Civista Bancshares, inc (CIVB) Q3 2021 Earnings Call Transcript

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Civista Bancshares, inc (CIVB -1.50%)
Q3 2021 Earnings Call
Oct 27, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to Civista Bancshares Third Quarter 2021 Earnings Call. [Operator Instructions]. Please note that this event is being recorded.

I would like to turn the call over to Mr. Dennis Shaffer, President and CEO. Please go ahead.

Dennis G. Shaffer -- Chief Financial Officer and President

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 2021 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.

Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website.

The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute the most directly comparable GAAP measures. The press release available on 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' third quarter 2021 earnings call. At the conclusion of my remarks, we will take any questions you may have.

Let me start off by noting several significant accomplishments or transactions that occurred during the third quarter. This morning, we reported net income of $9.6 million or $0.64 per diluted share for the third quarter of 2021 and net income of $29.6 million or $1.90 per diluted share for the 9 months ending September 30th, 2021.

Our earnings per share for the quarter increased 43.3% compared to the third quarter of 2020 as well as 39.7% compared to the first 9 months of 2020. 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.

Earlier this month, we announced a $0.14 quarterly dividend, which represents an annualized yield of 2.41% based on our September 30th market close of $23.23 and a dividend payout ratio of 1.88%. We also continue to look for ways to make our balance sheet more efficient. Late in September, we began redeploying $50 million of excess liquidity from cash into investments which we expect to result an $850,000 of additional interest income on an annualized basis.

We continue to be active in our repurchasing common shares. During the quarter, we repurchased 404,620 shares. Year-to-date, we have repurchased 909,859 shares or 5.7% of the outstanding shares at December 31st, 2020. Finally last Friday, we filed a $100 million shelf offering, which was a renewal of our existing shelf that was set to expire at the end of November.

Now, let us 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 3% or 12% on an annualized basis. The category that we saw the largest increase in was commercial real estate. We originated 3,700 loans for nearly $400 million through the SBA's Paycheck Protection Program. At September 30th, we had 772 PPP loans remaining with balances of $83.3 million. All of our first round loans have been processed with all but 9 of the first round loans totaling $2.7 million having been forgiven.

In addition, 50.2% of our round 2 loans have initiated the forgiveness process. We anticipate having approximately $20 million 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 2022. We continue our focus on managing COVID-19 loan deferrals, as well as asset quality as a whole. Our deferrals have continued to improve from 3.6% of total loans at December 31st, 2020 to less than 1% at September 30th. 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.

Net interest income increased $509,200 or 2.5% over the linked quarter and increased $2.4 million dollars or 11% year-over-year. Net interest income for the first 9 months of 2021 increased $5.9 million or 8.9% compared to 2020. Our net interest margin was 3.62% and 3.48% for the quarter and for the first 9 months of 2021, respectively. Both measures are lower and than the comparable 2020 periods, but higher than the linked quarter as the impact of our second quarter balance sheet restructuring contributed a full quarter of impact

As we shared in our first quarter earnings release, the increase 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. We continue to see decreases in our funding cost due to the lower interest rate environment. Funding cost went down by $306,000 compared to the linked quarter and $1.2 million when comparing the third quarter of 2021 through the third quarter of 2020 and $3 million dollars when comparing the first 9 months of 2021 to the same period of 2020.

Our yield on earning assets is comparable to the prior year quarter and increased by 5 basis points over the linked quarter as new loan rates remain stable and the balance sheet restructuring of transactions we executed in May took full effect. Our yield on earning assets for the first 9 months of 2021 declined 42 basis points compared to the same period in 2020, as interest rates began to tumble late in the first quarter of 2020.

Out the effect of the $1.8 million gain on the sale of our Visa B stock that occurred in the second quarter, non-interest income declined $814,000 or 11.2% in comparison to the linked quarter and increased 0.$3 million dollars or 11% 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.

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.

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 $1.6 million, down from our linked-quarter of $2.2 million as refinances began to decline and hold inventories continue to be tight across our markets for the. First 9 months of 2021, we recorded gains of $6.6 million compared to $5.5 million in 2020. We sold $56.9 million of mortgage loans during the third quarter of $2021 and $204.7 million during the first 9 months of 2021.

Third quarter volume was down $12.3 million from the linked quarter as demand for refinancing continue to soften. The average premium recognized on the sale of loans decreased from 3.20% for the linked-quarter to 2.83% for the current quarter. Service charge revenue was a bright spot, increasing $202,000 for the linked quarter and $280,000 for the first 9 months of 2021 compared to 2020.

