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Civista Bancshares Inc (CIVB 0.79%)
Q4Â 2019 Earnings Call
Feb 7, 2020, 1:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Civista Bancshares Fourth Quarter and Full-Year 2019 Earnings Conference Call.
[Operator Instructions]
I would now like to turn the conference over to Dennis Shaffer, Civista Bancshares' President and Chief Executive Officer. Please go ahead, sir.
Dennis G. Shaffer -- President and Chief Executive Officer
Good afternoon. This is Dennis Shaffer and I would like to thank you for joining us for our fourth quarter and full-year 2019 earnings call. I am 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.
Before we begin, I'd 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 risk 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 fourth quarter and full-year 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'm very pleased to announce that this morning we reported record earnings for 2019. Our full-year results resulted in record net income of $33.2 million or $2.01 per diluted share. Our fourth quarter results were also very good with net income of $7.7 million or $0.47 per diluted share.
I would like to take a moment to discuss some of our accomplishments in 2019.
We increased our loan portfolio 9.4% or $147 million for the year, ending with $1.7 billion in loans. In addition to those loans that were added to the portfolio, we also sold $125.8 million of loans in the secondary market. While the loan side of the house was very busy with new production, we were also very successful in the deposit area. Our deposits increased $98.9 million or 6.3%. At the end of October, we opened a full-service branch in Beachwood, Ohio, which is on the east side of Cleveland. We have had a loan production office in the area for a few years that has been very successful generating loans. This full-service office will allow us to serve all of the needs of our current customers in the Cleveland area as well as prospective customers.
Also in October, we announced that we would begin the process of redeeming our convertible preferred stock. The convertible preferred stock was in the money, in fact, nearly tripling in value, so virtually all of our holders converted their preferred stock to common stock.
Speaking of capital management, during 2019, we had a stock repurchase plan of up 472,000 shares of stock. We repurchased 188,200 shares at a weighted average price of $20.77. That repurchase plan expired in December and our Board approved a new repurchase plan of up to 672,000 shares for 2020.
Getting back to our financial results, our full-year diluted earnings per share increased $0.16 compared to our adjusted 2018 results, which is an 8.6% increase. Our fourth quarter results, compared to adjusted 2018 earnings, showed a slight decline. In the fourth quarter of 2019, our diluted earnings per share was $0.47, which is a decline of 3.8%, but that is primarily due to a December 2018 accrual adjustment we made to our wealth management income.
Our return on average assets was 1.37% for the quarter and 1.5% year-to-date, while our return on average equity was 9.44% for the quarter and 10.64% year-to-date. The increase in our core earnings continues to be driven by our strong net interest income in what has been an interesting interest rate environment. Net interest income increased $477,000 for the fourth quarter and $19 million for the year. Interest income increased $814,000 for the fourth quarter and $24.4 million for the year.
Our average earning assets increased $162.2 million for the fourth quarter and $429.7 million for the year. The volatility in the interest rate environment tipped the scale on our average yields. For the fourth quarter, our average yield decreased 3.6%, while for the year, our average yield increased 5.5%.
Our interest expense increased $337,000 for the fourth quarter and $5.4 million for the year. These increases were due to both increased balances and a higher cost of funding. During the first half of 2019, funding costs rose to catch up with the increases the Fed put in place during 2018. Deposit costs have not decreased as quickly as the Fed moved in the last half of 2019.
Net interest income grew by 3.9% for the linked quarter and 28.7% year-over-year. Our net interest margin remained strong at 4.18% for the quarter and 4.31% for the year, compared to to 4.38% and 4.21% in 2018. Included in our 2019 margin are 14 basis points of accretion in the fourth quarter and 15 basis points of accretion for the year, compared to 22 basis points and 6 basis points for the same periods in 2018.
All of the comparisons that I made to 2018 include the adjusted earnings for both the fourth quarter and year-to-date periods. The non-GAAP tables on our earnings release have the full details of our adjusted earnings.
We were successful in increasing our non-interest income in 2019. During the quarter, non-interest income increased $762,000 or 15.7% in comparison to the fourth quarter of 2018 and increased $3.9 million or 21% for the year, primarily due to our acquisition of UCB during the third quarter of 2018. For both periods, we have seen an uptick in service charges and interchange fees from the addition of UCB.
