Civista Bancshares Inc (CIVB) 2018 Q1 法說會逐字稿

Good day, everyone, and welcome to the Civista Bancshares, Inc. First Quarter 2018 Earnings Release. (Operator Instructions) And please note that today's event is being recorded. I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead.

Thank you. Good afternoon. I would like to thank you for joining us for our first quarter 2018 earnings call. I'm joined today by John Betts, SVP of the company and Chief Risk Officer of the bank; Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Donna Jaskolski, SVP of the company and Customer Experience Officer of the bank; Jim McGookey, SVP of the company and In-house Legal Counsel of the bank; Todd Michel, SVP of the company and Controller of the bank; Chuck Parcher, SVP of the company and Chief Lending Officer of the bank; and Paul Stark, SVP of the company and Chief Credit Officer of the bank.

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 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' first quarter of 2018 earnings call.

I would like to begin by discussing our results, which were issued this morning. At the conclusion of my remarks, we will take any questions that you may have. Overall, our first quarter 2018, our 2018 results -- overall, our first quarter 2018 was another quarter of strong core earnings sustaining the momentum we've enjoyed over the past several quarters. Our continued focus on growing noninterest income streams is yielding results. Noninterest income for the quarter grew by over 9% over the first quarter of 2017.

In addition to our strong financial performance, the quarter was highlighted by the announcement of our agreement to acquire United Community Bancorp, a $546 million asset bank located just west of Cincinnati in Lawrenceburg, Indiana. This morning, we reported net income to our common shareholders for the first quarter of 2018 of $6.7 million or $0.55 per diluted share compared to $4.3 million or $0.40 per common share for the same period in the prior year.

I would like to point out that as the result of the 2017 Tax Cut and Jobs Act, our effective tax rate fell to 14.6% compared to 29% in 2017. The reduction in our federal income tax rate accounted for $797,000 or approximately 33% of our increase in net income. Our first quarter was another one we can be proud of with a return on average assets of 1.70% and a return on average equity of 15.37%.

Looking at our balance sheet. During the first quarter, total assets increased $74.4 million or 4.9%. This increase is almost entirely attributable to the increase in cash balances of $78.5 million from our income tax refund processing program, partially offset by a decline in our loan portfolio of $10.9 million. From what we've seen, the first quarter of 2018 has been a challenging quarter for loan growth across the industry with ag loan pay downs and construction on our commercial projects slowing due to weather, our first quarter is typically our slowest quarter in terms of loan growth.

In addition, the prolonged winter season has depressed loan growth across the industry. We did originate approximately $98 million in loans during the quarter. However, some of those loans have yet to be drawn upon. We also expressed -- or experienced approximately $76 million in paydowns, which nets to a decline of about $10 million in balances. We ended the quarter with $82 million in undrawn construction loans that we expect to begin drawing up as the Ohio weather breaks. Our loan pipeline is strong in all markets across our footprint.

Our outlook continues to be that we will grow our loan portfolio in the mid-single digits in 2018. Deposits increased $85.7 million or 7.1% from December 31, 2017. While we did see growth in our core deposit accounts, the primary driver for the increase was deposits related to our income tax refund program, which allowed us to reduce brokered deposits by $109.4 million. Our capital levels continued to exceed all regulatory thresholds for being well capitalized. As we have demonstrated, we will be disciplined in our approach to deploying capital through both organic and acquisitive growth like our announced acquisition of UCB.

Let me talk a little bit about net interest income. We were very pleased with the growth in our net interest income, which increased $1.9 million or 14.6%. The increase was the result of an additional $79.5 million in average loans outstanding, along with a 35 basis point increase in the yield of our loan portfolio. Our first quarter net interest margin remains strong at 4.05% compared to 3.67% for the first quarter of 2017. Historically, the excess cash generated from our income tax refund processing program in the first and second quarters has had a significant impact on our margin. That impact was reduced this year for several reasons.