Interchange revenue was consistent with our linked quarter and increased $150,000 for the quarter and $663,000 for the first 9 months of 2021 as consumers seem to be maintaining the online and cashless retail buying habits that began during the economic shutdown. Wealth management revenue continues its strong contribution to our non-interest income, increasing $230,000 for the quarter and $605,400 for the first 9 months of 2021. We continue to bring in new accounts, as well as benefiting from strong financial markets.

The reduction in swap fees is a result of our decision to book select 5 and 7-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 loans. Adjusting for the $3.8 million federal home loan bank prepayment penalty we incurred in the second quarter, non-interest expense for the linked quarter would have increased $704,000 or 3.7% and $3.9 million or 7.3% year-over-year.

The year-over-year increase is primarily attributable to a $2.5 million increase in compensation expense. The largest components of which were a $803,200 increase due to normal pay raises, a 908,400 dollar increase in commissions paid to mortgage originators and a $300,000 increase in health insurance claims. Our efficiency ratio for the quarter was 62.2% compared to our adjusted ratios of 59.5% for the linked quarter and 59.9% year-over-year.

Turning our focus to the balance sheet. Year-to-date, our total loans declined by $52.7 million, which includes a $134 million reduction in PPP loans. Excluding PPP loans, our loan portfolio would have grown by $81.3 million or 5.9% annually. Third quarter growth was consistent with that of our second quarter at $55.3 million or 12% annualized. Demand for commercial real estate loans across our footprint continued. 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 $128 million which are near an all-time high. While we continue to battle loan payoffs on completed projects, reduced outstandings 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 2021.

On the funding side, we experienced growth in every category except time deposits with total deposits, increasing $245.4 million or 11.2% since the beginning of the year. Non-interest bearing demand accounts, which made up 34.2% of our total deposits at September 30th grew by $111.7 million compared to December 31st, 2020. While balances related to our income tax processing program made up $31.5 million of the increase, $48.9 million of the growth came from non-interest bearing business accounts and $28.5 million from public entities. We also experienced a $92.7 million increase in our interest-bearing demand accounts, driven by a $52.1 million increase in public fund accounts.

During the pandemic, we automatically downgraded commercial loans that requested concessions beyond the initial 90-day modification period. Our total criticized loan portfolio which includes all classified and substandard loans declined from $148.1 million at December 31st, 2020 to $106.1 million headsets at September 30th, 2021.

The segment with the largest number of criticized loans is hotels and lodging totaling $61.4 million. Many of these operators have experienced increased occupancy from leisure travel during the third quarter of 2021. We anticipate further reduction in our criticized portfolio as hotel revenues stabilize.

While there 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 $710,000 dollars in net recoveries. As a result, it was not necessary to record a provision expense during the quarter. The ratio of our allowance for loan losses to loans increased from 1.22% at year-end 2022, 1.33%. Exclusive of the PPP loans, this ratio would have been 1.38%. Our allowance for loan losses to non-performing loans also increased to 503.5% at the end of the quarter from 343.05% at the end of 2020.

We ended the quarter with a tangible common Equity ratio of 9.28% compared to 9.98% at December 31st, 2020. The extra $67.5 million of liquidity related to our income tax refund processing business at quarter end, combined with the $83.3 million in PPP loans had the effect of reducing our tangible common equity ratio by approximately 52 basis points.

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. As previously stated, we recently announced our fourth quarter dividend of $0.14 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 of value.

During the quarter, we purchased 404,620 shares of our stock for $9.2 million at an average price of $22.74 per share. Year to date, we have repurchased 909,859 shares or 5.7% of our shares that were outstanding at December 31st, 2020. We have approximately $11 million authorized to be repurchased under the current repurchase program.

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 9 months of 2021, labor shortages and supply chain issues are affecting many of our customers. In spite of these challenges, we remain optimistic.

Our loan pipelines are solid. We expect that most of the remaining PPP Phase 2 loans will be forgiven during the balance of 2021. We will continue leveraging our new digital banking platform and plan to roll out online account opening during the fourth quarter, all of which will allow us to provide a better customer experience. Thank you for your attention this afternoon. And now we will be happy to address any questions you may have.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions].

First question comes from Terry McEvoy, Stephens. Please go ahead.

Terry McEvoy -- Stephens -- Analyst

Hey guys, good afternoon. You there?

Dennis G. Shaffer -- Chief Financial Officer and President

Hey Terry. Terry?

