Civista Bancshares Inc (CIVB) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to the Civista Bancshares, Inc. Fourth Quarter and Full Year 2017 Results Conference Call. (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.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter and full year 2017 results. As I am sure most of you are aware, Jim Miller retired at the end of the year. I would like to take this opportunity to thank him for his 31 years of service to our organization. We look forward to his continued involvement as the chairman of our board. I am joined today by John Betts, Senior Vice President of the company and Chief Risk Officer of the bank; Rich Dutton, Senior Vice President of the company and Chief Operating Officer of the bank; Donna Jaskolski, Senior Vice President of the company and Customer Experience Officer of the bank; Jim McGookey, Senior Vice President the company and In-house Legal Counsel of the bank; Todd Michel, Senior Vice President of the company and Controller of the bank; Chuck Parcher, Senior Vice President of the company and Chief Lending Officer of the bank; and Paul Stark, Senior Vice President of the company and Chief Credit Officer of the bank.

Before we begin, I would like to remind you that today -- 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 forecasts 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' fourth quarter and full year 2017 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 questions that you may have.

Overall, our fourth quarter of 2017 was very successful and capped off another year of solid core earnings. Our 2017 highlights include a very successful $32.8 million capital issuance in February that was largely oversubscribed. We opened a new loan production office on the west side of Cleveland in Westlake, Ohio, and our loan growth was 10.3% for the year and 7.9% annualized for the fourth quarter of 2017.

We continue to be disciplined in how we grow our loan portfolio and believe this is reflected in our asset quality, which continues to hold at prerecession levels. In early October, we also announced the results for our most recent CRA examination, which resulted in a satisfactory rating, which allows the company to actively pursue strategic partners.

This morning, we reported net income to our common shareholders for the fourth quarter of 2017 of $3.7 million or $0.32 per diluted share compared to $3.3 million or $0.33 per common share from the same period in the prior year. For the year ending December 31, 2017, we reported net income to our common shareholders of $14.6 million or $1.28 per diluted share compared to $15.7 million or $1.57 per common share for the prior year. 2017 was another year we can be proud of, with a return on average assets of 1.05% for the fourth quarter and 1.04% for the year and a return on average equity of 8.65% for the quarter and 9.19% for the year.

To accurately compare our 2017 from '16 results, there are a few adjustments that you need to make. Our 2016 results were impacted by a large loan recovery that increased our earnings on an after-tax basis by $1.5 million or $0.13 per diluted share. In addition, the issuance of $1.6 million additional shares of common stock in February of this year should be taken into consideration when comparing the current and prior year's EPS amounts. As a result of the 2017 Tax Cut and Jobs Act, we wrote down our net deferred tax asset by $511,000, which had the effect of reducing our diluted earnings by $0.05 per share. Going forward, we anticipate the act having the effect of lowering our effective tax rate from 28% to 17%.

So this continues to be an organization focused on growth and providing above-average total returns to our shareholders. We will balance our commitment to each of our constituencies; and we evaluate a number of alternative initiatives, including compensation adjustments for nonexecutive employees, in reaction to the impact we expect the act to have on our organization.

Looking at our balance sheet. Total assets increased $148.6 million or 10.8% from December of 2016. This increase is almost entirely attributable to loan growth and proceeds from our February follow-on offering. Year-to-date, our loan portfolio grew $109.2 million or 10.3%. In addition to the loans added to our portfolio, we also sold $76.6 million of loans to the secondary market. Along with the opening of our Westlake loan production office, we were successful in attracting experienced commercial lenders in many of our urban markets. Loan production was vibrant in all of our markets at rates we believe are sustainable. While the rate of loan growth was slightly lower in the fourth quarter, our lenders continued to provide momentum in an optimistic view for 2018. Our investment portfolio grew by $35.2 million as we temporarily invested $32.8 million in net proceeds from the capital offering. Deposits increased $83.8 million or 7.5% from December 31, 2016. While we did see growth in our core deposit accounts, the primary driver for the increase was an additional $67.4 million in wholesale funding used to assist in funding our loan growth. Our capital levels continued to exceed all regulatory thresholds. We hope to put our capital to work by growing the company through acquisition. Those of you who have followed us for any period of time know that we will be disciplined in how we deploy those funds.

Net interest income. We continue to be pleased with our growth in our net interest income, which increased $2 million or 16% for the quarter compared to the same quarter of 2016. I would point out that we had a $387,000 interest recovery on 2 previously nonaccruing loans in the fourth quarter of this year. Net interest income for the year increased $4.2 million or 8.4% when compared to 2016. Our year-over-year increase is even more impressive, remembering the $919,000 recovery from a nonaccruing commercial loan which was included in 2016's interest income. Taking out the impact of these 2 recoveries, our year-over-year net interest income would have increased by 9.7%.

