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Civista Bancshares Inc (NASDAQ:CIVB)
Q3 2019 Earnings Call
Oct 25, 2019, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Civista Bancshares, Inc. Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [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 -- Chief Executive Officer and President

Good afternoon. This is Dennis Shaffer and I would like to thank you for joining us for our third quarter 2019 earnings call. I'm joined today by Rich Dutton, SVP of the Company, and Chief Operating Officer of the Bank; and 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 during today's call, including the question-and-answer period, you may hear forward-looking statements related to the future financial results and business operations for Civista Bancshares, Inc. Our actual results may differ materially from current management forecast and projections as a result of factors over which the Company has no control. Information on these risk factors and additional information on forward-looking statements are included in our news release and in the Company's reports on file with the Securities and Exchange Commission. We will record this call and make it available on Civista Bancshares website at civb.com.

Again, welcome to Civista Bancshares third 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 you may have. I am very pleased to announce that this morning we reported another quarter of strong core earnings with net income for the third quarter 2019 of $7.5 million or $0.46 per diluted share and $25.5 million or a $1.54 per diluted share for the nine months ended September 30, 2019.

To adequately compare to 2018, you need to add back the $9.2 million and $12.3 million in pre-tax, non-recurring expenses related to the acquisition of United Community Bancorp and the restructuring of their securities portfolio that were included in the comparable 2018 periods. After doing so, our diluted earnings per share would have been $0.37 for the quarter and $1.37 for the nine months ended September 30, 2018, which means our 2019 diluted earnings per share increased by 24.3% for the quarter and 12.4% year-to-date.

Our return on average assets was 1.38% for the quarter and 1.56% year-to-date, while our return on average equity was 9.38% for the quarter and 11.07% year-to-date. We had another great quarter, driven by our strong net interest income and non-interest income. During the third quarter, we did automate our accretion model related to the purchase accounting adjustments of UCB loans and consequently reviewed our assumptions. Through that process, we determined that we needed to adjust the speed of accretion. Accordingly, we made an adjustment during the quarter of $209,000, which decreased our margin to 4.12%. We estimate that that impact of purchase accounting accretion will increase our margin in future quarters by approximately 15 basis points.

While net interest income for the quarter declined slightly due to the accretion adjustment, our net interest margin remains strong at 4.12% and 4.35% year-to-date. Our core margin, excluding accretion is 4.15% for the quarter and 4.21% year-to-date compared to 4.15% and 4.14% a year ago. We increased non-interest income by 2.1 -- we increased non-interest income by $2.1 million for the quarter and $3.5 million for the first nine months of 2019, compared to the same periods last year. These increases are primarily due to increases in gains in service charges and interchange fees, which are consistent with the increases we've seen with the addition of new customers and debit card users from the UCB transaction.

In addition, gains on the sale of mortgage loans increased $260,000 from the linked quarter and $466,000 year-over-year. We originated and sold $80.5 million of mortgage loans in the first nine months of 2019 compared to $57.9 million during the same period in 2018. In the third quarter alone, we sold $36 million of mortgage loans. We continue to focus on controlling non-interest expense, which increased only 0.6% for the linked quarter. Our 2018 results included $8.8 million and $12 million in pre-tax non-recurring expenses related to the UCB acquisition. Adjusting for the non-recurring items, our non-interest expense increased $11.5 million or 30% year-over-year, which we are pleased with, given that the acquisition of UCB increased our size by 36%. Our loan portfolio increased $49.9 million during the third quarter and $86.7 million year-to-date. That equates to an annualized growth rate of 12.4% for the quarter and 7.5% year-to-date.

We continue to have strong growth in virtually all loan categories and across our entire footprint. Our recent focus on treasury management services has aided in the growth of commercial and industrial loans. Commercial real estate growth has been strong, predominantly in our urban markets, including better-than-expected growth in the Cincinnati MSA. Included in the first nine months of 2019 were $90.7 million in loan payoff which somewhat muted our loan growth. The majority of our payoffs came from the successful completion of construction projects that are sold or refinanced into the permanent market.

Our loan pipelines remain very strong. In addition, we have a $117.4 million in approved, undrawn construction loans at September 30. We anticipate a strong finish to 2019 with our loan portfolio growing at a slightly above -- slightly above a mid-single-digit annual rate. On the funding side, our deposits increased $52.7 million since the beginning of the year. This increase was primarily the result of a $29.2 million increase in non-interest bearing demand and an increase of $35.1 million in interest-bearing demand accounts.

