Earnings Call Transcript - CIVB Q3 2021

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Operator, Operator

00:07 Good day, and welcome to Civista Bancshares Third Quarter 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. 00:27 Now I'd like to turn the call over to Mr. Dennis Shaffer, President and CEO. Please go ahead.

Dennis Shaffer, President and CEO

00:34 Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our third quarter 2021 earnings call. I’m joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Chuck Parcher, SVP of the company and Chief Lending Officer of the bank; and other members of our executive team. 01:02 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. 01:45 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. 02:10 We will record this call and make it available on Civista Bancshares’ website at www.civb.com. Again, welcome to Civista Bancshares third quarter 2021 earnings call. At the conclusion of my remarks, we will take any questions you may have. 02:34 Let me start off by noting several significant accomplishments or transactions that occurred during the third quarter. This morning, we reported net income of $9.6 million or $0.64 per diluted share for the third quarter of 2021 and net income of $29.6 million or $1.90 per diluted share for the nine months ending September 30, 2021. 03:09 Our earnings per share for the quarter increased 33.3 percent compared to the third quarter of 2020 as well as 39.7 percent compared to the first nine months of 2020. This is a direct result of our continued focus on growing and diversifying our revenue streams and the disciplined approach that we take in managing the company. 03:38 Earlier this month, we announced a $0.14 quarterly dividend which represents an annualized yield of 2.41 percent based on our September 30 market close of $23.23 and a dividend payout ratio of 21.88 percent. 04:00 We also continue to look for ways to make our balance sheet more efficient. Late in September, we began redeploying $50 million of excess liquidity from cash into investments, which we expect to result in $850,000 of additional interest income on an annualized basis. 04:23 We continue to be active in repurchasing common shares. During the quarter, we repurchased 404,620 shares. Year to date, we have repurchased 909,859 shares or 5.7 percent of the outstanding shares at December 31, 2020. 04:48 Finally, last Friday, we filed a $100 million shelf offering, which was a renewal of our existing shelf that was set to expire at the end of November. 05:01 Now, let's turn our attention to our quarterly numbers. We were extremely pleased with our loan growth for the quarter. Excluding PPP loans, our loans grew by 3 percent or 12 percent on an annualized basis. The category that we saw the largest increase in was commercial real estate. 05:22 We originated 3,700 loans for nearly $400 million through the SBA’s Paycheck Protection Program. At September 30, we had 772 PPP loans remaining with balances of $83.3 million. All of our first-round loans have been processed with all but nine of the first-round loans totaling $2.7 million having been forgiven. In addition, 50.2 percent of our round two loans have initiated the forgiveness process. 06:01 We anticipate having approximately $20 million of PPP loans remaining at the end of the year and hope to have them all forgiven or in payout by the end of the first quarter of 2022. 06:17 We continue our focus on managing COVID-19 loan deferrals as well as asset quality as a whole. Our deferrals have continued to improve from 3.6 percent of total loans at December 31, 2020 to less than 1 percent at September 30. Due to our efforts of working with customers and the strength of our borrowers, we have not experienced any defaults attributable to the pandemic and delinquencies remain at historically low levels. 06:52 Net interest income increased $592,000 or 2.5 percent over the linked quarter and increased $2.4 million or 11 percent year over year. Net interest income for the first nine months of 2021 increased $5.9 million or 8.9 percent compared to 2020. 07:19 Our net interest margin was 3.62 percent for the quarter and 3.48 percent for the first nine months of 2021. Both measures are lower than the comparable 2020 period, but higher than the linked quarter as the impact of our second-quarter balance sheet restructuring contributed a full quarter of impact. 07:47 As we shared in our first quarter earnings release, the increased liquidity we experienced as a result of the Federal Government stimulus program and the excess cash created by our tax processing program both continue to have a negative effect on our year-to-date margin. 08:06 We continue to see decreases in our funding costs due to the lower interest rate environment. Funding costs went down by $306,000 compared to the linked quarter and $1.2 million when comparing the third quarter of 2021 to the third quarter of 2020 and $3 million when comparing the first nine months of 2021 to the same period of 2020. 08:37 Our yield on earning assets is comparable to the prior year quarter and increased by five basis points over the linked quarter as new loan rates remain stable and the balance sheet restructuring transactions we executed in May took full effect. Our yield on earning assets for the first nine months of 2021 declined 42 basis points compared to the same period in 2020 as interest rates began to tumble late in the first quarter of 2020. 09:12 Backing out the effect of the $1.8 million gain on the sale of our VISA B stock that occurred in the second quarter, non-interest income declined $814,000 or 11.2 percent in comparison to the linked quarter and increased $2.3 million or 11.4 percent year over year. The decline in tax program fees from the second to third quarter is typical and the decline in gain on sale of mortgages is reflective of a slowdown in refinancing across our footprint. These declines were partially offset by an increase in service charges. 09:57 The adjusted year-over-year increase was the result of increases in virtually every category of non-interest income, particularly gains on the sale of mortgage loans, service charges, interchange fees and wealth management fees as we continue to focus on growing our non-interest income streams. 10:20 Mortgage banking continues to be the largest driver of our non-interest income, although refinance activity slowed considerably. Third quarter gains on the sale of mortgage loans were $1.6 million down from our linked quarter of $2.2 million as refinances began to decline and home inventories continue to be tight across our markets. For the first nine months of 2021, we recorded gains of $6.6 million compared to $5.5 million in 2020. 