Good day, and welcome to the Civista Bancshares Second Quarter 2020 Earnings Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead, sir.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our second quarter 2020 earnings call. I'm joined today by Rich Dutton, Senior Vice President of the company; and Chief Operating Officer of the Bank; and Chuck Parcher, Senior Vice President of the company and Chief Lending Officer of the bank; and other members of our executive. 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 involves 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 our website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. We will record this call and make it available on Civista Bancshares website at civb.com. Again, welcome to Civista Bancshares Second Quarter 2020 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 that you may have. This morning, we reported earnings for the second quarter 2020 of $6.5 million or $0.41 per diluted share and $14.3 million or $0.88 per diluted share for the 6 months ended June 30, 2020. This represents a decrease in net income…

We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Nick Cucharale with Piper Sandler.

So I wanted to make sure I understood the commentary on the loan modifications. It struck me that you guys were especially proactive with your borrowers, which contributed to the mid-20s deferral rates as a percentage of loans when you back out the PPP. Understanding the environment is uncertain, is your expectation that $431 million number at June 30 comes down meaningfully in the near term?

Yes, I'll have Chuck elaborate a little bit. But yes, I think I tried to address that a little bit in the commentary. It's very preliminary. We did a bulk of those or probably 2/3 of those modifications by mid-April. So they're just now coming due. So we've run some numbers to kind of project those. That was the $150 million I was referring to in the comments. Chuck, you want to -- Chuck or Paul?

Nick, it's Chuck. We had all of our lenders kind of go out and pull all the customers that took deferrals. And obviously, they continue to come up, and we continue to look at those. But we're looking in that 10% range, as Dennis mentioned, that around $150 million. And even from that perspective, we've moved a lot of them that took full payment deferral in the first piece to interest-only deferrals in the second piece. So when you think about that $150 million, I would tell you probably $95 million to $100 million of that's going to be interest-only with the other $50 million to $60 million being full P&I payment deferral.

Okay. Thank you for clarifying. So you guys had a big quarter for swap fees, as you mentioned in the prepared remarks. Has customer appetite continued since the end of the quarter?

Yes. I would tell you, customer appetite is still as strong. Based on the rate environment today, we have tried to widen those margins out some, Nick. We were doing a lot of stuff, pretty big rate reduction in that LIBOR plus [ 2.25%, 2.50% ] range. We've kind of moved that -- those swap rates up to LIBOR plus [ 3.00% to 3.25% ], it sort of help save our margin. And at the same time, we're also examining whether we're better off putting those on short-term and swaps or putting some balances on the books as far as straights, like a 4%, 5-year fixed or 7-year fixed as compared to that swap fees. So we're trying to blend that out, but the customer demand to go along is definitely there.

And Nick, we also have been successful in kind of reinstituting some floors. We've been able to push that up a little bit. And it kind of gone away as rates have gone up. Now as rates are coming back down, we are implementing a few floors now but when you widen the spreads and you start to put floors in, I think it will slow some demand because all banks haven't adjusted to that. But we're getting our first look at deals.

This is Chuck again, Nick. The one thing that Dennis mentioned in his commentary, we did renegotiate our swap contract with our provider. So our cut of the swap fee is a little bit higher going forward.

Okay. Great. And then can you just help us think about how you're viewing expenses in the near term? And just given the operating environment, do you see any opportunity for some cost savings longer term?

Nick, this is Rich. I think the run rate of what we did this quarter, while maybe the composition of it might change a little bit. I think that's a pretty good number for the next quarter and probably the next 2. What we're saving on travel. We're spending on janitorial services as we clean up after exposure to the COVID and whatnot. But I think in terms of big-ticket items. I don't know that anything is going to change dramatically.

Yes. Nick, I would say that given the fact -- I think it gets increasingly more difficult for banks going forward just given the fact that we're going to be in this lower interest rate environment. We've always been a shop that is focused on revenue, growing the revenue side, which we'll continue to do. But I think we do have to have an organization. We'll take a harder look at some of our -- some of that noninterest expense. And we're prepared to do that as an organization. But just the environment, we're in the early stages of this thing. So I just think we're going to have to look for every way, both on the revenue and expense side as we go forward.

