe the higher interest rate environment will inevitably slow the economy and loan growth, we believe our loan portfolio will grow at a mid-single-digit rate for at least the first half of 2023. On the funding side, we reported a $203.3 million increase in total deposits from year-end 2021 to 2022 with increases in every deposit category, except interest-bearing demand accounts as customers migrated into higher-yielding deposit accounts. If we were to exclude the deposits accounts acquired from Comunibanc, total deposits would have been unchanged from year-end 2021 to 2022, although we would have seen a similar migration from interest-bearing demand and savings accounts into higher-yielding time deposits. We continue to focus on attracting noninterest-bearing demand accounts, which made up 34.2% of our total deposits at year-end. These accounts are primarily made up of operating accounts of our business and municipal customers. We continue to believe our deposit franchise is one of Civista's most valuable characteristics and contributes significantly to our peer-leading net interest margin and profitability. Despite the uncertainties associated with the economy, we have not seen any deterioration in our customers' financial positions across our footprint. In fact, year-end classified loan levels have improved and are below pre-COVID levels. While we did make the $752,000 provision during the quarter, it was solely attributable to growth in our loan and lease portfolio rather than economic stress. In addition, we realized $118,000 in net recoveries during the year. The ratio of our allowance for loan losses to loans at year-end declined slightly from December 2021 from 1.33% to 1.12% as did our allowance for loan losses to nonperforming loans, which was 261.45% at December 31, 2022 compared to 496.10% at the end of 2021. I would note that if we include the credit mark of $5.4 million associated with Comunibanc loans and Vision Financial Group leases, our ratio of allowance for loan losses to loans would have been 1.33% at the end of the year. As we look forward to the adoption of CECL in the first quarter of 2023, we anticipate increasing our allowance for credit losses by $3.3 million and recording a liability for unfunded commitments of $3.4 million. These initial entries will not impact earnings as they will be recorded through equity. While longer-term interest rates have moderated, the higher interest rate environment continues to put pressure on bond portfolios. Although unrealized losses in our securities portfolio begin to moderate in the fourth quarter, we did experience a $67.4 million decline in other comprehensive income from December 31, 2021 to December 31, 2022, related to unrealized losses in our investment portfolio. As a result, we ended the quarter with a tangible common equity ratio of 5.91% compared to 9.25% at December 31, 2021. Despite this decline, our Tier 1 leverage ratio at December 31 was 8.92% and remains well above what is deemed well-capitalized for regulatory purposes. Civista continues to create capital through earnings, and our overall goal remains to have adequate capital to support organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be the payment of dividends and share repurchases. We continue to believe our stock is a value. While we did slow the pace of repurchases during the fourth quarter, we repurchased 7,205 shares of common stock for $152,400 at an average price of $21.15 per share. For the year, we repurchased $742,000 and 15 shares at an average price of $22.58 per share. This represents 5% of our shares that were outstanding at December 31, 2021. We have an authorization of approximately $6.1 million remaining in our current repurchase program. As you know, we added Vision Financial Group, a small equipment leasing and finance company to Civista in October. We have retained our management team and are well on our way to integrating them into our organization. Vision originated $40.6 million in leases and loans during the fourth quarter at a weighted average yield of 9.2%, and we have budgeted them to originate $164.5 million in leases and loans during 2023. In summary, we are pleased with another quarter and year of excellent earnings, exceptional loan growth and solid credit quality. I would like to say again that none of this would be possible without the efforts of our team. So this is fortunate to have people who care about our shareholders, our customers, our communities and each other. Despite the uncertain environment surrounding interest rates in the greater economy as well as the inflationary pressures we are all facing, we remain optimistic. Businesses and consumers across our footprint continue to have strong balance sheets, our loan pipelines remain solid, and we have successfully integrated Comunibanc and Vision Financial Group 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.
Operator, Operator
And today's first question comes from Terry McEvoy with Stephens.
Terence McEvoy, Analyst
Maybe you talked about mid-single-digit loan growth. Could you maybe discuss your deposit strategy or just overall funding strategy if the industry continues to experience an outflow of deposits.