10:59 We sold $56.9 million of mortgage loans during the third quarter of 2021 and $204.7 million during the first nine months of 2021. Third quarter volume was down $12.3 million from the linked quarter as demand for refinancing continues to soften. The average premium recognized on the sold loans decreased from 3.20 percent for the linked quarter to 2.83 percent for the current quarter. 11:33 Service charge revenue was a bright spot increasing $202,000 for the linked quarter and $280,000 for the first nine months of 2021, compared to 2020. Interchange revenue was consistent with our linked quarter and increased $150,000 for the quarter and $663,000 for the first nine months of 2021 as consumers seem to be maintaining the online and cashless retail buying habits that began during the economic shutdown. 12:12 Wealth management revenue continues its strong contribution to our non-interest income, increasing $230,000 for the quarter, and $654,000 for the first nine months of 2021. We continue to bring in new accounts as well as benefiting from strong financial markets. 12:35 The reduction in swap fees is a result of our decision to book selective five- and seven-year fixed-rate loans on our balance sheet. Given the current rate environment, we have elected to book the higher fixed-rate loan that we might otherwise have swapped to a lower variable-rate loan. 12:55 Adjusting for the $3.8 million Federal Home Loan Bank prepayment penalty we incurred in the second quarter, non-interest expense for the linked quarter would have increased $704,000 or 3.7 percent and $3.9 million or 7.3 percent year over year. 13:15 The year-over-year increase is primarily attributable to a $2.5 million increase in compensation expense, the largest components of which were an $832,000 increase due to normal pay raises, a $984,000 increase in commissions paid to mortgage originators and a $300,000 increase in health insurance claims. Our efficiency ratio for the quarter was 62.2 percent compared to our adjusted ratios of 59.5 percent for the linked quarter and 59.9 percent year over year. 14:00 Turning our focus to the balance sheet. Year to date, our total loans declined by $52.7 million which includes a $134 million reduction in PPP loans. Excluding PPP loans, our loan portfolio would have grown by $81.3 million or 5.9 percent annually. 14:26 Third quarter growth was consistent with that of our second quarter at $55.3 million or 12 percent annualized. Demand for commercial real estate loans across our footprint continued. 14:41 Real estate construction loan demand continued the trend that started during the second quarter. We are encouraged by the loans booked during the second and third quarters as well as the strong demand across our footprint and undrawn construction lines totaling $128 million which are near an all-time high. While we continue to battle loan payoffs on completed projects, reduced outstanding on operating lines of credit and increased liquidity of our customers, we continue to expect that we will grow our loan portfolio at a mid-single-digit rate for 2021. 15:24 On the funding side, we experienced growth in every category except time deposits with total deposits increasing $245.4 million or 11.2 percent since the beginning of the year. 15:41 Non-interest bearing demand accounts, which made up 34.2 percent of our total deposits at September 30, grew by $111.7 million compared to December 31, 2020. While balances related to our income tax processing program made up $31.5 million of the increase, $48.9 million of the growth came from non-interest bearing business accounts and $28.5 million from public entities. We also experienced a $92.7 million increase in our interest bearing demand accounts driven by a $52.1 million increase in public fund accounts. 16:30 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 31, 2020 to $106.1 million at September 30, 2021. 16:58 The segment with the largest number of criticized loans is hotels and lodging totaling $61.4 million. Many of these operators have experienced increased occupancy from leisure travel during the third quarter of 2021. We anticipate further reduction in our criticized portfolio as hotel revenue stabilizes. 17:23 While there are still uncertainties associated with the economy, we continue to see improvement in both the economy and our customers' financial positions. In addition, year to date we have realized $710,000 in net recoveries. As a result, it was not necessary to record a provision expense during the quarter. 17:51 The ratio of our allowance for loan losses to loans increased from 1.22 percent at year-end 2020 to 1.33 percent. Exclusive of the PPP loans, this ratio would have been 1.38 percent. Our allowance for loan losses to non-performing loans also increased to 503.5 percent at the end of the quarter from 343.05 percent at the end of 2020. 18:23 We ended the quarter with a tangible common equity ratio of 9.28 percent compared to 9.98 percent at December 31, 2020. The extra $67.5 million of liquidity related to our income tax refund processing business at quarter end, combined with the $83.3 million in PPP loans had the effect of reducing our tangible common equity ratio by approximately 52 basis points. 18:57 We continue to create capital through earnings. Our overall goal is to have adequate capital to support our growth both organically and through acquisitions. Two important parts of our capital management strategy are the payment of dividends and share repurchases. 19:15 As previously stated, we recently announced our fourth quarter dividend of $0.14 per share. We also remain active in repurchasing our shares; even with the recent increase in our stock price we continue to believe our stock is a value. During the quarter, we purchased 404,620 shares of our stock for $9.2 million at an average price of $22.74 per share. 19:45 Year to date, we have repurchased 909,859 shares or 5.7 percent of our shares that were outstanding at December 31, 2020. We have approximately $11 million authorized to be repurchased under the current repurchase program. 20:06 In summary, we are pleased with another quarter of solid earnings, continued loan growth, net interest margin expansion and improved credit quality. While the economy has opened up during the first nine months of 2021, labor shortages and supply chain issues are affecting many of our customers. In spite of these challenges, we remain optimistic. 20:33 Our loan pipelines are solid. We expect that most of the remaining PPP phase two loans will be forgiven during the balance of 2021. We will continue leveraging our new digital banking platform and plan to roll out online account openings during the fourth quarter, all of which will allow us to provide a better customer experience. 20:58 Thank you for your attention this afternoon. And now, we'll be happy to address any questions you may have.

