Civista Bancshares, Inc. (CIVB) Q3 2021 Earnings Report, Transcript and Summary

00:07 Good day, and welcome to Civista Bancshares Third Quarter twenty twenty one earnings call. All participants will be in listen-only mode. [Operator Instructions] 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.

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 twenty twenty one 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 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. 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 twenty twenty one 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 nine point six million dollars or zero point six four dollars per diluted share for the third quarter of twenty twenty one and net income of twenty nine point six million dollars or one point nine zero dollars per diluted share for the nine months ending September thirty, twenty twenty one. 03:09 Our earnings per share for the quarter increased thirty three point three percent compared to the third quarter of twenty twenty as well as thirty nine point seven percent compared to the first nine months of twenty twenty. 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 zero point one four dollars quarterly dividend which represents an annualized yield of two point four one percent based on our September thirty market close of twenty three point two three dollars and a dividend payout ratio of twenty one point eight eight percent. 04:00 We also continue to look for ways to make our balance sheet more efficient. Late in September, we began redeploying fifty million dollars of excess liquidity from cash into investments, which we expect to resolve in eight hundred and fifty thousand dollars of additional interest income on an annualized basis. 04:23 We continue to be active in our repurchasing common shares. During the quarter, we repurchased four hundred and four thousand six hundred and twenty shares. Year to date, we have repurchased nine hundred and nine thousand eight hundred and fifty nine shares or five point seven percent of the outstanding shares at December thirty one twenty twenty. 04:48 Finally, last Friday, we filed a one hundred million dollars 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 three percent or twelve percent on an annualized basis. The category that we saw the largest increase in was commercial real estate. 05:22 We originated three thousand seven hundred loans for nearly four hundred million dollars through the SBA’s Paycheck Protection Program. At September thirty, we had seven seventy two PPP loans remaining with balances of eighty three point three million dollars. All of our first round loans have been processed with all, but nine of the first round loans totaling two point seven million dollars having been forgiven. In addition, fifty point two percent of our round two loans have initiated the forgiveness process. 06:01 We anticipate having approximately twenty million dollars 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 twenty twenty two. 06:17 We continue our focus on managing COVID-nineteen loan deferrals as well as asset quality as a whole. Our deferrals have continued to improve from three point six percent of total loans at December thirty one twenty twenty to less than one percent at September thirty. 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 level. 06:52 Net interest income increased five hundred and ninety two thousand dollars or two point five percent over the linked quarter and increased two point four million dollars or eleven percent year over year. Net interest income for the first nine months of twenty twenty one increased five point nine million dollars or eight point nine percent compared to twenty twenty. 07:19 Our net interest margin was three point six two percent and three point four eight percent for the quarter and for the first nine months of twenty twenty one, respectively. Both measures are lower than the comparable twenty twenty 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 three hundred and six thousand dollars compared to the linked quarter and one point two million dollars when comparing the third quarter of twenty twenty one to the third quarter of twenty twenty and three million dollars when comparing the first nine months of twenty twenty one to the same period of twenty twenty. 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 twenty twenty one declined forty two basis points compared to the same period in twenty twenty as interest rates began to tumble late in the first quarter of twenty twenty. 09:12 Backing out the effect of the one point eight million dollars gain on the sale of our VISA B stock that occurred in the second quarter, non-interest income declined eight hundred and fourteen thousand dollars or eleven point two percent in comparison to the linked quarter and increased two point three million dollars or eleven point four 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 one point six million dollars down from our linked quarter of two point two million dollars as refinances began to decline and home inventories continue to be tight across our markets. For the first nine months of twenty twenty one, we recorded gains of six point six million dollars compared to five point five million dollars in twenty twenty. 10:59 We sold fifty six point nine million dollars of mortgage loans during the third quarter of twenty twenty one and two hundred and four point seven million dollars during the first nine months of twenty twenty one. Third quarter volume was down twelve point three million dollars from the linked quarter as demand for refinancing continue to soften. The average premium recognized on the sales loans decreased from three point two zero percent for the linked quarter to two point eight three percent for the current quarter. 