While we have essentially held our tax refund processing business constant for each of the past 3 years, our balance sheet has continued to grow, and loans, which are our highest yielding assets, comprised a larger portion of our average earning assets. Additionally, during the first quarter of 2018, we used some of the cash generated from our tax program to replace short-term wholesale borrowings, which resulted in a lower amount of excess cash sitting in our account at the Fed, than in the previous first quarters. All of these items together lessened the impact the excess cash has had on our first quarter margin, resulting in an overall effect of reducing our margin by just 3 basis points compared to 33 basis points in 2017.

With respect to deposit pricing, we are experiencing very limited pressure to increase rates. Between the first quarter of 2017 and 2018, the federal funds rate has increased 100 basis points while our average cost of interest-bearing liabilities only increased 14 basis points. As stated on prior calls, we continue to increase pricing on a one-off basis to select large accounts with very little impact on our overall funding costs. Our overall funding rates remain extremely favorable at just 52 basis points for the quarter. Our strategy of keeping our balance sheet asset-sensitive has been successful as the increase in our earning asset yield outpaced the increase in our funding rates.

I'll talk a little bit about noninterest income. Our noninterest income was up $5.6 million for the quarter, an increase of $478,000 or 9.3%. Service charges increased $89,000 or 8.5%. $34,000 of this increase was the result of us changing our earnings credit with the rate we used to offset service charges on business deposit accounts while overdraft charges made up $43,000 of this increase. Net gain on sale of loans includes both residential mortgage and SBA loan sales. Our gain on the sale of residential mortgage loans was $314,000 while our gain on the sale of the guaranteed portion of SBA loans was $19,000. Combined, our gain on sale of loans increased $76,000 or nearly 30%.

Our volume of residential mortgage loans sold increased 20.4% to $14.6 million for the first quarter of 2018, while the average premium earned on the sale of mortgage loans improved from 2.10% to 2.15%. Our residential mortgage pipeline is also solid going into the second quarter. Those of you who have been following us know that wealth management has been and continues to be a focus. Wealth management fees increased $145,000 or 20.5%. Our average assets under management increased to $479.4 million compared to $424.5 million for the first quarter of 2017. We continue to view wealth management as an opportunity to grow noninterest income.

Our income tax refund program continues to be an important contributor to our first and to a lesser extent, second quarter operations. Income from that program for the first quarter was $2.2 million, which was consistent with that of the prior year. Other noninterest income increased $86,000. The largest single component of this increase was a $57,000 increase in swap fee income.

I'll now talk a little bit about the noninterest expense. Our noninterest expense increased $703,000 or 6.1% compared to the first quarter of 2017. Our compensation expense increased $392,000 largely due to an increase in health insurance costs of about 130 -- $145,000. We self-insure our health insurance, which results in lower costs over time, but has the tendency to provide higher cost toward the beginning of a plan year. Our net occupancy and equipment expenses increased $148,000 due to increased utility expenses and snow removal costs. The previous 2 years, we've experienced much milder winters. 2018 has been more of a typical winter here in Ohio, which resulted in higher costs.

Professional Services increased $101,000, primarily due to services to assist with our workflow initiatives and process improvement projects and the reinstatement of examination fees by the state of Ohio. We are pleased with the impact our investments in production and support positions during late 2017 and early 2018, have had on our efficiency ratio, which was 59.2% compared to 62.5% for the first quarter of 2017. With the additional revenue from our income tax refund program during our first and second quarter, we anticipate our efficiency ratio will normalize over the balance of the year into the low 60s.

Our asset quality remained strong, which gave us another quarter where we did not need to make a provision. Our nonperforming loans declined to $8.3 million from $9.5 million at the end of 2017, which represents a 0.52% -- which represented 0.52% of total assets. The ratio of allowance for loan losses to loans was 1.11% at March 31, 2018, compared to 1.13% at December 31, 2017. The allowance for loan losses and nonperforming loans increased to 154.21% at March 31, 2018, from 137% at the end of 2017. We continue to be disciplined in how we originate loans and believe this is reflected in our continued strong credit metrics.

I would now like to take a moment and give you a brief update on our announced partnership with UCB. There are a number of reasons we feel Civista and our shareholders will benefit from this transaction. At $546 million in assets, it will accelerate our growth as well as provide the efficiencies that come with greater scale. In addition to being a natural extension of our footprint, UCB provides entry into Southeastern Indiana and the Cincinnati MSA, which will give Civista a presence in each of Ohio's top 5 MSAs. The low-cost core deposit relationships will provide funding for commercial lending across our footprint, and we are confident we will be able to leverage our commercial lending expertise to accelerate and expand on what UCB's management has already started in and around Cincinnati, Southeast Indiana and Northern Kentucky.