Operator, Operator

21:06 We will now begin the question and answer session. First question comes from Terry McEvoy of Stephens. Please go ahead.

Terry McEvoy, Analyst, Stephens

21:30 Hey guys, good afternoon. Are you there?

Dennis Shaffer, President and CEO

21:46 Hey, Terry.

Terry McEvoy, Analyst, Stephens

21:52 First question is on the expenses: the software maintenance expenses were up about $300,000 year over year and I know you mentioned the new digital banking platform. So I guess my question is, is that a good run rate to use going forward? I know you mentioned you're going to roll out the online account opening next quarter. And maybe spend some time, if you could, just talking about how the new digital banking platform is, how your customers are using it and some early feedback?

Rich Dutton, SVP and Chief Operating Officer

22:23 Okay. Terry, this is Rich. We did have about $200,000 worth of kind of one-time non-recurring expenses related to that that we did expense in the quarter. So the run rate, I think I told you last quarter, will be about $200,000 a quarter and that's just about where we expect it to be going forward. But I think if you're looking at a run rate for expenses for Q4 and Q1 of next year, $19.2 million is probably a good number.

Dennis Shaffer, President and CEO

22:58 On the online account opening, Terry: we'll initially roll that out here in the fourth quarter. But we'll initially roll that out and we'll market it to existing customers within our footprint and neighboring states and then we'll further expand upon that once we see usage patterns and analyze the data. The initial rollout will be targeted and marketed toward existing customers so that we can analyze that data.

Rich Dutton, SVP and Chief Operating Officer

23:39 The other thing I'd add is that we don't anticipate any additional expenses attributable to the online account opening.

Terry McEvoy, Analyst, Stephens

23:47 Great. And then maybe as a follow-up, maybe just talk about new loan yields and margin competition for commercial real estate loans?

Chuck Parcher, SVP and Chief Lending Officer

24:00 Terry, this is Chuck. I'd love to say that it's softening; that’s not the case. As you know, we've seen a little pickup in the treasury, but we have not seen the ability to pass that movement upward to our customers as far as loan rates yet. We're hoping that we'll see that going forward, but that has not been the case. It's been very competitive. We have had some really nice growth across all of our metro markets actually, and Columbus and Cleveland are ultra-competitive right now.