11:33 Service charge revenue was a bright spot increasing two hundred and two thousand dollars for the linked quarter and two hundred and eighty thousand dollars for the first nine months of twenty twenty one, compared to twenty twenty. Interchange revenue was consistent with our linked quarter and increased one hundred and fifty thousand dollars for the quarter and six hundred and sixty three thousand dollars for the first nine months of twenty twenty one 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 two hundred and thirty thousand dollars for the quarter, and six hundred and fifty four thousand dollars for the first nine months of twenty twenty one. 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 three point eight million dollars federal home loan bank prepayment penalty we incurred in the second quarter, non-interest expense for the linked quarter would have increased seven hundred and four thousand dollars or three point seven percent and three point nine million dollars or seven point three percent year over year. 13:15 The year over year increase is primarily attributable to a two point five million dollars increase in compensation expense, the largest components of which were an eight hundred and thirty two thousand dollars increase due to normal pay raises, a nine hundred and eighty four thousand dollars increase in commissions paid to mortgage originators and a three hundred thousand dollars increase in health insurance claims. Our efficiency ratio for the quarter was sixty two point two percent compared to our adjusted ratios of fifty nine point five percent for the linked quarter and fifty nine point nine percent year over year. 14:00 Turning our focus to the balance sheet. Year to date, our total loans declined by fifty two point seven million dollars which includes one hundred and thirty four million dollars reduction in PPP loans. Excluding PPP loans, our loan portfolio would have grown by eighty one point three million dollars or five point nine percent annually. 14:26 Third quarter growth was consistent with that of our second quarter at fifty five point three million dollars or twelve 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 one hundred and twenty eight million dollars 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 twenty twenty one. 15:24 On the funding side, we experienced growth in every category except time deposits with total deposits increasing two hundred and forty five point four million dollars or eleven point two percent since the beginning of the year. 15:41 Non-interest bearing demand accounts which made up thirty four point two percent of our total deposits at September thirty grew by one hundred and eleven point seven million dollars compared to December thirty one twenty twenty. While balances related to our income tax processing program made up thirty one point five million dollars of the increase, forty eight point nine million dollars of the growth came from non-interest bearing business accounts and twenty eight point five million dollars from public entities. We also experienced a ninety two point seven million dollars increase in our interest bearing demand accounts driven by a fifty two point one million dollars increase in public fund accounts. 16:30 During the pandemic, we automatically downgraded commercial loans that requested concessions beyond the initial ninety day modification period. Our total criticized loan portfolio, which includes all classified and substandard loans, declined from one hundred and forty eight point one million dollars at December thirty one twenty twenty to one hundred and six point one million dollars at September thirty, twenty twenty one. 16:58 The segment with the largest number of criticized loans is hotels and lodging totaling sixty one point four million dollars. Many of these operators have experienced increased occupancy from leisure travel during the third quarter of twenty twenty one. We anticipate further reduction in our criticized portfolio as hotel revenue stabilize. 17:23 While there is still -- 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 seven hundred and ten thousand dollars 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 one point two two percent at year end twenty twenty to one point three three percent. Exclusive of the PPP loans, this ratio would have been one point three eight percent. Our allowance us for loan losses to non-performing loans also increased to five hundred and three point five percent at the end of the quarter from three forty three point zero five percent at the end of twenty twenty. 18:23 We ended the quarter with a tangible common equity ratio of nine point two eight percent compared to nine point nine eight percent at December thirty one twenty twenty. The extra sixty seven point five million dollars of liquidity related to our income tax refund processing business at quarter end, combined with the eighty three point three million dollars in PPP loans had the effect of reducing our tangible common equity ratio by approximately fifty two 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 zero point one four dollars 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 four hundred and four thousand six hundred and twenty shares of our stock for nine point two million dollars at an average price of twenty two point seven four dollars per share. 19:45 Year to date, we have repurchased nine hundred and nine thousand eight hundred and fifty nine shares or five point seven percent of our shares that were outstanding at December thirty one twenty twenty. We have approximately eleven million dollars 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 twenty twenty one, 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've expect that most of the remaining PPP phase two loans will be forgiven during the balance of twenty twenty one. We will continue leveraging our new digital banking platform and plan to rollout 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.