Gain on sale of loans increased $620,000 for the quarter and $1.1 million for the year on strong mortgage activity. During the quarter, Civista originated and sold $45.2 million of mortgage loans, compared to $21.4 million in 2018. Year-to-date, our mortgage loans sold totaled $125.8 million, compared to $79.5 million in 2018. The decline in wealth management fees during the quarter is attributable to a $245,000 accrual adjustment made during the fourth quarter of 2018. We continue to view wealth management as an opportunity to grow non-interest income and look forward to expanding these services into our new markets.
Controlling non-interest expense continues to be a priority. After adjusting for $782,000 of acquisition expenses incurred during the fourth quarter of 2018 and $12.7 million incurred during the entirety of 201, non-interest expense increased $9.7 million[Phonetic] for the quarter and 24.1% year-over-year. A similar adjustment is necessary to draw a meaningful comparison of compensation expense, which included $172,000 and $5.2 million of acquisition-related expense. Adjusted compensation expense increased $601,000 for the quarter and $7.1 million for the year. This was attributable to an increase in FTEs and normal pay raises. Our FTE count increased by 75 to 445, compared to 2018, and it was primarily attributable to the UCB acquisition.
The increase in net occupancy and equipment again is primarily due to the addition of eight branches and a loan production office in the UCB transaction, and the opening of our new Beachwood, Ohio branch. Conversely, the decrease in data processing expense was primarily due to conversion-related expenses of $260,000 for the quarter and $5.5 million for the year, related to the UCB transaction in 2018. Professional services also decreased, due to $139,000 and $1.6 million of expenses associated with the UCB transaction, included in the fourth quarter and year-to-date during 2018.
Our efficiency ratio was 61.4% for the year, compared to our adjusted efficiency ratio of 62.9% in 2018. Given our business model of operating as a community bank in rural communities and as a more boutique commercial bank in urban markets, we think of ourselves as a low-60s efficiency ratio.
We continue to be pleased with loan production across our footprint. Our loan portfolio grew $147 million or 9.4% for the year and 14.5% annualized for the quarter. While the majority of the growth came in both owner- and non-owner-occupied commercial real estate, we had strong growth in virtually every category and across our footprint. We anticipate growing our loan portfolio at a mid-single-digit rate for 2020.
On the funding side, our deposits increased $98.9 million or 6.3% during the year, with $90.7 million of that growth coming in core deposit accounts. We are particularly pleased that $73.5 million of this growth was in business and municipal operating accounts. We added two treasury bankers to our staff early in 2019 and are beginning to see lift in deposit growth from new and existing business customers across our footprint.
On the wholesale funding side, FHLB advances increased $32.9 million to $226.5 million at year-end. I'm sure many of you are wondering what impact CECL will have on our bank. We were fortunate to meet the guidelines for the delayed implementation of CECL and will not be required to adopt it until 2023.
While our asset quality remained strong, the growth in our loan portfolio led us to record an $885,000 provision during the fourth quarter and $1 million for the year. Our asset quality metrics continue to be solid. Our non-performing loans were $9.1 million, representing 0.39% of total assets at year-end, compared to $9.9 million in 2018. The ratio of our allowance for loan losses to loans was 0.86% at December 31, 2019, compared to 0.88% at December 31, 2018. Our coverage of non-performing loans increased to 161.95% at December 31, 2019, from 137.87% at the end of 2018.
As we look back on 2019, it was another very busy and extremely successful year for Civista. In a challenging interest rate environment, we managed to organically grow our loan portfolio by 9.4%. We were also able to fund a large portion of that loan growth with core deposit funding, which grew at 6.3%. And we were able to do that, while maintaining our margin at 4.31%.
We are pleased with a record year, 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. Looking forward into 2020, while the lending environment remains 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 will be happy to address any questions you may have.
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session.
[Operator Instructions]
Today's first question comes from Michael Perito of KBW. Please go ahead.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Hey, good afternoon everybody. Happy New Year.
Dennis G. Shaffer -- President and Chief Executive Officer
Hey, Mike.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Thanks for taking my questions. I wanted to start on the loan growth outlook. The mid-single-digit outlook does seem a little conservative, based on kind of the acceleration over the course of the year at loan growth. And I'm curious, if that's a function of the kind of a set up, with the funding of the balance sheet now, with the loan-to-deposit ratio stepping up toward 100% -- right at 100% or so, over the course of the year. And now, you guys are in the position, where you want to fund, kind of, loans, dollar for dollar with deposit growth going forward, and that kind of limits you a little bit onto the net growth, you can show? Or are there other factors that kind of leads you to maintaining that mid-single-digit guidance for next year after the strong end to 2019?