Terry McEvoy, Analyst, Stephens

24:31 Thanks, Chuck. I appreciate the time.

Chuck Parcher, SVP and Chief Lending Officer

24:33 Thanks Terry.

Operator, Operator

24:37 Next question is from Nick Cucharale of Piper Sandler. Please go ahead.

Nick Cucharale, Analyst, Piper Sandler

24:42 Good afternoon. Guys. How are you?

Dennis Shaffer, President and CEO

24:45 Hi, Nick. Great.

Nick Cucharale, Analyst, Piper Sandler

24:47 Just on the mortgage side, what was the breakdown in purchase versus refinance in the quarter?

Dennis Shaffer, President and CEO

24:55 I've got September in front of me, which makes for the quarter. September was 64 percent purchase, 36 percent refinance, and we've seen that continue to rotate across the numbers here. It's pretty close to that for the quarter as well. I can give you an exact number after the fact, but I know last month it was 64/36. We've been watching it pretty close.

Nick Cucharale, Analyst, Piper Sandler

25:19 Okay. And then I appreciate the commentary with respect to the buyback and the increased dividend recently. Can you talk about another prong of your capital allocation strategy — just your appetite for M&A and the landscape within your footprint?

Dennis Shaffer, President and CEO

25:36 Sure, Nick. We continue to have a number of ongoing talks with many of the smaller banks across our footprint. I think discussions are probably a little bit more active than they have been and there are a few more of those discussions going on. 25:59 Our view really hasn't changed much. Where we would like to do a deal, we believe that getting a little larger makes us a little bit more efficient. We continue to be opportunistic, but for us it's got to be the right deal, both in terms of creating long-term shareholder value and it needs to make sense for both the buyer and the seller because those are the deals that are most successful. But I would say that the discussions are probably a little bit more active than they have been in the past.

Nick Cucharale, Analyst, Piper Sandler

26:38 Thank you for taking my questions.

Chuck Parcher, SVP and Chief Lending Officer

26:40 Were you still there? Next — 69 percent purchase for the quarter.

Nick Cucharale, Analyst, Piper Sandler

26:49 Thanks, Chuck.

Operator, Operator

26:53 Thank you. Next question is from Michael Perito of KBW. Please go ahead.

Michael Perito, Analyst, KBW

26:59 Hey. Good afternoon, guys.

Dennis Shaffer, President and CEO

27:01 Hi, Mike.

Michael Perito, Analyst, KBW

27:06 Two questions. One, just on the size of the balance sheet portfolio and the security portfolio discussed in the prepared remarks, but it's likely to stay pretty flat here. Hopefully, the excess cash works pretty well into the mid-single-digit loan growth expectation over the next handful of quarters? Is that generally how you guys are looking at the total asset base?

Dennis Shaffer, President and CEO

27:27 I would say yes, that's where we want to go is to the loan growth for sure. We did that transaction a little over the end of the quarter. I think we had $50 million earmarked to be invested on. I think $43 million of it got invested by September 30 and the rest of it has been since. But yes, I think things have stabilized and certainly we have our excess liquidity; we don't have to borrow. That's where the balance will go.

Michael Perito, Analyst, KBW

28:02 Helpful. Thanks. And then just on the expenses, I think you said $19.2 million was a better kind of starting point to grow off of for the next couple of quarters. And just curious, Dennis, as we look at overall core expenses, I think you're on pace to do about maybe $77 million, $77.5 million. How should we think about year-on-year growth? Maybe a little too early in the budgeting process to ask, but there's a lot of labor pressures in the market right now. Do you think putting you up in the $79.5 million–$80 million full year range for next year is too heavy or do you think there's enough headwinds out there where a pace to add two percent growth is likely?

Rich Dutton, SVP and Chief Operating Officer

28:50 You're right, we're early in the budgeting process, but I think if you grew expenses in the 2 percent to 4 percent range just across the board, that's kind of the way we're looking at it, again very preliminarily. And you alluded to wage inflation. It's definitely out there for sure.

Dennis Shaffer, President and CEO

29:11 Yes. I think the wage inflation is real. In September, we did a half-dollar an hour increase for all of our hourly non-exempt employees. In the end, it just means that the cost eventually gets passed on to consumers, so banks have to figure out ways to operate more efficiently. We know that consumer and business behaviors are changing and more customers are banking digitally. So that's why we invested the dollars we did in upgrading our mobile app for consumers and our treasury management platform for our business customers, and it's also why we migrated to use the online account opening feature. That's a big step forward for us. To combat that inflation, banks are going to have to figure out how to operate more efficiently in some of these areas, and that's what we'll be looking to address and tackle.

