Image source: The Motley Fool.
Civista Bancshares Inc (CIVB 1.47%)
Q1Â 2019 Earnings Call
May. 03, 2019, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to Civista Bancshares Incorporated 2019 First Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions to ask a question. (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.
Dennis G. Shaffer -- President and Chief Executive Officer
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our first quarter 2019 earnings call.
I'm joined today Rich Dutton, SVP of 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.
Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc., that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.
Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, the most directly comparable GAAP measures. The press release, available on the website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. We will record this call and make it available on Civista Bancshares website, at www.civb.com.
Again, welcome to Civista Bancshares first quarter 2019 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 another strong quarter of core earnings with net income of $9.5 million or $0.57 per diluted share. This is a direct result of our strong net interest margin, our continued focus on growing our non-interest income streams and our disciplined approach in managing the company. The integration of the customers and employees that came to us through our transaction with United Community Bancorp or UCB also continues to be a focus. Our continued ability to generate strong core earnings allow our Board of Directors to approve an increase in our quarterly dividend during the first quarter from $0.09 to $0.11 per share, which represents a dividend payout ratio of nearly 20%.
Our return on average assets was 1.72% for the quarter compared to 1.70% for the previous year quarter and our return on average equity was 13% for the quarter compared to 15.37% for the previous year quarter. Return on average tangible common equity was 17.65% for the quarter compared to 18.91% for the prior year quarter, this represents a 6.75% decline which is comparable to our estimates for the UCB acquisition. The increase in our core earnings continues to be driven by increases in net interest income. Net interest income grew by 4.7% over the linked quarter and 47% year-over-year. Our net interest margin remains strong at 4.45% compared to 4.38% for the linked quarter and 4.05% year-over-year. We had significant improvements to interest income compared to both the first quarter of 2018 as well as the linked quarter. We are seeing increases due to both volume and rate compared to both periods.
The increase in average earning assets is due to both the UCB transaction as well as the strong loan growth we experienced in 2018 and early 2019. The increase in yields is due to both our positioning over the past two years to be asset sensitive as well as accretion income. Accretion income accounted for approximately $992,000 or 22 basis points in the first quarter of 2019.
Likewise, changes in our interest expense were attributable to increases in average interest bearing liabilities and the average rate paid on those liabilities. In past years, we experienced a decrease to our net interest margin in the first quarter due to the impact of excess cash from our tax refund processing program. In recent years we have been successful in positioning our short term borrowing needs to take advantage of the influx of cash from our tax program.
During the first quarter of 2019 the average non-interest bearing deposit related to the tax refund processing program were $240.1 million. This allowed us to pay down $66.5 million of federal home loan bank borrowings. Identifying and growing sources of non-interest income also continues to be a focus. During the quarter non-interest income increased $1.4 million or 30% in comparison to the fourth quarter of 2018, and increased $668,000 or 12% year-over-year. Service charge revenue was in-line with our link quarter at $1.5 million and up $322,000 or 28.4% over our first quarter of last year, which is consistent with the new retail and business customers that came to us through the UCB transaction.
As expected, interchange revenue declined $124,000 or 12% compared to the link quarter, with the post holiday season decline in debit card activity. When compared to our first quarter of last year interchange revenue increased $352,000 or 63.5%. These fluctuations were largely the result of our nearly 15,000 new debit card customers came with the UCB transaction, which increased our outstanding debit cards by 70%.
Wealth management revenue declined $261,000 or 43.6% compared with the link quarter. This was the result of a change in the way we recognize revenue related to our wealth management services from one month in a year to current, which result in recognizing an extra month of revenue during the fourth quarter of 2018. Wealth management revenue of $847,000 was in line when compared to our first quarter of last year. We continue to view the introduction of wealth management services in the southeastern Indiana and the expansion of those services across our entire footprint as an opportunity to grow non-interest income.
Our mortgage business continues to provide consistent results even in what has been an uncertain rate environment. Our income tax refund processing program continues to be an important contributor to our non-interest income and it is concentrated in the first and second quarter of each year. Income from that program was $2.2 million, which was consistent with the prior year.