Charles A. Parcher -- Senior Vice President
Yeah, Mike. I would say, we were in that mid- to single-digit range from a projection perspective. We're kind of a little aware, where the economy is exactly going to go here in 2020. It being an election year, I'd say that mid -- I would call it mid- to high-single digits assumption is probably the right assumption for us. We did come into the year with a pretty healthy pipeline. We came into the year with a nice construction portfolio that is available to be drawn. So, we feel good about where we're at. We're just a little apprehensive about where the economy is going to go in the back half of the year.
Dennis G. Shaffer -- President and Chief Executive Officer
And we can continue, Mike, I think to be selective in the loans that we will make sure we're getting the pricing and in the structure of the loans. So, I think that's why, given what Chuck said and being a little bit selective is why we've targeted kind of that mid-single-digit loan growth.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Okay, that's helpful. Thank you, guys.
And on the deposit side, can you talk a little bit more about the cost of some of the growth that you guys are seeing and how you expect that to trend into 2020 here? Do you think there's room for funding costs to move down, if you're growing at a mid-single-digit pace or do you think it might be -- move a little slower downward as you guys are growing the overall portfolio, based on kind of the market pricing dynamics that you see today?
Richard J. Dutton -- Senior Vice President
Mike, this is Rich. I mean, our funding costs have always been among the lowest in the peer group. And there is not a whole lot room for them to come down. It has come down, I think, one basis point linked quarter. That's where the compression of our margin comes from. I mean, again I think, with the treasury folks that we hired early in the year, there's an ability to attract business deposits. That's where, our deposit growth for the most part is going to come from.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Okay.
Richard J. Dutton -- Senior Vice President
I think, again, we're seeing some pretty good momentum, as it builds toward the end of the year.
Charles A. Parcher -- Senior Vice President
And we continue to try to build out that treasury platform, Mike. I mean, it's our goal to continue to try to bring in as many low-cost flattish core deposits as we possibly can.
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah. We had tremendous success in 2019. I think we have that momentum. That's going to carry over into 2020. I mean, that is, is of huge emphasis for us because we think we can continue to garner a little bit more of that relationship from some of those commercial clients.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Helpful. Thank you.
And then, one more, just on capital. I'm wondered, Dennis, just the conservatism on the economic outlook, does that carry into your M&A appetite as well, as we think about your capital plans for this year? And I guess, that's where we would start out, there's a couple of follow-ups[Phonetic]. But does that impact your your willingness, I guess, to pursue M&A, given the conservative economic kind of thoughts you guys are having for the back half of 2020?
Dennis G. Shaffer -- President and Chief Executive Officer
No, no. I actually think the interest rate environment is going to put a little bit of pressure on these net interest margins for some of these smaller banks. So, if anything, I think that environment is going to hopefully fuel some activity there. There has not been a ton in Ohio other than the First Defiance and Home Savings deal. So, I think that the outlook for the economy and with the interest rate environment, it's going to going to help that per se. So, I think being pretty well-levered up, we want to try to find a bank that has -- ideally would have a lower loan-to-deposit ratio than us, so that we can continue to put those funds to work.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. And actually, I am going to pivot a little back to my loan growth question. Good job, you reminded me of a question I wanted to ask. Is there room -- what kind of assumptions are you guys making, if any, around the First Defiance United Community merger. I know it's just closed and conversion hasn't happened yet. So, there might still be some time for a bunch of moving pieces to play out. And I know, both franchises weren't very overlapped. But do you think in the kind of the northern half of the state, there'll be opportunities from any disruption? Or how are you guys doing that and is that factored in at all, kind of, to your loan growth budgeting for 2020?
Charles A. Parcher -- Senior Vice President
We really haven't factored.Michael, this is Chuck. We really haven't factored, really any of that disruption into our loan growth assumptions. We haven't seen a lot of it yet. Quite frankly, I guess, I'm looking at it more so from a fact --- a perspective, I think that'll probably be a little bit more competitive than a little bit less competitive, just because it didn't have a little bit more sheer size. I don't know yet, if there is -- we haven't seen any yet as far as any employee is being let go, that would be somebody that we would like to target, in addition to bringing and help to generate loans from their portfolio. That hasn't taken place yet, but we'll probably know more at our next call next quarter.
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. Well, thank you guys for taking my questions. As always, I appreciate it.
Dennis G. Shaffer -- President and Chief Executive Officer
You bet.
Richard J. Dutton -- Senior Vice President
Thanks, Mike.
Operator
And our next question today comes from Nick Cucharale of Piper Sandler. Please go ahead. Your line is open, Mr. Cucharale.