Our fourth quarter net interest margin remains strong at 4.24%. If we back out the impact of the fourth quarter recovery, our net interest margin would have been 4.14% compared to 4.05% for the fourth quarter in 2016. Certainly, our net interest margin for 2017 was 4.01% compared to 3.93% for 2016. If we were to adjust both years' margin for the effects of the previously mentioned recoveries, our 2017 margin would have been 3.99% compared to 2016 margin of 3.86%. Our core net interest income remains strong and expanding for both the fourth quarter and the year compared to 2016.

Our average loan balances for the fourth quarter increased 10.4% compared to the fourth quarter of 2016 and 2% compared to the linked quarter. The yield on loans for the fourth quarter of 2017 increased 29 basis points to 4.82% when compared to the same period in the prior year. Again, 14 basis points of our fourth quarter yield is attributable to the previously mentioned recoveries. Our 2017 yield expanded 2 basis points to 4.62% when compared to the prior period. However, our large interest recovery accounted for 9 basis points of 2016 yields.

With respect to deposit pricing. We have experienced very limited pressure to increase our deposit rate. As stated on prior calls, we had extended select pricing on a few large municipal accounts with very little impact on our overall funding costs. As I mentioned earlier, we did gather $67.5 million in wholesale deposit to assist in funding our loan growth. Those deposits do have a higher interest cost than retail deposits. This did have an impact on our core deposits, increasing them to 27 basis points for the quarter and 19 basis points for the year. That said, our overall funding rates remain extremely favorable at 54 basis points for the quarter and 46 basis points for the year. The increase in our earning asset yield has outpaced the increase in our funding cost.

Our noninterest income was $3.6 million for the quarter and increased $487,000 compared to the fourth quarter of 2016. Noninterest income was $16.3 million for 2017, an increase of $202,000 or 1.3% compared to 2016. Net gain on sale of loans includes both SBA and mortgage loan sales. Our SBA loan activity was minimal during 2017, resulting in a decline in the gain on sale of SBA loans of $60,000. Our volume on mortgage loans sold increased 13% or $76.6 million for 2017, while the premium earned on the sale of mortgage loans declined slightly from an average of 2.46% during 2016 to 2.25% in 2017, resulting in our gain of sale of loans increasing $129,000 or 31.5% for the quarter compared to the fourth quarter of 2016 and $55,000 for the year when compared to 2016. Our mortgage pipeline continues to remain very solid going into 2018.

ATM and interchange fees increased $151,000 for the quarter when compared to the same quarter in 2016 and $210,000 for the year when compared to 2016. These increases were primarily the result of more favorable pricing received on debit card transactions that went into effect early in 2017. Wealth management fees increased $146,000 or 21.2% during the fourth quarter and $390,000 or 14.6% year-over-year when compared to prior year period. This was achieved by increasing our assets under management from $431.5 million at December 31, 2016, to $480.3 million at December 31, 2017. In addition, in August, we implemented a fee increase. We continue to view wealth management as an opportunity to grow noninterest income.

Other noninterest income declined $341,000 for the year ending 2017 compared to 2016. The decline was primarily due to a $173,000 decline in swap fees and a $180,000 decline in gain on sale of OREO properties. Our noninterest expense increased $1.7 million or 15.7% compared to the fourth quarter of 2016. Year-to-date noninterest expense increased $4.7 million or 10.8% compared to 2016. The increases in both periods are primarily due to increases in compensation expense, the components of which include additional -- additions to staffing, increased incentive and commission expense, higher health care costs and an increase in our pension expense. As we've discussed in previous quarters, when we see an opportunity to acquire a talent and it is consistent with our strategy, we will invest in people. Year-over-year, our full-time equivalents increased by 14 from 333 employees to 347 employees. While these additions, along with our normal merit raises, increased compensation expense by $864,000 for the quarter and $2.6 million for the year, we continue to be pleased with the impact that these are, in our previous additions, are having on our earnings and on our overall operation. Unfortunately, our employees have incurred higher than what was typical medical expenses for 2017. The company self-insures for the health it provides our employees. While we believe being self-insured results in lower costs over time, we have experienced higher claims than were anticipated during the year. As a result, our health insurance expense increased $186,000 compared to the fourth quarter in 2016 and $526,000 for the full year of 2017.

You might recall, in 2014, we froze our pension plan. However, the plan continues to recur expenses related to plan participants. As is typical, we anticipate a number of retirements annually. However, this year, we had 2 highly compensated plan participants retire, which had the effect of increasing our pension expense by $294,000 for the fourth quarter and $740,000 for the year. We expect, and we anticipate, 2018 expenses related to our pension to return to 2016 levels.