Non-interest expenses are up compared to the first quarter of last year as well as link quarter. The acquisition of UCB accounted for the increase in non-interest expense compared to the first quarter of 2018. Comparing to the fourth quarter of 2018 is difficult, due to the noise that was included both from an acquisition standpoint as well as normal accrual through (ph) ups that typically happened during the fourth quarter of the year. The acquisition of UCB increased our size by approximately 38%. Compensation expense and occupancy expense, both increased in line with the increase in assets. Compensation expense was affected by three factors. The addition of the retained employees of UCB, 2018 merit increases and an increase in our health insurance cost. The 2018 merit increases, which took effect on April 1st of last year accounted for about $115,000 of the increase.
Health insurance costs accounted for about $513,000 of the increase. Amortization of intangibles increased $207,000 due to the intangibles created from the acquisition of UCB. All other categories of non-interest expense increased between 20% and 25%, in line with expectations. We continue to be pleased with loan production across our footprint. Our loan portfolio grew by $11.3 million or a rate of 2.9% on an annualized basis. While this growth is not in line with what we expect for the year, our first quarter is typically slower than what we expect the balance of the year. The majority of the growth came in both owner and non-owner occupied commercial real estate and in residential real estate loans. In addition to undrawn construction loans, our pipelines remain strong and we continue to anticipate upper single digit loan growth over the course of the year.
On the funding side, our deposits increased $185.9 million or 11.8% since the beginning of the year. The primary driver for the increase was deposits related to our tax refund program, which increased $187 million during the quarter. As I mentioned, when we talked about our margin we manage our wholesale funding in anticipation of the free funding we take in during the tax refund processing season. We use the tax funds to pay down broker deposits and other short term borrowings.
Our asset quality remains very strong. As a result, we did not provide a provision expense for the quarter. Our non-performing loans were $9.2 million at the end of the first quarter compared to $9.9 million at the end of 2018, which represented 0.40% of total assets. The ratio of our allowance for loan losses to loans was unchanged from year end at 0.88%. And our allowance for loan losses to non-performing loans also increased to 150.6% at the end of the first quarter from 137.8% at the end of 2018.
We are pleased with the benefits of this, the shareholders are already realizing as a result of our UCB transaction from the efficiencies that come with greater scale and the low cost core deposit funding that we are using for commercial lending across our entire footprint. While we remain focused on integrating our new customers and employees, our team continues to serve as customers throughout our footprint and I believe our results are reflective of those efforts.
We are pleased with another strong quarter fueled by solid core earnings. We are confident our disciplined approach to managing Civista and our long term focus on driving shareholder value will continue yielding positive results. So much so that our Board approved an increase in the quarterly dividend by 22.2% during the quarter.
In closing, while the deposit and lending environments remain competitive we are confident that our continued focus on relationships will allow Civista to grow both loans and deposits without relaxing our standards. Thank you for your attention this afternoon and now, we'll be happy to address any questions that you may have.
Questions and Answers:
Operator
We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Kevin Reevey with D.A. Davidson. Please go ahead.
Kevin Reevey -- D.A. Davidson -- Analyst
Good afternoon.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi, Kevin.
Kevin Reevey -- D.A. Davidson -- Analyst
How are you guys doing?
Dennis G. Shaffer -- President and Chief Executive Officer
Good, good. Yourself?
Kevin Reevey -- D.A. Davidson -- Analyst
Great, thanks. So first question is related to the NIM, you know the NIM came in a lot better than what we were expecting, but you know given where the yield curve is and you know the Fed's comment on rates, how should we think about your NIM going forward both on a GAAP basis and on a core basis?
Dennis G. Shaffer -- President and Chief Executive Officer
Well, one, I think you know the NIM, we saw some expansion there and I think it's how we managed our -- you know how -- we got the tax money and we were able to pay off some of those broker deposit, so that obviously benefits us a little bit in the first quarter. I think -- going forward I think if rates stay flat you know we're going to see our NIM be flat or slightly compressed maybe a little bit. There is you know -- some pressure on the loan side. It's very competitive out there, so deposits you know pressure is out there, but I don't think -- I think it will be pretty consistent if rates stay flat to where we were in the first quarter.