Nick Cucharale -- Piper Sandler -- Analyst
I'm sorry about that. Good afternoon, gentlemen.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi, Nick.
Nick Cucharale -- Piper Sandler -- Analyst
With the tax business coming into focus in the first quarter, can you help us think through your expectations, is it similar to prior years?
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah. Although I will tell you that it's going to be a little less, I think. In the last past several years, I think that the total revenue that we earned on that was $2.7 million. This year, we expect it to be $2.4 million, with about $1.9 million that happened in the first quarter, but it is not materially different. And I think, in terms of the funds flowing through, that will be pretty similar. But it is going to be a little bit less than what we've had the last two or three years.
Nick Cucharale -- Piper Sandler -- Analyst
Okay, that's great. And did you happen to extend your agreement to future years or is that?
Dennis G. Shaffer -- President and Chief Executive Officer
We did happen to do that. I think we've always and we did that in December.
Charles A. Parcher -- Senior Vice President
We had a new year. We ended the year [Technical Issues]
Nick Cucharale -- Piper Sandler -- Analyst
Okay. That's great. And then, just building on the loan growth outlook here, as far as the segments are concerned, are you expecting similar trends with commercial real estate leading the way or is the focus is on greater diversification in 2020?
Charles A. Parcher -- Senior Vice President
Mike, it's Chuck. I think we'll keep it hopefully at the same kind of of trajectory with commercial real estate. Our goal is to help augment or, I guess, keep that at the same growth pace. But maybe to grow our C&I a little bit quicker as far as from a trajectory perspective, we did hire a new first-to-run retail and I would like to see us through a little bit more consumer lending peer [Indecipherable] into 2020 as compared to what we've done in the past. But I would tell you, I would, as for modelling -- I would say, it's commercial real estate, which still lead the way as far as from a full-line perspective.
Nick Cucharale -- Piper Sandler -- Analyst
That's great color. Thanks for taking my question.
Dennis G. Shaffer -- President and Chief Executive Officer
Thanks, Nick.
Operator
And our next question today comes from Kevin Swanson of the Hovde Group. Please go ahead.
Kevin Swanson -- Hovde Group -- Analyst
Hi guys.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi, Kevin, how are you?
Kevin Swanson -- Hovde Group -- Analyst
How are you?
Dennis G. Shaffer -- President and Chief Executive Officer
Good.
Kevin Swanson -- Hovde Group -- Analyst
Hey, most of my questions are answered. I appreciate the color. But maybe just thinking about the expense base, obviously it was up a little bit, but not -- although it's surprising, given the strong production in mortgaging loans. But how do we kind of think about the expenses going forward, I guess, in kind of conjunction with the mid-single-digit loan growth outlook for 2020? Thanks.
Dennis G. Shaffer -- President and Chief Executive Officer
Thanks, Kevin. Rich, you want to tackle it?
Richard J. Dutton -- Senior Vice President
Yeah. I mean, I think that you're right on in terms of growth in the commission expense because of the increased loan demand. I think what we're looking at in the first quarter for next year is again we've got the increase in the payroll taxes, that's like a piece of it. [Indecipherable]. I mean, that first quarter wise, bigger. And then, health insurance, and I don't know if you've been on the calls before, but we always kind of -- we're self-insured, and so, we take an expense what the underwriters tell us that we are to, what we should expect. But I would tell you that more years than not, as the year progresses, we end up --- got to reducing that expenses, we see the actual expense coming through. So, to say it's front-end loaded, it's probably not, the wrong way to look at it.
I think we're looking at a run rate, and run rate is not the right term. But for the first quarter, I think and I got the number here in front of me, and I can't find it, why don't we say that was going to be timed for fourth quarter[Phonetic]. Let me flip on page, I've got $17.6 million is what we've got for non-interest expense for the first quarter.
Charles A. Parcher -- Senior Vice President
Yes, $17.6 million.
Kevin Swanson -- Hovde Group -- Analyst
And then, maybe just one follow-up on the tax business. Was there something specific that drove that kind of the difference between '19 and the expectation for '20? I guess, now we're a couple of weeks past the hub testing, just curious if there is anything you're seeing in the market?
Dennis G. Shaffer -- President and Chief Executive Officer
No, there is nothing that we're seeing in the market. It's just I think, again our partner TPG, who is owned by Green Dot, they've got their own bank and it was just kind of a load shift, I think. Part of one of the bigger producers, they shift a little bit more of that business to them, and we got a little bit more of the, kind of, smaller party originators that was kind of a load shift. I suppose, it's the best way to look at it.