Professional services increased $137,000 in the fourth quarter and $405,000 for the year. The increase is primarily attributable to services to assist with our imaging and workflow initiatives, and process improvement projects and the reinstatement of examination fees by the State of Ohio. We are mindful of the impact of increasing our capacity that it has on our efficiency ratio, which was 66.4% for the fourth quarter 2017 and 67% for the year, and we look forward to an improved level going forward. Our asset quality remained strong, which allows us not to make a provision during the quarter or the year. Our nonperforming loans were $9.5 million at the end of 2017, which represented just 0.63% of total assets and it's an 18% improvement from 2016. While our loan growth did reduce the ratio of allowance to loans to 1.13% at December 31, 2017, from 1.26% in 2016, the allowance for loan losses to nonperforming loans increased to 137.8% from 113.7%.

In summary, we are very pleased with another strong quarter and year, fueled by our solid core earnings. While the lending environment remains competitive, Civista continues to demonstrate that by focusing on relationships, we are able to grow without relaxing our standards. We are happy now with our CRA rating restored to a level that we feel is reflective of our commitment to each of our communities and one that we believe removes any uncertainty regarding our ability and desire to pursue a disciplined growth strategy. We anticipate that 2018 will be a year of more of the same, with a continued focus on loan growth and more emphasis on deposit acquisition to help with our growth. We are confident our disciplined approach to managing Civista and our long-term focus on driving shareholder value will yield results of which we can continue to be proud.

Thank you for your attention this afternoon, and now we will be happy to address any questions that you may have.

(Operator Instructions) And the first question today comes from Nick Cucharale with Sandler O'Neill.

First, with the tax refund processing coming back in 1Q, I was hoping you could share your thoughts or expectations for the financial impact compared to prior years.

Yes. Nick, this is Rich. I would love exactly the same as where it's all the last 2 years.

Sounds good. And then secondly, appreciate the color on the interest recovery affecting the margin this quarter. Could you share with us how you're thinking about the NIM heading into 2018?

Yes. This is Rich, too. Nick, I think it expanded a little bit this year. Again, we kind of have been pretty solid working and saying that we've got a balance sheet set up on an asset-sensitive basis. I hope they could choose expansion, but we don't expect it to contract.

Got it. And then third, just given the excellent asset quality mix with your growth ambition, when do you expect you'll resume loan loss provisioning?

Paul, do you want to answer that? We do blend it for growth.

Yes. I think we bring a lot out of asset quality issues. I think we're getting near the bottom. But I think we're going to continue to provide -- look at each quarter to provide based on growth and just in the event that any charge-offs kind of pop up. We don't anticipate anything abnormal.

The next question comes from Kevin Reevey with D.A. Davidson.

So I just wanted to follow up on Nick's question. So you said your NIM, you don't expect huge expansion in 2018. Is that off of the year-end core number or the year-end GAAP number?

I'd say the year-end GAAP number. And one thing, I guess, I want to make sure that we consider, I guess, is the tax impact. We do have a pretty decent NIM portfolio. So there will be -- I guess when we look at the tax equivalent yields, those numbers are going to come down some, if that makes sense.

Okay. And then how should we think about the noninterest expense line item going into 2018?

I think, again, we've had some loss with the pension and a couple of the large employees retiring. But I think a good run rate quarterly going forward is something in the 12 -- what we model is 12,175,000. If you put that in your model, that would be pretty close.

Okay. That's great. And then on the loan guidance, kind of -- do you think it will be similar to what it was in 2017? Or do you think it should be a little bit stronger now? We have tax reform, and I assume that your clients feel better given that we've got clarity out of Washington, D.C.?

Yes. This is Chuck Parcher. Yes. I think demand's been pretty solid. I would tell you that the customers seem more optimistic. We haven't seen that big increase in CapEx yet, the CapEx spending from them yet. Primarily, we're still doing a lot of real estate. But the biggest hindrance will be, to be honest with you, where kind of our competitors' rates go. We're trying to be pretty diligent in keeping that margin relatively solid. We've seen -- we've started to raise rates with the increases of 5- and then 10-year treasuries. But some of our competitors have not followed suit with us. So the biggest -- I think the biggest hindrance will be kind of where the whole rate environment goes in 2018.

And then my last question is on M&A. Now that you have your CRA rating, it's satisfactory, kind of -- if you can kind of outline your acquisition strategy and priorities.