Charles A. Parcher -- Senior Vice President and Chief Lending Officer
And Kevin this is Chuck. We did get a nice balance you know, on some of the stuff we've approved in the fourth quarter of last year when the five year treasury got up there around 3%. Now obviously that's fallen, you know 60 basis points, 70 basis points since that time period, but some of the stuff we closed in the first quarter, I would tell you we've got some exceptional margins on.
Richard J. Dutton -- Senior Vice President and Chief Operating Officer
Kevin, this is rich. The only thing I'd add to that, again Dennis indicated we had about 22 basis points related to the accretion and purchase accounting adjustments. There were 9 basis points in there related to repayments or pay down of loans. So probably instead of 445 as a run rate maybe 436 would've been a more normalized rate for the year -- for the quarter. Just to kind of put that perspective.
Kevin Reevey -- D.A. Davidson -- Analyst
Great, thanks. And then earlier you said that your pipelines were pretty strong. Where are you seeing a lot of loan demand come from, is that more from your Cincinnati market or is it from other markets and can you talk about the types of loans that you're seeing build up in your pipeline?
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah. It's really been pretty good cross-sectional across our entire footprint. Kevin it's -- just look at some of the numbers when we closed the first quarter, I think we had about 35 million closed in Cleveland, we had about 30 million closed in Columbus. The nice part was we had about 15 million to 16 million closed in our new market there in southeast Indiana/Cincinnati. So we already got some traction there. So really as I look across that we've got -- we've had nice demand across all of our footprint, even in a lot of our rural markets.
Our pipeline has been good, I would tell you it's still a little more leaning toward commercial real estate than it is C&I. And we're feeling a little bit of pressure from competition, but all in all our margins are holding pretty good. The biggest pressure we've got is really were the treasury are gone when we set those margins as an initial rate. So now we feel good about where we're at. I would say pipeline is as good as they've ever been right now.
Kevin Reevey -- D.A. Davidson -- Analyst
Great. Thank you very much.
Dennis G. Shaffer -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Michael Perito with KBW. Please go ahead.
Michael Perito -- KBW -- Analyst
Hey, good afternoon guys.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi Mike.
Michael Perito -- KBW -- Analyst
I just want to start on the expenses, you had a couple of comments in the prepared remarks but as we think about the run rate moving forward it seemed like the healthcare benefits were maybe a little elevated. Can you give us a little bit more color about where you expect that to settle out, as we move through the year now, if the merit increases are in the run rate?
Richard J. Dutton -- Senior Vice President and Chief Operating Officer
Yeah. Mike this is Rich. And again we give merit raises in April. So we still got one more month coming up and I think other than that, that's probably all (inaudible) that you will see although big change from first quarter to second quarter and the balance of the year. I think if you looked at our non-interest expense run rate somewhere around (inaudible) that would be a good rate for the next quarter.
Michael Perito -- KBW -- Analyst
Helpful Rich, thank you. And then just on capital you know the T.C. is sitting here at 10% you got the buyback out there. How are you guys thinking about that. I mean obviously the returns in the quarter were really strong. I understand there are a couple items like the tax revenue, seasonality and also the higher purchase accounting, which probably boosted that a little bit more than the normalized rate. But you're obviously, your ROE profile as really improved and the capital levels are already strong. So how are you guys thinking about deploying capital moving forward at this point?
Dennis G. Shaffer -- President and Chief Executive Officer
Well, I think we look at really three things. I mean we have three ways to deploy it. And number one for us is still going to be acquisition and growth, and we'd like to do a deal and it's fairly quiet out there now, but I think we'd like what the last deal has done for us. And we think there's a lot of positives -- maybe possibly doing another deal, it's got to be the right deal and it's not, we will continue to try to grow internally, build out some of our business units and maybe increase our presence in some of the markets that we're in. Obviously we paid the increased dividend as well and then as Rich said, we have that stock repurchase program back out there, so those are really the three avenues, but first and foremost I think we still view ourselves as an acquisitive franchise and we'd like to continue to grow through acquisitions and organically.