Dennis Shaffer, President and CEO
I believe we have a unique approach with our tax program in the first half of the year, and we manage accordingly. We anticipate an influx of deposits, which, although they fluctuate, are substantial enough to help us reduce our borrowings. We continue to focus on maintaining a strong core deposit franchise, particularly with our noninterest accounts. While we expect some funds to shift into higher-yielding money markets or CDs, we trust that our deposit base is loyal and doesn't require us to pay the highest rates. Our deposit beta for the past year was minimal, at around 11 basis points in the fourth quarter. We anticipate that the deposit beta will increase more quickly this year compared to 2023, which may require us to be more competitive with our deposit pricing. However, we still believe we don't need to be the highest-paying bank to keep our deposits. We aim to be competitive and offer fair rates. Our robust core deposit base will be crucial for banks in the future, distinguishing those with strong deposits from those without. We may need to adopt a more aggressive strategy in 2023 compared to 2022.
Terence McEvoy, Analyst
And then as a follow-up, the leasing or lease revenue and residual income of $2.3 million. I had my notes from last quarter that there was some residual income booked at the end of the deal. So I'm maybe asking, what do you see more normal? Is that a normal run rate going forward? Or was there some incremental gains in the fourth quarter given that the deal closed?
Richard Dutton, SVP, COO
So Terry, this is Rich. And certainly, net lease revenue and the residual piece of it makes it kind of lumpy. But I don't know that we're leasing experts enough yet to tell you that the fourth quarter was different than what we expect going forward. I think I would use that as typical until we tell you otherwise. I think it looked pretty reasonable from what we have heard from our newest members of the team and what we've seen.
Dennis Shaffer, President and CEO
Yes. I would say, Terry, I mean under normal leasing production. Fourth quarter is usually a little higher quarter than first or second quarter. It usually kind of gets back end loaded a little bit. So I guess, as Rich said, we'll give you a little more guidance as we kind of go along here.
Operator, Operator
And our next question today comes from Manuel Navas with D.A. Davidson.
Manuel Navas, Analyst
As we consider the mid-single-digit loan growth target, a significant part of that is attributed to lease originations. Are you still intending to retain a substantial portion of those on the balance sheet? Could you elaborate on the mid-single-digit loan growth mix for the first half of 2020? What are the expectations in that regard?
Richard Dutton, SVP, COO
As we did our forecasting for the year, the mid-single-digit growth rate primarily pertains to the bank loan portfolio. Additionally, we projected about $165 million in production for the leasing side, with plans to hold about half of that and sell the other half in the marketplace. However, as we manage our funding throughout the year, we may adjust those figures slightly. Overall, that's how we have structured our model.
Manuel Navas, Analyst
With kind of the pricing changes at the end of December in the deposit portfolio, what are kind of our expectations of that has the beta changed at all? Like what are you kind of targeting going forward? Any kind of firm guidance on that end?
Dennis Shaffer, President and CEO
Well, beta will definitely change. I think as I alluded to my comments, I think to get a little bit more aggressive there. Rich got guidance there for us is...
Richard Dutton, SVP, COO
Well, I mean I think our deposit beta for the fourth quarter was, what, 11 basis points. And I think what we've modeled going forward is probably more like, I think, I want to say in 12 basis points. Again, I think we've kind of lagged and will continue to lag, but I think the velocity of increases in our deposit rates is going to pick up. But again, I think first half of the year, you're going to see our margin continue to expand, and it kind of depends on what the Fed does on the back half of the year. But I don't see it compressing. It will expand to a point and probably hang out there until the bid makes a big move up or down.
Dennis Shaffer, President and CEO
We are closely monitoring the interest rate curve, which has become more inverted. Therefore, we anticipate that both we and other banks will push to increase loan yields and spreads. Initially, banks have been trying to keep up with the rapid interest rate increases, but we expect to see a normalization in 2023. For our part, we plan to raise our spreads and lease spreads as we enter 2023.
Manuel Navas, Analyst
As you kind of get some of your normal seasonal inflows in deposits in the first half of the year, how much of the borrowings can pay back? Are you targeting to kind of get back to 3, 4Q levels? Like how quickly?