Kevin Swanson -- Hovde Group -- Analyst
Okay. Great, thanks. I appreciate it.
Operator
And our next question today comes from Scott Beury of Boenning and Scattergood. Please go ahead.
Scott Beury -- Boenning and Scattergood -- Analyst
Hey, good afternoon guys.
Dennis G. Shaffer -- President and Chief Executive Officer
Hi, Scott, good afternoon.
Scott Beury -- Boenning and Scattergood -- Analyst
I just wanted to kind of touch on a few things. First off, on the loan yield, kind of looking at, where new loans are coming on and I obviously can respect that[Phonetic] this is dependent on mix and product type. But looking at the yield on the portfolio today and where new yields are coming on, do you have any thoughts on kind of the directional trend line that you expect for the overall loan yields in the portfolio? I think, stripping out the accretion, my math is that you were down about 15 basis points or so this quarter.
Charles A. Parcher -- Senior Vice President
That's correct. And loan yields have definitely fallen back in the fourth quarter and they stablized[Phonetic] as we've started new originations in 2020. But we still feel that there is going to be some downward pressure, looking forward. I don't know that I've got a great number for you today, Scott. But, we're definitely probably off a few clicks from where we were last year.
Richard J. Dutton -- Senior Vice President
Yeah. The fourth quarter would have had the full impact of the three interest rate reductions. So, even though, some of them happened mid year and some of them later in that third quarter, the fourth quarter had the full impact, which I think impacted at 15 basis points that you saw. So, that's -- but the loans are definitely going on at a lower rates than what we were putting them on the first quarter of 2019.
Scott Beury -- Boenning and Scattergood -- Analyst
So, maybe, would it be fair to say that we could expect, maybe not, quite the same reduction that you experienced this quarter with the flat interest rate environment, but maybe some directional [Indecipherable] through the year, based on the new originations?
Richard J. Dutton -- Senior Vice President
Yeah. We think that's pretty accurate, right.
Dennis G. Shaffer -- President and Chief Executive Officer
And we think that will be not as great in the first quarter, I think, as it might be later in the year, because we've got all the tax program income coming in the first quarter or the majority of it coming in that first quarter from a margin perspective, right.
Scott Beury -- Boenning and Scattergood -- Analyst
Excellent. That's very helpful. And then, few other questions. First off, on the tax rate, I know you have some lumpiness usually kind of through the year. But the tax rate was a bit low, for me, in the fourth quarter. Is kind of a 14% to 15% range, a good rate to use for 2020?
Dennis G. Shaffer -- President and Chief Executive Officer
14% or 15% tax. I would say 15%, if I were you.
Scott Beury -- Boenning and Scattergood -- Analyst
Okay. Thank you. And then lastly, from a little bit of a broader perspective, I know that you're still actively exploring M&A opportunities. Just wanted to kind of follow-up on that and looking at the earnings power of the company right now, your capital ratios, just kind of wanted to get a sense of any thoughts you might have on the buyback, and particularly any thoughts you might have on the decision to not be more active with that in the fourth quarter?
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah. I think, given that we're growing our capital and we're earning and growing our capital the way we are, we did increase the authorization of the buyback going in here to the first quarter. And without an M&A transaction imminent, I think that we would probably be a little bit more aggressive with the buybacks. We think that's a good way to deploy some of our capital.
Scott Beury -- Boenning and Scattergood -- Analyst
Excellent. That was helpful. All right. Well, that answers all my questions and thanks for taking the time guys.
Dennis G. Shaffer -- President and Chief Executive Officer
Thank you, Scott.
Richard J. Dutton -- Senior Vice President
Thanks, Scott.
Operator
And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Shaffer for any final remarks.
Dennis G. Shaffer -- President and Chief Executive Officer
Yeah. Thank you. I do want to thank everyone for listening today and for those that participated on the call. Again, we are extremely pleased with our fourth quarter and 2019 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 have created through our disciplined-relationship pricing approach. We look forward to a prosperous 2020 and to talking to you again in a few months to share our first quarter results. Thank you for your time today.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Dennis G. Shaffer -- President and Chief Executive Officer
Charles A. Parcher -- Senior Vice President
Richard J. Dutton -- Senior Vice President
Michael Perito -- Keefe Bruyette & Woods Inc. -- Analyst
Nick Cucharale -- Piper Sandler -- Analyst
Kevin Swanson -- Hovde Group -- Analyst
Scott Beury -- Boenning and Scattergood -- Analyst