Michael Perito -- KBW -- Analyst
Helpful. Then just lastly, can you just remind us on the capital side like in a perfect world where are those ratios would be ideally as we try to kind of isolate how much access you're operating with today?
Dennis G. Shaffer -- President and Chief Executive Officer
I would say 9% or so -- we had 9% range. I think our GCE is around 10 today. So we think that optimal levels probably somewhere around 9%.
Michael Perito -- KBW -- Analyst
Great. Thank you.
Dennis G. Shaffer -- President and Chief Executive Officer
Thanks Mike.
Operator
(Operator Instructions) Our next question comes from Scott Beury with Boenning Scattergood. Please go ahead.
Scott Beury -- Boenning and Scattergood -- Analyst
Hey, good afternoon guys.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi, Scott.
Scott Beury -- Boenning and Scattergood -- Analyst
Most of my questions have been answered actually, but on the deposit side, obviously you've had the big inflows from the seasonality in the tax business, excluding that was there any really base like customer deposit growth during the quarter?
Dennis G. Shaffer -- President and Chief Executive Officer
No, we see some fluctuation in our deposits and in fact our business deposits were down about 26 million, if you looked at between our checking and our savings deposits. So we went back to look to see what happened first quarter of last year and it was like down the identical amount. So we continue to add business accounts, our commercial guys and the retail folks are doing a very good job of adding deposits.
So -- but there was no real one big account that we added, but we have added number of nice sized deposit accounts. There was really no closings and we've lost no public funds, but we've had no -- the public funds that we bought from -- that we acquired in the UCB transaction and the public funds that we had, we had nobody close any accounts, so that was the positive.
Charles A. Parcher -- Senior Vice President and Chief Lending Officer
And Scott, we have hired two new treasury people, one of them started here a couple of weeks ago in the Columbus market and our other person starting in the Cleveland market in two weeks. So we're hoping to get a lift on the treasury/business deposit side with added employee probably looking out into the second, third quarter.
Dennis G. Shaffer -- President and Chief Executive Officer
And then on the lending side, I think the loan growth that we put in along in the fourth quarter and the first quarter that amounted to about $57 million on organic loan growth. Fourth quarter last year we grew about 46 million, another 11 million. So that gave us a nice lift in net interest income.
Richard J. Dutton -- Senior Vice President and Chief Operating Officer
Hey Scott, this is Rich. One more thing you just to add on Dennis's comment. The decrease that we saw in the business account, we saw the identical increase in our municipal accounts. So that was business for paying taxes to our municipal customers and the dollar just went from one account to the other. So that was kind of a nice byproduct to get from having a pretty decent sized municipal deposit portfolio, if you will.
Scott Beury -- Boenning and Scattergood -- Analyst
No. Excellent. I appreciate that. So it sounds like is just some ebbing and flowing between different accounts there, some seasonal trends. As you look out through the rest of the year, I guess adjusting out for the tax inflows, do you have any sense of where you see deposit growth, what's a reasonable target. I think that you can still be a little bit tactical on the pricing side to kind of maintain the margin rather than need to go chase out new money to support growth.
Dennis G. Shaffer -- President and Chief Executive Officer
Right. We think that's going to be mid to low single digit growth on the deposit side. We do have a number of deposit initiatives as Chuck was alluding on the Treasury side, there's some checking promotions that will go on, there's a bank at work program that we're rolling out. So a number of initiatives that we're working on and rolling out to grow deposits because they're very valuable to us. Then I would say that from kind of projecting out we're going to be a at that mid to low single digit range.