That's very helpful. And then just lastly, I see you noted the settlement impacting the ATM interchange line. Do you have that amount by any chance?

I'm sorry, could you ask me that question again, Nick?

Yes, there was a settlement that you mentioned in the earnings release just impacting the ATM interchange line. Do you have that amount?

I do. It was $150,000.

Our next question will come from Michael Schiavone with KBW.

So can you guys tell us your thoughts on the deployment of the excess liquidity build in the quarter and the trajectory of the NIM for the remainder of the year?

In terms of excess liquidity, I mean, I guess, again, I don't know how familiar you are with -- Mike, with our balance sheet and the tax program and how those funds flow in, in the first half of the year and out in the second half of the year. But by June, I think we were down to just $50 million of tax funds as far as liquidity goes, then again, we took that $180-ish million of funding from the SBA's PPP loan facility -- liquidity facility. So those are the big, I guess, liquidity components. I'm not sure if you're alluding to something else. But in terms of the margin, I think we said at the end of the last quarter, when we modeled it out, we thought that we would have about 30 basis points of compression and if you take out the PPP impact, that's just about what we had. I think we had 28 cases points of compression. Our balance sheet is pretty asset-sensitive and things reprice pretty quickly. So as long as our loan guys can continue to do the good job that they're doing in terms of holding the line on the asset pricing side, we feel like we've borne the brunt of the compression. It will continue to contract, but nothing like it did in the second quarter.

Right. Right. We just have so much more than reprices. And again, we had the rate drop near the end of the first quarter. So we have 1/3 of that portfolio. So there will be compression moving forward, as Rich alluded to. But we also had the PPP money and a lot of that money got deposited into some of our accounts, that money will run -- is running out as we go. So -- and then I mentioned $87 million of personal deposit growth, some of that is most likely the impact of the COVID-19 because people -- we have these stay-at-home orders in place, and people aren't spending money. I think personal spending in Ohio for the quarter was down 6%, 7%, 8%. So that's a contributor to some of that buildup of that liquidity.

Okay. That's a lot of color. That's helpful. Can you also provide some color on the loan growth pipelines outside of PPP? And what you are expecting for the remainder of the year?

Chuck and Paul, I'll have Chuck Parcher, Chief Lending Officer; and Paul Stark, Chief Credit Officer, address that.

Yes. Our pipeline stayed relatively strong throughout the entire time period, Mike. And obviously, we had a little bit of growth or quite a bit of growth in the commercial real estate bucket. We had quite a few projects that were taking place across, especially our metro regions and those projects continue from a construction perspective, we're just talking about this morning, I think we only had 1 construction project that I'm aware of that actually got stopped during the whole COVID process. So those dollar amounts continue to fund out. Columbus has been a very hot market for us as far as from a construction area. There's still a lot of demand there, especially on the multifamily side and a need for product. So we can see that to continue going forward. Obviously, like everybody else, we've kind of shut down the hotel lending and the restaurant lending, et cetera. But we still feel good about where our pipeline sits looking from here into the next few months anyway.

And we've got businesses that have flourished during this time. It's general logic, you have about half the businesses that struggle and half of them are just flourishing.

Well, the unique thing about -- this is Paul Stark. The unique thing about this cycle is the fact that every company is being impacted differently. And there's still a lot of liquidity in particularly in investors, and they're moving forward. On the other hand, you've got some others that are really struggling to recover from that business disruption and the revenue disruption. So we're looking at each of them separately, but it's amazing how strong parts of it remain.

I'll say the nice part, Mike, is as I was looking at some of the data, we're getting growth out of every marketplace, which feels really good. We're led a little bit by Columbus so far year-to-date, but we've got growth in Cleveland. We've got growth in that Southeast Indiana, Cincinnati market. And then we've got growth also in our legacy markets through the center of Ohio.

[Operator Instructions] Our next question will be from Russell Gunther with D.A. Davidson.

This is Ryan on for Russell. I just had a quick question on the $9.8 million in deferred fees. Are you able to provide any thoughts on the recognition of the PPP fees throughout the next couple of quarters?