Richard Dutton, SVP, COO
Well, I mean, I guess you never know, but over the last 2 or 3 years, I would tell you that our average deposits from the tax program in the first quarter have been right around and around $240 million, $250 million, and that's been pretty steady each in the last 2 or 3 years. So we could pay back starting sometime the week of February 20, when we'll see that money start to flow in, and we have a bunch more in the beginning. But again, over the whole quarter, if you averaged it, it's about $240 million is what we anticipate.
Manuel Navas, Analyst
And would that go off to borrowings?
Richard Dutton, SVP, COO
Yes. fungible. I mean we'll borrow overnight at the end of the year, what, $390 million, I think, is what we work. So again, that's what it's for.
Manuel Navas, Analyst
What are the BFG loans and leases yielding currently?
Dennis Shaffer, President and CEO
9.2% was the fourth quarter production average.
Richard Dutton, SVP, COO
Was 9.2% Manuel.
Operator, Operator
On for Mike Perito. I want to talk about the loan growth guidance real quick for mid-single digits. It seems like that's a little bit of a deceleration from the recent momentum you guys have had on an organic basis. Is there some conservatism in there just kind of given the economic uncertainty? And like the economy holds up, is there some upside?
Charles Parcher, SVP, Chief Lending Officer
Yes, Tim, this is Chuck. Typically, we have seen growth in the mid- to high single digits in the past. Last year was exceptional for us. Currently, our pipelines have decreased slightly compared to the fourth quarter. We anticipate a couple of significant payoffs soon—one from a completed project and another from a sale of one of our larger companies, expected in the first quarter. We might be taking a slightly cautious approach. While our pipelines are still solid overall, we don't see the same level of momentum as we enter the first quarter. What we're observing now are more substantial deals, but fewer of them. Those with significant capital still in the market are continuing to invest, enhancing their deals to adapt to current cap and interest rates, but the demand from smaller deals has declined somewhat.
Timothy Switzer, Analyst
And what about geography-wise, can you talk about maybe the Columbus and Toledo area? And I know you're probably trying to look to hire some new lenders and those spots. Can you give us some update on how that's been.
Charles Parcher, SVP, Chief Lending Officer
As we reflect on the past, Cleveland was our fastest growing market last year. However, Cleveland, Cincinnati, and Columbus all performed well for us. In Columbus, we engage in more dollar trading, leading to increased development lending. We are completing deals there, receiving payments, and moving on to the next ones. There's significant activity in Columbus, while in Cleveland and Cincinnati, we are retaining more assets on our books. In Toledo, we're beginning to ramp up efforts after losing an employee in the community bank sector. Just yesterday, we hired two new team members to enhance our presence there—one is a 28-year veteran from Huntington and the other has over 12 years of experience with State Bank. We feel we have improved our talent and strengthened our market position. I'll be dedicating more time to Toledo in the first quarter as we move beyond the vision financial aspect. We're definitely looking to increase our operations in Toledo throughout 2023.
Dennis Shaffer, President and CEO
We believe there is significant opportunity ahead. As I mentioned earlier, we're seeing growth across our entire footprint. Cleveland has had some unique challenges, particularly with recent mergers and acquisitions. Over the past five years, there have been notable deals like Huntington's acquisitions of FirstMerit and TCF, along with Cortland being bought by Farmers, which has led to some instability but also created chances for us. Columbus is experiencing remarkable growth due to investments from companies like Intel and Amazon. Cincinnati is seeing consolidation among community banks, presenting us with opportunities to make substantial progress there. Additionally, Toledo, where Chuck has spent most of his banking career, is a market we know well. We have established relationships and contacts, and we see a tremendous opportunity to expand our presence in all these markets.
Timothy Switzer, Analyst
Can we move to expenses just real quick? Do you guys are kind of looking at the core run rate here, and you should be getting some more community bank cost saves, like as we're exiting 2023, is like $24 million, $24.5 million of quarterly run rate, is that kind of like a reasonable expectation, I guess, the cost saves offset by some inflationary expenses and investment.