Scott Beury -- Boenning and Scattergood -- Analyst
Excellent, that's helpful. And then on the fee income side, I think you might have addressed this already, but on -- the wealth management line was a little bit -- it was down. I think you had some kind of specific items in the fourth quarter. If I know it's correct, but it's been kind of flat around that between 800,000 and 900,000 a quarter. Do you see with an expanded customer base any really upside to that line item as we go through the year. Because I'm kind of looking at and thinking that there was a market impact this quarter.
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah, there was that adjustment that we made, you know from the fourth quarter it was really why that revenue was down. But it's been very consistent. If you looked at it from you know first quarter -- year-over-year it's been pretty consistent. We still think there is upside. You know we're just now introducing new services, down in the Lawrenceburg. We've hired a pretty season guy down there. He started to move over book of business. So we see upside there just as we -- Chuck mentioned on the Treasury side, we still need to build out our wealth platform throughout. So I think that's an opportunity for us plus there is opportunity through our retail ranges. We historically have not done a good job selling the brokerage side through the retail branches. We kind of more focused on a kind of a higher net worth client, which is still going to be our focus, but I think there's opportunity on that brokerage side to deliver services through our retail branches.
Scott Beury -- Boenning and Scattergood -- Analyst
Got it. Excellent. That's very helpful. And then just one last one for me, credit is excellent, obviously with you know the net recoveries during the quarter and your non-accruals down significantly. I just -- you know with no provision again this quarter it just kind of getting a sense of what the rest of the year is going to look like on the provision side. Do you have the period and fair value mark that's remaining on the UCB loans?
Charles A. Parcher -- Senior Vice President and Chief Lending Officer
I think that the number was about between $3 million and $4 million on the credit market.
Dennis G. Shaffer -- President and Chief Executive Officer
It was about 4.2 million at year end. So it's probably down slightly from there.
Charles A. Parcher -- Senior Vice President and Chief Lending Officer
But that portfolio has been performing pretty well. We felt it was in pretty good shape when we got it and don't really expect any clouds on the horizon.
Dennis G. Shaffer -- President and Chief Executive Officer
We'll continue probably to provide for any growth that we have. It's just you know we follow the model and it hasn't allowed us to provide really too much. So what we will provide for growth going forward.
Scott Beury -- Boenning and Scattergood -- Analyst
Excellent, that's helpful. All right. That's all for me. Thanks.
Dennis G. Shaffer -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Kevin Reevey with D.A. Davidson. Please go ahead.
Kevin Reevey -- D.A. Davidson -- Analyst
Just a housekeeping question, I know your tax rate was higher than normal, how should we think about the tax rate for the remainder of the year?
Richard J. Dutton -- Senior Vice President and Chief Operating Officer
Hi, Kevin, this is Rich. That came in at effective rate of about 16% and that's probably a good rate. One of the byproduct of UCB acquisition was that the revenue that we earn in Indiana is subject to Indiana income tax and that accounted for that kind of 1% if you will increase in our effective rate.
Kevin Reevey -- D.A. Davidson -- Analyst
Excellent, thank you very much.
Operator
(Operator Instructions). At this time there are no further questions in the question queue. And this will conclude our question-and-answer session. I would like to turn the conference back over to Dennis Sheaffer for any closing remarks.
Dennis G. Shaffer -- President and Chief Executive Officer
Well, in closing, I just want to thank everyone for listening in today and thank those that participated in the call. Again, I'm extremely pleased with our first quarter results and how we are integrating the UCB acquisition. I'm also very proud of the strong low cost core deposit franchise that we've created through our discipline relationship pricing approach. We look forward to continued success for the balance of 2019 and to talking to you again to you all again in a few months to share our second quarter results. Thank you for your time today.
Operator
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Duration: 30 minutes
Call participants:
Dennis G. Shaffer -- President and Chief Executive Officer
Kevin Reevey -- D.A. Davidson -- Analyst
Charles A. Parcher -- Senior Vice President and Chief Lending Officer
Richard J. Dutton -- Senior Vice President and Chief Operating Officer
Michael Perito -- KBW -- Analyst
Scott Beury -- Boenning and Scattergood -- Analyst
Transcript powered by AlphaStreet
This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.