Yes. We think most of that will recognize most of that income as points from the forgiveness piece in the fourth -- in quarter -- in first quarter of next year. We will take that in over 24 months. So I think it equates to about $400,000, maybe around $410,000 a month?

$410,000 a month.

$410,000 a month. So -- but we think that most of that we'll recognize in the fourth quarter of this year or first quarter of next year. And we expect the majority of that to be forgiven. Most of our loans, 80% of our loans had an average loan balance of around $120,000 or so. So there's been talk that anything under maybe $150,000 is a 1-page forgiveness type application, some sort of easy process. So we do expect the bulk of those to be forgiven.

Got it. And then just one more on the retail portfolio. Just was curious how those conversations with borrowers have been going in, any more detail you're able to provide on either the coverage ratios or LTVs there?

As far as growth or as far as asset quality?

As far as asset quality?

Okay. So as far as the -- our retail portfolio. We don't have a large consumer portfolio, most of it is HELOCs and residential mortgages. We've been really pleased with the performance of the payment streams on the mortgage portfolio. Our deferrals are less than 100, and a lot of those are going back to payments. Now it will be interesting to see what happens when the unemployment benefits, the rich unemployment benefits phase out here pretty soon. But thus far, it's been less than 1% deferrals.

[Operator Instructions] And our next question will come from Kevin Swanson with Hovde Group.

Just 1 follow-up here on the PPP. Remind me again, the percentage of non-clients you did with PPP. And then I guess the follow-up to that would be, how are you guys thinking about traction and keeping those clients with the bank? And what do you guys see as kind of an offensive move utilizing that program?

Kevin, this is Paul. As far as the origination of these, I would say the vast majority of these customers were our customers. And we did take a portion of loans that were not customers as well. But I -- it's kind of hard to -- we didn't really measure that per se. But looking backwards at -- probably 80% were customers, at least. And then from the standpoint of retention, we did work on that...

Yes, we've been working really hard on that, to be honest with you, Kevin, this is Chuck. And we put together a list of the target pieces. And I will tell you, even the noncustomers that we took the bulk of them were referrals from our [ CLI ] sources, our accounting firms, our law firms, or et cetera, they called us and said, "Hey, you guys are doing this very successfully. We can't get these through the regionals. Can you take care of these clients for us." And because we were able to do that, we did generate quite a bit of goodwill across all our marketplaces. And we've had quite a bit of success, a, right now, more so on the deposit side than the lending side, but we're working through very quickly and very -- I just looked at one the other day, we just brought a new $4 million client in, based solely on our PPP work, and we've got a lot of those opportunities bubbling up right now, then I probably have a little better idea of what those total numbers will be at the end of the third quarter, to be honest with you.

And Kevin, those opportunities, I mean those deposit accounts that they're opening are not just as they open the business deposit account. We've hooked a lot of those people up with our retail managers or our private bankers, and they are already -- we -- I've gotten a lot of e-mails where people have opened their personal checkings and their money market accounts, CDs, wealth accounts, mortgage loans out of it. So we have really done a very good job, we know who those customers are, and we immediately -- they were so happy that we were able to get them through the process. And we got 87% of our clients through Round 1 of the PPPs. And there were a whole lot of banks that had that high of a percentage. But 87% of the applications that we got, we got through Round 1, and people are really happy and I think we've been able to parlay that in into expanding some of these relationships with existing clients and these new clients.

And I can't emphasize enough the amount of goodwill we generated with the [ CLI ] bases. I mean they would kept saying, "Hey, we've got a client that we really need to get through this. Even if we couldn't pick that client upfront right away, we built a goodwill there, but we really built a lot of goodwill with all the accounting firms around the state.

[Operator Instructions] 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 in the call. Again, given the low interest rate environment and the fact that a lot of the economy was shut down for a good portion of the quarter, I was extremely, extremely pleased with our second quarter results. The balance of 2020, we know will continue to be a challenge. We do look forward to meeting that challenge. And to talking to all of you again in a few months to share our third quarter results. So thank you for your time today.

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