All of that being said, we are probably most excited with the prospect of partnering with an organization and people that value community banking and being a positive member of the local communities the way Civista does. The more our 2 organizations interact, the more confident we become that this is very much a cultural fit that will yield significant economic benefit to our customers and our shareholders for years to come. We are in the initial stages of filing for our regulatory approvals and while nothing is certain, we continue to believe we are on track for the transaction to close in the third quarter of this year.

In closing, 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. We are very pleased with another strong quarter and year fueled by solid core earnings and are excited about the opportunities partnering with UCB will provide Civista and its shareholders going forward. We are confident our disciplined approach to managing Civista and our long-term focus on driving shareholder value will yield results, of which we 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 our first questioner today will be Nick Cucharale with Sandler O'Neill.

Just -- regarding that margin commentary, very helpful, Dennis, and I don't want to get too far ahead, but with the significant reduction in the average cash balances, do you kind of expect that dynamic to recur in future periods?

As far as the improvement of the net interest margin?

Or just the lessening of the drag in the first quarter.

I would say yes. Rich, you want to comment further?

Nick, we've held the operations of the tax program constant for 3 years, while our balance sheet has grown. I think the big difference maybe this year in addition to that was the fact that we had about $100 million of broker deposits that we paid off with some of those proceeds. So we had more of our assets invested in higher earning assets as opposed to just sitting at the Fed earning whatever the Fed rate was even though that continues to increase. So that's kind of a long answer to yes, we would anticipate that the drag going forward would be more similar to what we had this year as opposed to what it had been in prior years.

Okay, that's very helpful. And then just more broadly, kind of as you -- as we go into the second quarter here, what is your NIM outlook going forward?

We think we'll get improvement of the NIM. I mean, historically, we have and we think that will continue. Our loan yield was up about 35 basis points year-over-year so we think that -- and our funding costs were only up about 14 basis points. So we think we'll continue to get that and then with the tax -- with the tax money, that impact being less, we'll have less of those deposits that we'll be carrying, we should be able to continue to improve that margin, yes.

So Nick I might just add, like what Dennis said in his comments, I mean there was really only 3 basis points of impact for that tax cash. So I think we would anticipate some slight expansion going forward, that's probably right.

Right.

Okay, great. And then just on the loan growth front, obviously some seasonality this quarter. Are there any markets in particular that are ramping up? Or are the healthy pipelines kind of pretty broad-based at this point?

It's pretty broad-based right now, Nick. This is Chuck Parcher. Obviously, Columbus and Cleveland still kind of dominate a lot of our loan growth, but we're really seeing -- we're seeing good healthy pipelines across all the regions, actually.

And the next questioner today will be Michael Perito with KBW.

I want to just clarify that the prior margin comment because I think, the NIM I guess will expand next quarter, but once United comes on, I think it's going to come down at least probably like 28, 25 bps, right, I mean when all that liquidity comes on the balance sheet?

It will come down a little bit, yes.

Okay, and then -- but then as you deploy that the hope will be that it will start expanding off of that, is that correct?

That's correct.

Okay. Great, helpful. I'm curious what -- can you remind us in the Cincinnati market, how you feel from a personnel standpoint, you stand today to kind of drive business growth in that market. Can you just tell us what you have operating down there from a lending capacity and what you'll be getting? And if you think you need to make any additions there?

Well, today, our office is kind of in the southern part of Dayton. We do have a commercial lender there that has worked that market for a number of years with a prior financial institution and he continues to pull business out of there. We will team him up eventually with the UCB office that's going to probably be in Northern Kentucky. So we think, from a lending standpoint, we're pretty well positioned. They've been trying to add people and they actually have an opening that we need to really fill once they come on board as far as another lender. Otherwise, we feel we're in pretty good shape. We will eventually add a wealth officer, a wealth management officer into the mix down there to sell wealth services, but other than that, we feel we're in pretty good shape with the personnel that they have coming on board.