As we mentioned during last quarter's call, we are emphasizing treasury services to our commercial customers and prospects which has aided and expanding lower cost, commercial and municipal operating accounts, These increases were partially offset by a $24.4 million decline in brokered deposits, which was shifted to short-term Federal Home Loan Bank advances, which increased $42.5 million. Our asset quality remains strong. While we experienced $208,000 of net recoveries during the quarter, we did provide a $150,000 for loan losses to accommodate the growth in our loan portfolio. Our non-performing loans declined to $9.4 million from $9.9 million at the end of 2018, which represented 0.42% of total assets. The ratio of allowance for loan losses to loans was 0.86% at September 30, 2019, compared to 0.88% at December 31, 2018.

The allowance for loan losses to non-performing loans increased to 149.9% at September 30, 2019 from 137.8% at the end of 2018. While we had good loan growth during the quarter, we continue to be disciplined in how we originate loans and believe this is reflected in our continued strong credit metrics. With FASB's final ruling earlier this month, Civista meets the test to delay implementation of CECL until 2023. However, we will continue to prepare for its implementation.

I'm sure many of you saw the announcement earlier this week that we will be redeeming our convertible preferred shares on December 20. We believe redeeming our preferred shares helps to uncomplicate our capital structure particularly for investors that may not follow Civista closely. We also announced that we purchased -- we repurchased 188,200 shares of common stock during the quarter at an average price of $20.77 per share. We continue to view our stock repurchase program as one of the options available to us in maximizing shareholder value.

Again, we are pleased with another strong quarter fueled by solid core earnings and are confident our disciplined approach to managing Civista and our long-term focus on driving shareholder value will continue to yield positive results.

In closing, while the lending and deposit environments remain competitive we believe 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 Nick Cucharale with Sandler O'Neill & Partners. Please go ahead.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Good afternoon, gentlemen.

Dennis G. Shaffer -- Chief Executive Officer and President

Hey, Nick.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

So, first, I'd like to start out on the margin. I appreciate your commentary on the go-forward rate of the accretion impact, but can you give us some color with --on your outlook for the core NIM?

Richard J. Dutton -- Senior Vice President

I'm sorry, I didn't hear the last part of that.

Dennis G. Shaffer -- Chief Executive Officer and President

The core NIM.

Richard J. Dutton -- Senior Vice President

Okay. So, the core NIM, I think, is going to be steady for the last quarter. We modeled a one rate cut to occur next week and one at the end of the year that really won't have any impact. So, we're really not thinking that -- for the quarter -- quarter-to-quarter, it's going to be pretty flat based on what we modeled.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Okay, great. And then secondly, you guys had a nice gain in wealth management this quarter. Can you kind of just discuss your progress with respect to broadening your customer base to incorporate UCB and your outlook for this business going forward?

Dennis G. Shaffer -- Chief Executive Officer and President

Sure. I think the wealth management, we've hired a seasoned veteran down in the Lawrenceburg in the Indiana market, a gentlemen that came from one of the larger institutions down there, had a pretty sizable portfolio. He's been able to transition over quite a few accounts. In addition, we're gaining pretty good momentum from our private bankers who are working really well with our wealth managers, particularly, in a lot of our urban markets and really across the footprint, really across the footprint, but those two areas, we had revamped the private banking area about a couple of years ago to align it more with that wealth. We're starting to bear some of the fruit from those -- from that restructuring.

So, we'll continue to look for opportunities in the wealth management area, but we've been pleased with what we've been able to do so far.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Okay. And then, you mentioned the better than expected growth from the Cincinnati MSA this quarter. Can you help us quantify how much of the linked quarter growth came from that market?

Dennis G. Shaffer -- Chief Executive Officer and President

Well, I don't have the exact quarter to quarter piece of that.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Okay.

Dennis G. Shaffer -- Chief Executive Officer and President

But I do have -- I can tell you, I guess, from a year-to-date perspective of about -- of the $86.7 million of growth we've had in the first nine months, a little bit over $40 million of that have come from the Cincinnati MSA.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Okay, great. And then lastly, can you just update us on deposit pricing in your markets and have you seen an abatement in the competitive landscape, given the interest rate environment?