Michael Perito, Analyst, KBW

30:20 Okay. Helpful. Lastly on the NIM, I think you, Rich or Dennis, mentioned there's $850,000 of interest income to come in from some of the liquidity deployment. But I think back out the PPP and the accretion, the core NIM quarter was about 3.26 up four basis points quarter on quarter. It seems like with the loan growth and the actions you took over the course of the quarter that should continue to move higher. With the long end where it is and no help on short-term rates, do you have any thoughts about where that core NIM could trend near term with the loan yield pressures you're seeing? Any insight would be a helpful starting point.

Rich Dutton, SVP and Chief Operating Officer

31:04 I think you're right. If it moves, it's going to be basis points. I think we have done and continue to monitor the excess liquidity to see if there are opportunities there, but really the things we put in place we would expect to push the margin up by basis points. I think we said last quarter 12 to 17 basis points over the 12-month period and that's kind of how we want it to play out. I think Chuck and his team are doing the best they can to hold the line. We're putting on assets at a rate pretty comparable with what we did in the prior quarter. So less pressure there. But absent any larger scale movement in interest rates, I think where we are is where we'll be, with possible basis point movement.

Dennis Shaffer, President and CEO

31:58 When you make all the adjustments, Mike, I think for the year, it's been basis points of contraction for us as opposed to some of our competitors that have had that or more in a single quarter. So I think our adjustments have been good—we've been doing a pretty good job reducing our interest expense and holding the line on our loan pricing.

Michael Perito, Analyst, KBW

32:33 Helpful. All right, guys. I appreciate all the insights as always. Thank you.

Operator, Operator

32:40 Next question is from Russell Gunther of D.A. Davidson. Please go ahead.

Russell Gunther, Analyst, D.A. Davidson

32:51 Hey, good afternoon guys. I wanted to talk about the growth outlook. Really strong result over the last couple of quarters. Understand the guide for the year of mid-single digits and that implies a similar amount in the fourth quarter. As you look out into 2022, is a high single-digit pace achievable for you guys or what would cause your growth results to take a step back sustainably going forward from where you've been running the past couple of quarters?

Chuck Parcher, SVP and Chief Lending Officer

33:28 I think we've kind of always been mid- to high-single-digit growth, Russell. I think that's probably a pretty good forecast for us. A lot of it depends on how fast some of our projects get completed and how fast they move to the market. We've seen a little bit more aggression out of the market lately, taking those projects off our balance sheet a little quicker than they have in the past. That might limit us a little bit from the growth cycle, even though the book is long. But I think you're probably in the right thought process: mid- to high-single-digit growth is reasonable, probably somewhere in the center of that.

Russell Gunther, Analyst, D.A. Davidson

34:13 And then is that likely to remain commercial weighted or is there any increased appetite for portfolio single-family residential? I know you mentioned the security book not really expected to build, but is single-family at all incrementally more attractive here?

Chuck Parcher, SVP and Chief Lending Officer

34:31 It's interesting. One thing that might help us a little bit is maybe we won't run off as much single-family. This year and last, I think we're now $18 million from the beginning of the year in single-family as we've taken some of our on-balance-sheet single-family product and moved it into sales and sold it in the market. So maybe we'll get a little bit more net growth just by not doing as much of that as the refinancing activity slows.

Dennis Shaffer, President and CEO

34:54 That's somewhat reflected with our swap strategy as well. We have not taken swaps as much because we'd rather get the yield right now as opposed to converting those to lower variable-rate loans. So growth will almost entirely come from the commercial book.

Russell Gunther, Analyst, D.A. Davidson

35:20 Great. Well, thank you guys. Rest of my questions are asked and answered. Appreciate your help.

Chuck Parcher, SVP and Chief Lending Officer

35:25 You bet. Thank you.

Dennis Shaffer, President and CEO

35:28 Thanks Russell.

Operator, Operator

35:29 This concludes the question and answer session. Now I'd like to turn the conference back over to Mr. Dennis Shaffer for closing remarks. Please go ahead.

Dennis Shaffer, President and CEO

35:36 Well, in closing, I just want to thank everyone for listening and thank those that participated on the call. Again, we are pleased with our third quarter and we look forward to talking to you again in a few months to share our year-end results. So, thank you for your time today.

Operator, Operator

35:55 Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.