Personnel is a pretty good mix of both C&I and CRE, so it should give us the right opportunity to pick up in both of those categories.

Okay. And then on the wealth and the trust side. I mean, you've had 2 kinds of really strong quarters back to back here. How much of that has been market-driven? And how much new business have you guys been able to bring on over the last 6 to 12 months in that part -- in that segment of the business?

New money, we've increased, we've been averaging about 10% increase in growth there on new money. A lot of the impact in that change has been we restructured our department and the way we are compensating our employees is a little bit different there. So that is driving a -- we've eliminated some of the trailing income that they were receiving and that is driving some of the results to the bottom line there. So that's been a significant improvement that we made as well as we had a system change that will save us probably about $120,000 or so a year with that department. So from a profitability standpoint, we made some enhancements there. It should drop more to the bottom line. We continue to grow at about a 10% pace. We do think we have opportunity to kind of continue to expand that business because the transaction not only -- will not only be going into the Cincinnati marketplace or the Southeast Indiana marketplace selling wealth services, but we should be able to use the increased earnings to kind of build out that business for us. So we may be able to expand a little bit more into Cleveland and Columbus and do a little bit more out of those markets as well.

Okay, helpful. And just one last one for me, just a quick clarification. Dennis, you said on the call, I believe, I wanted -- was it that you expect the full year efficiency to be in the low 60s? Or do you expect the quarterly run rate to normalize in the low 60s going forward?

The full year.

(Operator Instructions) And our next questioner today will be Kevin Reevey with D.A. Davidson.

So first question is, it looks like you didn't take a provision this quarter. How should we think about provisioning going forward for the rest of the year?

I think we've been trying -- we've been saying -- this is Paul Stark. We've been saying that we're going to provide it based on growth and any charge-offs and obviously, the reason -- one of the main reasons we didn't provide this quarter was the growth was just a little bit below flat and the risk profile has improved. I don't know how much more we can squeeze out of that in terms of further improvement. So we do expect -- and I know we've probably said this a couple times, but we do expect that we'll have to provide based on our plans, particularly for growth.

Yes, our credit quality really improved. If you looked at it year-over-year from first quarter last year to first quarter this year, the past dues were down 45%. So we thought, a year ago, we were at an all-time low and it just keeps getting a little bit better. So we follow the formula and there was really no need to provide so we did not do so in the first quarter.

And then moving along to competition. I appreciate your commentary on deposit competition. Could you give us some color on the competition you're seeing for lending in your market?

It has been a little bit more competitive than it has been in the last probably 12 to 18 months. With the rate increases, we've seen a few banks kind of hold rates down and haven't increased it at the same velocity as the market from that perspective. But to be honest with you, the deals that we really, really want to get, we've been -- we've priced to get those and haven't had a problem acquiring them. It's just a matter of -- we've had to sharpen our pencils a bit more, but at the same time, our yields on loans continued to increase. And the fact that we've been in the mid- to high-90s from a loan-to-deposit ratio, we haven't really had to stretch to try to get some lower earnings loans.

And then lastly in your prepared remarks, you said you were looking for mid fired, correctly mid-single-digit loan growth this year on an organic basis? I know historically it was mid- to high-single-digit. Am I reading too much into that?

Yes, I think we're still in that mid- to high range. Basically, like Dennis said, we've got about -- we're sitting on about $82 million of construction loans to fund here between now and the end of the year, let alone what's in our pipelines. And we're seeing some -- we've really seen some activity pick up here in the last 4 to 6 weeks as far as stuff that hasn't totally entered the pipeline but we're working on. So we still feel pretty optimistic about the year on the lending side.

And there looks to be no further questions. So this will conclude our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Yes, I would just say that we were very pleased with the quarter. With the tax jobs act and tax cut, that only attributed to 33% of that $2.4 million increase that we had for the -- when you look at quarter-over-quarter -- the quarter compared to 2017 first quarter. So we were really pleased with that net interest income. It was up $1.9 million and the noninterest income and really a lot of our business lines were up. So we're very, very pleased with the results for this quarter, and we're very optimistic going forward. So thank you for participating.

And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.