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

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

21:46 Hey, Terry.

21:52 First question is the on the expenses, the software maintenance expenses were up about three hundred thousand dollars 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?

22:23 Okay. Terry, this is Rich. We did have about two hundred thousand dollars 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 two hundred thousand dollars 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, nineteen point two million dollars is probably a good number.

22:58 And then on the online account opening and stuff, Terry. We'll initially roll that out or it should roll out here in the fourth quarter. But we'll initially roll that out and we'll market it to existing customers within kind of our footprint in the neighboring states and then we'll further expand upon that once we see some patterns and analyze some -- the usage and stuff like that. But the initial rollout will be targeted -- marketed and targeted towards existing customers to begin with so that we can analyze that data.

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

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

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 seeing the ability to pass that movement upward to our customers as far as the loan rates yet. We're hoping that we'll see that here going forward, but that has not been the case. It's been very competitive. We have had some really nice growth across both of our metro -- all of our metro markets actually and Columbus and Cleveland are ultra-competitive right now.

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

24:33 Thanks Terry.

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

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

24:45 Hi, Nick. Great.

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

24:55 I've got september in front of me, which make for the quarter. September was sixty four percent purchased, thirty six percent refi and we've seen that continue to rotate across the numbers here, here it’s pretty much – it’s pretty close to that, I mean, for the quarter as well. I can give you an exact number after the fact. Bur I know last month it was sixty four thirty six we've been watching it pretty close.

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.

25:36 Sure, Nick. We continue to have a number of ongoing talks with many of the smaller banks really across our footprint. I think discussions are probably a little bit more active than they probably -- than normal and there probably 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 I think 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 call for a line 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.

26:38 Thank you for taking my questions.

26:40 Were you still there, I mean next -- sixty nine percent purchase for the quarter.

26:49 Thanks, Chuck.

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

26:59 Hey. Good afternoon, guys,

27:01 Hi, Mike.

27:06 Two questions. One, just on the size of the balance sheet portfolio, the security portfolio [indiscernible] in the prepared remarks, but it's likely to kind of say pretty flat here [Technical Difficulty] 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?

27:27 I would say yes, that's where we wanted to go is to the loan growth for sure. And again, we did that transaction to kind of little over the end of the quarter. I think we had fifty million dollars of year mark to be invested on. I think forty three of it gotten invested by September thirty and the rest of it had been since. But yes, I think again, things have kind of stabilized and certainly we have our excess liquidity, we don't have to borrow make whether that's where the balance will go.

28:02 Helpful. Thanks. And then just on the expenses, I think you said nineteen point two million dollars was a better kind of starting point in grow off of for the next couple of quarters. And just curious, Dennis, as we look at overall core expenses, I think like seventy seven on pace to do about maybe seventy seven million dollars, seventy seven point five million dollars. I mean, how should we think about kind of year on year growth? I mean, maybe a little too early in the budgeting process to ask, but there's lot of labor pressures kind of an interesting market out there right now. I mean, is it -- do you think -- putting you up in the kind of seventy nine point five million dollars eighty million dollars full year range for next year is too heavy or do you think that there's enough kind of headwinds out there where pace to add two percent growth in there also that run rate.

28:50 You're right, we're early in the budgeting process, but I think if you grew expenses in the two percent to four percent range just across the board, that's kind of a way we're looking at it again very preliminarily. And you alluded to interesting on the wages. I don't know if that's the adjective we would use. But yes, it's out for sure.

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

30:20 Okay. Helpful. As just lastly on the NIM, I think you Rich or Dennis, I think you might have said, there's was like eight fifty thousand 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 three point two six up a four bps quarter on quarter. And I just -- I mean, it seems like with the loan growth and the actions you took over the course of the quarter that should continue to move higher. I guess mike my broader question is, with the long end where it is and no help on short term rates, do you guys have any thoughts about where that core NIM could trend to near term with the loan yield pressures you're seeing? And just any insight there would be helpful starting point.

31:04 I think you're right. If it goes up or down, it's going to be basis points. I mean, I think we done and continue to monitor the excess liquidity to see if there's opportunities there, but really the things that we put in place where we would expect to push the margin up again basis points. I think we said last quarter, twelve basis points or seventeen basis over the twelve month period and that's kind of play out where we wanted to. I think Chuck and his team are doing the best they can to hold the line. And I think we're putting on assets at a rate pretty comparable with what we had did in the prior quarter. So less pressure there. 31:46 But absent of any movement in interest rates larger scale, I think where we are is where we'll be, but possibly we could trend that, but it would be again, basis point.

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

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

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

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

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

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

34:31 It's interesting. The one thing might help us a little bit is, maybe we might not run off as much single family. I think this year and last, look, I think we're now eighteen million dollars 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 the market. So maybe we'll get a little bit more take growth just by not doing as much of that as the refinancing stuff.

34:54 Yes, that's kind of somewhat reflected with our swap strategy as well. I mean, we just have not taken -- we’d rather get the yield right now as opposed to really book those interest yield deals, the single family deals. So it is going to almost entirely be growth come from that commercial book.

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

35:25 You bet. Thank you.

35:28 Thanks Russell.

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.

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 guys again in a few months to share our year end results. So, thank you for your time today.

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