Yes. I think, Kevin, we'll continue to actively pursue acquisitions, opportunities that we believe that fit our organization. It could be a bank that has a low loan-to-deposit ratio, but we would not exclude -- we have -- if something fit and it was maybe an earnings player or something, we'd also look at that. So we kind of evaluate. Each situation is a little bit unique. What's important, I think, to us is that we want to be -- that transaction to be immediately accretive to our earnings, and we want it to have a reasonable tangible book value earn-back period. Every deal's a little unique. By reasonable, we generally mean about 4 years or less on the tangible book earn-back. That's, I think, what we've come out of -- we've got the improved CRA rating. We're getting the chance to look at a lot of other stuff. And we want to stay disciplined, but we would like to get an acquisition done. And we think an acquisition can help us and benefit this organization in numerous ways. So the key is still being disciplined and try to stay within those parameters.

So do I understand that you're also -- you would also entertain nonbank financial institutions as well?

I think we'll always look at things. I think an opportunity for us is obviously income, the noninterest income side and trying to -- following other fee-based businesses. So we would explore those possibilities, but I think our priority is really to find another bank. That's really our top priority. But we would not -- if the right opportunity came, we would definitely explore that.

The next question comes from Michael Perito with KBW.

Wanted to start on maybe asking the loan growth question for next year a different way. Can you maybe just give us some thoughts on what the internal budgeting is over there? I mean, are there any other new LPOs that you guys are contemplating? And that expense guide, Rich, is it $12.2 million? I mean, does that take into consideration any additional lending hires? And is that something you guys are still looking to do?

Yes. I think we're still looking to expand from that perspective, Mike. It's -- I would tell you, from a guidance perspective or fill, we kind of likely target, going into this year, that mid- to high single-digit growth rate. We still haven't really built out Toledo yet. That was something we were going to try to do in 2017 and kind of got pushed back, and thus, we'll be looking to do that in 2018. And we've got -- I think we've got a hire baked in -- another hire baked in for over there. And we'll continue as -- we'll kind of continue with the same model, especially looking into the rest of the year. If we can get a big producer from a major institution, we'll look to bringing them on to go from there. But we've got some capacity now in our lending staff that -- to produce that growth with the -- really, we brought 4 individuals in over the last 1, 1.5 years, I guess, I would say, 1 year and few months. 2 of them in the Cleveland area, one of them in the Columbus area and one of them in the Dayton/Cincinnati area. We've -- all of those markets were very vibrant last year, and we figured that, that will continue going into this year.

So definitely, we think those guys have room to run, so they absorbed some of the -- Rich's numbers are pretty -- probably a good number because it does bake in an additional hire or 2. But for the most part, we think that we still have a lot of capacity with the guys we've added, and that if we could find the right key person, we're not going to be -- we won't shy away from that. We think anytime we can add quality talent to this organization, particularly on the production side, that can pay for themselves in a pretty short period of time, we'll do that.

And Mike, I would tell you, we might have forecast a little bit more going into this year. But we've got quite a few successful development projects that we did in 2017 that are going to -- that are actually going to go to perm market here in 2018. In fact, we've got quite a little bit higher amount the first quarter than in any other quarter that we're looking at going forward. But as we've turned those out and replaced those with new development projects, that's where all the growth done will inevitably spin out.

Very helpful. And then on the provision, I understand you guys are kind of providing for growth, which is really good in the recoveries. I'm just curious if you have any insight. I mean, how much more potential material recoveries can you guys foresee kind of over the next 6 months? I know it's not necessarily that simple. But I mean, is there still stuff out there that can be material? Or is that list winding down pretty quickly?

Yes. This is Paul Stark. To be honest with you, we've got this thing worked for that. Unlike other recessions, this last recession, there's a lot of equity loss that was permanent. And so the 2 recoveries we took this year, one we were able to sell a note and the other one, we're finally able to get refinanced and pay it off. So those are awfully higher than both of those we had worked out a long time. There really aren't too many things that -- like that, even are possibilities going forward. We're going to keep chipping away at it, but I don't see big amounts. So both of those happen to be long-term nonperforming loans that helps to reduce that balance. So just isn't a whole lot out there.

Great. And then just last for me, guys. Just the M&A side you addressed. But just curious if tax reform kind of alters the board's stance on dividend and target payout. And just curious if you can give us any updates there.

Yes. I think we're continuing to evaluate the impact of the tax reform. We do know that it will have a positive impact on our earnings in the form of lower taxes. We're currently evaluating a number of alternatives into this year, including such things as the compensation, the adjustments that I mentioned, the nonexecutive employees and also the percent of our dividend payout to our shareholders. But -- so there's a number of initiatives and alternatives that we're evaluating, but as of this -- as of today, we reached no final decisions. We continue to watch a lot what our competitors are doing and the potential that, that impact could have on us, releasing the hiring and other items. So -- but those are 2 things that we definitely have had some pretty robust discussions about, but we haven't made any final decisions as of today.

Since there are no further questions, this concludes our conference for today. Thank you for attending today's presentation. You may now disconnect.