Dennis G. Shaffer -- Chief Executive Officer and President

Yeah, I mean it's still competitive. We do still see some outliers. A lot of the banks have retracted a little bit on their pricing as we have. Most of -- we have a very low deposit cost base, so our opportunity, really, lies with our CDs, our private banking, and our municipal accounts. Those are really where we give a lot of special pricing to. So that's really where our opportunity is, but it's still very competitive. We do have some outliers that really have not adjusted the pricing, but again, we focus really on those relationships. So, we're not chasing rate as much as some of our competitors are.

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Okay. Thank you for taking my questions.

Dennis G. Shaffer -- Chief Executive Officer and President

You bet.

Operator

Our next question comes from Kevin Reevey with D.A. Davidson. Please go ahead.

Kevin Reevey -- D.A. Davidson -- Analyst

Good afternoon.

Richard J. Dutton -- Senior Vice President

Hey, Kevin.

Dennis G. Shaffer -- Chief Executive Officer and President

Hey, Kevin.

Kevin Reevey -- D.A. Davidson -- Analyst

So, just curious what your mortgage lending pipeline looks like going into the fourth quarter. I appreciate the color on the pipeline for the commercial side.

Dennis G. Shaffer -- Chief Executive Officer and President

Pipeline, just give me one second [Indecipherable]. I looked it up here. Our pipeline going into the fourth quarter is about $82 million, which is obviously quite higher than it was going into the fourth quarter of last year. We've had a nice explosion of growth I'd say over the last -- this last quarter, just because of the way rates have reduced and I will tell you, we'd normally run about 80-20 from a purchase versus refi. The nice part is, we've really kept the purchase fees up, but refi amount has crept up. And we've -- in the third quarter, we were 64.5-35.5 purchase to refi.

Kevin Reevey -- D.A. Davidson -- Analyst

Great. So, should we expect the same performance in residential mortgage in the fourth quarter as we saw in the third quarter?

Dennis G. Shaffer -- Chief Executive Officer and President

I would say something close just because of some of the refi business, but notoriously in Ohio and here in the Midwest, it seems like, late November, early December, it seems to slow down. Now, the pipeline, we say that it doesn't, but as you know, purchases usually slow down that time of year up here, but I would say that the run rate can be somewhat similar.

Kevin Reevey -- D.A. Davidson -- Analyst

And then on the treasury management side, are you looking to continue to add professionals in that business and then what's the competitive landscape like to hire treasury management professionals?

Dennis G. Shaffer -- Chief Executive Officer and President

It's pretty competitive as you would guess, just because all the-especially the regional banks continue to drive -- try to drive more and more fee income. I would say we're going to look to add people, but not anytime in the near future. I would say, that would be somewhere in the next year and depending on where we expand in certain marketplaces.

Kevin Reevey -- D.A. Davidson -- Analyst

That's all, thank you very much.

Dennis G. Shaffer -- Chief Executive Officer and President

Thanks, Kevin.

Operator

[Operator Instructions] Our next question comes from Michael Perito with KBW. Please go ahead

Michael Perito -- KBW -- Analyst

Hey, good afternoon everybody.

Dennis G. Shaffer -- Chief Executive Officer and President

Hi, Mike.

Michael Perito -- KBW -- Analyst

Can you walk me through the comment in the release about the margin and the accretion change? Can you just walk me through the mechanics of what exactly altered at that and just maybe throw out a little bit more specifics about what happened exactly?

Dennis G. Shaffer -- Chief Executive Officer and President

Sure, sure. So, when we did the deal, we were using reports and it was a more manual process to the accretion that we got from our external accounts that helped us with that. As we moved forward, we wanted to automate that and as we went through that automation, we relooked at that -- some of the assumptions that we had and as we adjusted those assumptions, just to get it right, I guess, or consistent with those assumptions, we made that adjustment in the third quarter. So what that did was, reduced our margin by $209,000 in the quarter, where we sit at the end of the quarter's right, if you will, and going forward as we modeled, again, because we're doing it at a slower accretion than maybe we had been. It looks like, at least, for the next couple of quarters a 15 basis point boost, if you will, to our core margin and then that will diminish obviously as that adjustment -- the purchase accounting adjustment accretes down. Does that help?

Michael Perito -- KBW -- Analyst

Yeah, I guess, I'm just trying to. So -- by making this change, does this kind of elongate but lessen the time period in which you're going to recognize the accretable yield that you otherwise would have recognized and then if you didn't make the change, it would have came up sooner? Is that...