Dennis Shaffer, President and CEO
We would love to hit that number. I think if you back out the onetime stuff or fourth quarter noninterest expense is about $25.1 million I think what we're seeing for the first quarter of next year is 26.4% is kind of what we're forecasting because we'll have more payroll kind of expenses attached to that in the first quarter. Second quarter next year, we'll have our merit increases, and we're looking at probably a $27.1 million second quarter noninterest expense. And that, I think, barring any significant changes in terms of emissions or whatnot would be a number that ideas to run out for the rest of the year.
Operator, Operator
And the next question today comes from Daniel Cardenas with Janney Montgomery Scott.
Daniel Cardenas, Analyst
Just a couple of housecleaning questions for me. On the margin that you posted this quarter, how much yield accretion was baked into that number? And how should we look at it in '23?
Dennis Shaffer, President and CEO
Purchase accounting in the fourth quarter accounted for about 6 basis points of that. Without it, the number would have been 6 basis points lower. For the year, it was the same figure; it just worked out that way. Looking ahead, that’s a reasonable number to use for the next three to four quarters. It might vary by a basis point one way or the other, but I believe everything is accounted for.
Daniel Cardenas, Analyst
And then on the credit quality front, I did notice a bit of an uptick on your nonperformers linked quarter. What was driving that?
Paul Stark, Analyst
This is Paul. Nothing significant. We have one hotel that has been shut down, not necessarily for COVID reasons, but because of some mechanical issues. And the sponsor has been covering them and then finally stopped paying. So that's a big chunk of it. Again, you have to remember, we brought HCB in as we've shifted some of the culture in terms of the consumer portfolio, some of that stuff has fallen in there. By and large, I don't consider that a trend. It's just more fluctuation as far as what we're dealing with.
Daniel Cardenas, Analyst
And then tax rate, kind of a 17% assumption is still kind of a good assumption for you guys?
Dennis Shaffer, President and CEO
Yes, about 16.7% about 16.7%.
Operator, Operator
And our next question today is a follow-up from Terry McEvoy with Stephens.
Terence McEvoy, Analyst
Just wanted to follow up with the question on capital management. Will the capital impact from CECL? Will that be phased in over 3 years? And then just what are your thoughts here on building capital over the next few quarters?
Dennis Shaffer, President and CEO
Paul can correct me if I'm wrong, but it will be implemented over three years and will take effect in this first quarter. Paul agrees, so that's the correct response. As we move forward, we are increasing our capital and our earnings remain strong. We'll be careful with our approach to share repurchases, and we've significantly reduced those in the fourth quarter. We intend to remain cautious as we progress. Our capital levels are quite robust, though we noticed that the Tangible Common Equity was relatively flat in the fourth quarter, partly due to the acquisition we had, which had some impact. We believe that it will start to improve for us in 2023.
Timothy Switzer, Analyst
And maybe since I've got you, and this is the platform to ask the question. You acquired a bank, integrated it. You are off, you hit the ground running with the leasing company deal. So I guess my question is, what are your thoughts on nonbank or bank M&A in 2023 for your company?
Dennis Shaffer, President and CEO
Well, I think we obviously will continue to explore that. We want to continue to grow if it's the right deal for us and we can do it in a profitable manner that benefits our shareholders and we get employees and customers. We want to try to do that. There are some greater challenges right now when you do an M&A deal with all the AOCI adjustments that we have to look at in the marks that you have to give the credit portfolio, but it doesn't scare us away. We think we've been very successful in doing M&A deals. We think we integrate these pretty well. So we're going to continue to be actively looking and pursuing other deals. We want to get to a certain size because we think we continue to get more we become more efficient as a company. So we'll continue to have dialogue. And if the right deal comes along and it's the right fit for our company, we'll pursue that.
Operator, Operator
Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
Dennis Shaffer, President and CEO
Thank you. In closing, I just want to thank everyone for listening and thank those that participated in the call. Again, we are very pleased with the results of our fourth quarter and for the year, a very, very strong year for us. And while 2023 on would be another year full of new challenges. We look forward to meeting those challenges and to talking to all of you again here in a few months to share our first quarter results. So thank you for your time today.
Operator, Operator
Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.