Terry McEvoy -- Stephens -- Analyst

First question is the -- on the expense in the software maintenance expenses were up about $300,000 year-over-year. And I know you mentioned, the new digital banking platform. So I guess my question is that a good run rate to use going forward. I know you mentioned you are 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?

Richard J. Dutton -- EVP, Chief Operating Officer

Okay. Terry, this is Rich. We did have about $200,000 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 year will be about $200,000 a quarter and that's just about where we expect it to be going forward. But I think if you are looking at a run rate for expenses for Q4 and Q1 of next year, $19.2 million is probably a good number.

Dennis G. Shaffer -- Chief Financial Officer and President

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

Richard J. Dutton -- EVP, Chief Operating Officer

And the only thing I'd add Terry is that, we don't anticipate any additional expenses attributable to that -- to the online account opening.

Terry McEvoy -- Stephens -- Analyst

Great. And then maybe a quick follow-up, maybe just talk about new loan renewals just market competition for commercial and commercial real estate loans.

Charles A. Parcher -- EVP, Chief Lending Officer;

Yeah Terry, it's Chuck. I would love to say that it's softening but it's not the case. As you know, we've seen a little tick up in the [ treasury ] But we have not seen the ability to pass that movement upward to our customers, we don't have the loans rates yet. We are hoping that we will see that they are going forward, but that has not been the case, but 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.

Terry McEvoy -- Stephens -- Analyst

Thanks, Chuck. I appreciate it.

Charles A. Parcher -- EVP, Chief Lending Officer;

Thank you.

Dennis G. Shaffer -- Chief Financial Officer and President

Thanks, Terry.

Operator

Thank you. Next question is from Nick Cucharale of Piper Sandler. Please go ahead.

Nick Cucharale -- Piper Sandler -- Analyst

Good afternoon, guys. How are you?

Dennis G. Shaffer -- Chief Financial Officer and President

Hey, Nick. Great.

Nick Cucharale -- Piper Sandler -- Analyst

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

Richard J. Dutton -- EVP, Chief Operating Officer

I have got September purchase, this is my favorite quarter. September was 64% versus 36% refinance. We've seen that it continued to rotate across the number. Here -- it's pretty close to that. I mean, for the quarter as well. I can give you an exact number after the fact that I know last month it was 64%-36%. We have watched it pretty close.

Nick Cucharale -- Piper Sandler -- Analyst

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?

Dennis G. Shaffer -- Chief Financial Officer and President

Sure, Nick. We continue to have a number of ongoing talks with many of the smaller banks really across our footprint. I think the discussions are probably a little bit more active than they probably and normal and they probably are a few more of those discussions going on. Our view really hasn't changed much. We would like to do a deal, we believe that getting a little larger [ likes ] makes us a little bit more efficient. We continue to be I think opportunistic, but for us, it's going to be the right deal, both in terms of creating long-term shareholder value and it needs to culturally align 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.

Nick Cucharale -- Piper Sandler -- Analyst

Thank you for taking my questions.

Charles A. Parcher -- EVP, Chief Lending Officer;

Quite frankly, we're still there. I mean Nick, it was 69% purchase first for the quarter.

Nick Cucharale -- Piper Sandler -- Analyst

Thanks, Chuck.

Operator

Thank you. Next question is from Michael Perito with KBW. Please go ahead.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hey, good afternoon guys.

Dennis G. Shaffer -- Chief Financial Officer and President

Hey, Mike.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Few questions. One's just on the sort of the size of our balance sheet bit of the security portfolio and this in the prepared remarks, but it is likely going to stay pretty flat here at $5 million -- Hopefully have excess cash, along with the mid-single digit loan growth expectation over the next handful of quarters, is that generally how you are looking at the total level space?

Dennis G. Shaffer -- Chief Financial Officer and President

I would say yes. Yeah, that's where we want to think it was the long growth for sure. And again, we did that transaction, we kind of [ lit ] over the end of the quarter. I think we had $50 million earmarked to be invested and I think $43 of it got invested by September 30th, the rest of it has been since. But yes, I think, again, I think things have stabilized and certainly whatever excess liquidity or any liquidity, we don't have to borrow money to make assistance whether that's where the value go.