Richard J. Dutton -- Senior Vice President

Exactly. That's -- I mean, that's a reasonable assumption. The total amount of the adjustment didn't change, just the way that we're going to recognize it, so yeah.

Michael Perito -- KBW -- Analyst

Okay, that's helpful. Thank you, Richard. And then -- on the -- to follow up on the treasury management question, just on the hiring professional, just more broadly, if you think about, you've held the quarterly expense run rate pretty tight this year. As you guys start to budget for next year, any initial thoughts on what we can expect, even if it's just qualitative in terms of hires or investments that you guys need to make that we should be factoring in when we think about your expense growth for 2020?

Dennis G. Shaffer -- Chief Executive Officer and President

Yes, we're still working through our budget process. So, I don't have any real good answer for you, Mike. I mean, we're still trying to work through that budget. I mean, each department has submitted their request. I can tell you that everybody always submits to add a few more people. So, we have to kind of work through the numbers first and then start prioritizing things. I will tell you that that is an emphasis deposit growth. That's an emphasis for us and we've had pretty good success with the -- in the treasury field and with the people that we brought over. So, we'll continue to give that area emphasis.

Richard J. Dutton -- Senior Vice President

Mike, I would add just one thing, I mean our third quarter non-interest expense at $16.7 is probably a good proxy for the fourth quarter and we are interviewing right now for a CIO. I think that's something that Dennis talked about last quarter.

Dennis G. Shaffer -- Chief Executive Officer and President

Yeah.

Richard J. Dutton -- Senior Vice President

And then, while they're not hired yet, I mean, in terms of a significant salary. I don't know whether it'd be significant, but it'd be the most significant of anything that we would add in the next 12 months.

Michael Perito -- KBW -- Analyst

Okay. And then just lastly on capital, so you guys are redeeming the preferred, obviously, the tangible common levels will still be pretty strong even after that event. I noticed you start buying back some stock this quarter. Can you give us maybe the update, Dennis, on just the appetite for further repurchases and then also, obviously, I know your priorities still lie with organic growth and M&A and on the latter one, any updated thoughts on M&A as well?

Dennis G. Shaffer -- Chief Executive Officer and President

Yeah. As far as future repurchases, I mean, we do consider that a pretty good tool and we'll continue to utilize that, I think, going forward, particularly, if we keep earning the way we are earning, and we don't have an M&A deal, let's M&A [Phonetic] or something. So, I think that we will continue that. We kind of look at that and look at M&A, there is no execution risk there. So, we kind of value it the same way we look at an M&A deal as far as earn-back and we might be willing to take slightly longer earn-back period.

But we'll continue to -- we'll continue to look at that as a viable option for us to use our capital. As far as M&A, we continue to have a lot of conversations. I would say the tone of those conversations has changed over the last six months or so. There are less meet and greets and they're more substantive and seem to be more focused around a lot of the issues. The banks are dealing with management issues, board fatigue, regulatory stuff and I also think the current interest rate environment with this yield curve is going to put pressure on a lot of these banks because the margins are continuing to compress -- they're going to continue to compress and I think with us having the margin that we have, we are better prepared to deal with that. So we're continuing to have some pretty good dialog and some of the more recent announcements, I think, have fueled some of that as well. So that's kind of the update.

Michael Perito -- KBW -- Analyst

Great. Listen guys, thank you for taking my questions. I appreciate it.

Richard J. Dutton -- Senior Vice President

You bet. Thank you.

Operator

[Operator Instructions] At this time there are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Dennis G. Shaffer -- Chief Executive Officer and President

Thank you. Well in closing, I just want to thank everyone for listening today and for those that participated in the call. Again, we are extremely pleased with our third quarter results and are very proud of the production across all of our business lines and of the strong low-cost core deposit franchise that we've created through our disciplined relationship pricing approach. So, we look forward to continued success for the balance of the year and to talking to you again at the end of the year to share our results for 2019. So, thank you for your time today.

Operator

[Operator Closing Remarks].

Duration: 25 minutes

Call participants:

Dennis G. Shaffer -- Chief Executive Officer and President

Richard J. Dutton -- Senior Vice President

Nick Cucharale -- Sandler O'Neill & Partners. -- Analyst

Kevin Reevey -- D.A. Davidson -- Analyst

Michael Perito -- KBW -- Analyst

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