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Helpful. Thanks. And then just on the expenses, you think you said $19.2 million was a better kind of starting point to grow off of for the next couple of quarters, and just curious I mean if we look at some overall core expenses of I think quite $77 million on pace to do about maybe $77 million and $77.5 million. 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 a lot of labor pressures, kind of an interesting market out there right now. I mean is it -- do you think put you up in the kind of $79.5 million-$80 million full year range for next year is too heavy or do you think that there is enough kind of headwinds out there where pays to add a few percent growth in there also that run rate?

Richard J. Dutton -- EVP, Chief Operating Officer

So you're right. We're early in the budgeting process. But I think if you grew expenses in the 2% to 4% range just across the board, that's kind of the way we're looking at it. And again very, very preliminarily, and you alluded to, interesting on the wages, I don't know if that's the adjective, we would use yeah, it's out there for sure.

Dennis G. Shaffer -- Chief Financial Officer and President

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

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That's helpful. And then just lastly on the NIM. I think you Rich or Dennis, I think you might have said, there is like 850,000 of interest income to come in from some of the liquidity deployment. But I think if you back out the PPP and the accretion in the core NIM was about 3.26, up to 4 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 has actually continued to move higher. I guess my broader question is, with the long and where it is and no help on short-term rates, do you guys have any thoughts about where that core NIM could turn to near-term with the loan yield pressures you're seeing? And just any insight there would be helpful starting point.

Richard J. Dutton -- EVP, Chief Operating Officer

And I think you're right, I mean if it goes up or the ends it's going to be basis points. I mean, I think we've done and continue to monitor the excess liquidity to see if there's opportunities there. But the real -- 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, 12 basis points or 17 basis with the 12-month period.

Dennis G. Shaffer -- Chief Financial Officer and President

17

Richard J. Dutton -- EVP, Chief Operating Officer

And that's kind of playing out where we wanted to I think Chuck and his team are doing the best they can to hold the line and I mean I think we ahve put our assets rate pretty comparable to what we did in the prior quarter. So there is less pressure there, 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 up, but it would be, again, basis points.

Dennis G. Shaffer -- Chief Financial Officer and President

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

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

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

Operator

[Operator Instructions] Next question is from Russell Gunther, D.A. Davidson. Please go ahead.

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good afternoon guys.

Dennis G. Shaffer -- Chief Financial Officer and President

Hey, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

I wanted to talk about the growth outlook. So really strong result over the last couple of quarters, understand the guide for the year, mid-single digits and implies kind of a like them out in the fourth quarter. But as you look out into 2022, 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?

Richard J. Dutton -- EVP, Chief Operating Officer

Yeah, I mean I think that mid single, we've always been that mid to high-level single-digit growth job, Russell. I think that's probably a pretty good forecast for us. I mean, is a lot of it depends on how fast some of our projects get completed and how fast they go to to the perm market. We've seen a little bit more aggression out of the perm market lately taken those projects of our balance sheet a little quicker than they have in the past, that might limit us a little bit from the growth cycle of keeping them on the books for long. But I think you're probably in the right thought process mid to high single-digit price, price is somewhere [ south ] of that to be honest with you.

Russell Gunther -- D.A. Davidson -- Analyst

Okay. 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 securities book not really expected to build, but just portfolio and single-family at all incrementally and more attractive here.

Richard J. Dutton -- EVP, Chief Operating Officer

It's interesting, the one thing it might help a little bit as maybe we may not run off as one single family. I think this year last I look, I think we're down $18 million from the beginning of the year in single-family, as we've taken some of our on-balance sheet single-family product and move it in failed and sold in the market. So maybe will get a little bit more on tick of growth just by not doing as much of that as the refinance boom stuff.

Dennis G. Shaffer -- Chief Financial Officer and President

Yeah, and that's kind of use somewhat reflective 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 low interest yield deals, even in the single-family deals. So it is going to be almost entirely be that growth going to come from that commercial book.

Russell Gunther -- D.A. Davidson -- Analyst

Great. Well, thank you guys. The rest of my questions were asked and answered. Appreciate your help.

Dennis G. Shaffer -- Chief Financial Officer and President

You bet. Thank you.

Richard J. Dutton -- EVP, Chief Operating Officer

Thanks, Russell.

Operator

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.

Dennis G. Shaffer -- Chief Financial Officer and President

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.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Dennis G. Shaffer -- Chief Financial Officer and President

Richard J. Dutton -- EVP, Chief Operating Officer

Charles A. Parcher -- EVP, Chief Lending Officer;

Terry McEvoy -- Stephens -- Analyst

Nick Cucharale -- Piper Sandler -- Analyst

Michael Perito -- Keefe, Bruyette & Woods, Inc. -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

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