Civista Bancshares Inc (CIVB) 2018 Q2 法說會逐字稿

Good afternoon, and welcome to the Civista Bancshares Second Quarter 2018 Earnings 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. Mr. Shaffer, 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 second quarter 2018 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 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 our Civista Bancshares second quarter 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 you may have. Overall, our second quarter 2018 was another quarter of strong core earnings, continuing the momentum we've enjoyed over the past several quarters. With the continued strong earnings, we recently announced our dividend for the third quarter of 2018 at $0.09 per share, which was an increase of 28.6%.

This morning, we reported net income for the second quarter 2018 of $2.7 million or $0.24 per diluted share and $9.4 million or $0.79 per diluted share for the 6 months ended June 30, 2018. Included in both of those totals is $3.2 million in nonrecurring expenses related to the acquisition of United Community Bancorp or as I will -- we'll refer to them as UCB.

Our core earnings per share was $0.44 for the quarter and $0.99 year-over-year. Those represent increases of 51.7% and 45.6% year-over-year. After adjusting for nonrecurring acquisition cost, our return on average assets was 1.43% for the quarter and 1.57% year-over-year. Our return on average equity was 11.72% for the quarter and 13.51% year-over-year. While we are incurring expenses related to the acquisition of UCB, those expenses are in line with our projections.

The increase in our core earnings has been driven by our net interest income. Net interest income grew 10.5% for the quarter and 12.5% year-over-year. We have stated for some time that we are positioned for rising rates. Our results for 2018 speak for themselves. Our net interest margin remained strong at 4.21% for the quarter and 4.13% year-over-year compared to 4.05% and 3.86% in 2017.

Funding sources and funding cost have been a focus of ours. We continue to monitor the betas we use in our asset liability models and are currently modeling a deposit beta of 25 basis points, which we believe is reasonable. Between January 1, 2017 and June 30, 2018, the federal funds rate has increased a 125 basis points, while our average cost of interest-bearing liabilities increased only 18 basis points.

Noninterest income has been a good supplement in 2018, increasing 7% for the quarter and 8.3% year-over-year. The largest drivers of the increase have been wealth management fees and swap fees. Wealth management fees increased $98,000 for the quarter and $243,000 year-over-year. Average assets under management were $472.8 million during the first 6 months of 2018 compared to $441.6 million during the first 6 months of 2017. We continue to view wealth management as an opportunity to grow noninterest income. Swap fee income accounted for a $108,000 during the quarter and $166,000 year-over-year. In the current rate environment, more of our borrowers want to lock in fixed rates. Our mortgage business continues to provide consistent results even in a rising rate environment.

We continue to control noninterest expense, which increased only 1.8% for the quarter and 3.9% year-over-year, adjusted for the $3.2 million of acquisition expenses. The 2017 Tax Cut and Jobs Act lowered our income taxes by $1.1 million year-over-year. Similar to most community banking -- similar to most in the community banking industry, our loan portfolio declined in the first quarter by $10.9 million, primarily due to normal pay downs and the prolonged winter, which delayed construction projects. We are very pleased with how our loan production picked up during the second quarter, growing by $26.3 million or at an annualized rate of 9.1%. The majority of the growth came in owner-occupied commercial real estate and real estate construction loans. We continue to be predominantly a commercial real estate lender. Our pipeline for the second half of the year is strong.

On the funding side, our deposits decreased $58.8 million since the beginning of the year. While total deposits decreased, non-brokered deposits increased $45.4 million. We moved a $104 million of our wholesale funding out of brokered deposits into short-term Federal Home Loan Bank advances. Each year, we manage our wholesale funding to be as efficient as possible with the cash we take in from the tax refund processing business. Excluding the wholesale side of funding, we saw increases in all categories of deposits other than time deposits.

Our asset quality remains strong, which gave us another quarter where we did not need to make a provision. Our asset quality metrics continue to improve. Our nonperforming loans declined to $7.6 million from $9.5 million at the end of 2017, which represents -- which represented 0.49% of our total assets. The ratio of allowance for loan losses to loans was 1.09% at June 30, 2018 compared to 1.13% at December 31, 2017. The allowance for loan losses to nonperforming loans increased to 168.36% at June 30, 2018 from 137.73% 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.

We announced earlier this week that we have obtained all necessary shareholder and regulatory approvals for the closing of the UCB acquisition as well as an increase in our authorized shares. We look forward to welcoming the UCB shareholders, customers and employees to Civista. The acquisition is set to close on September 14 of this year. Our confidence has only grown in the benefits Civista's shareholders will realize as a result of this transaction. It will accelerate our growth and provides 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.

As we stated, when we announced the deal, UCB's 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 the Cincinnati, Southeast Indiana and Northern Kentucky markets. However, we are most excited with the prospect of partnering with an organization and people that value community banking and being a positive member of our local communities the way Civista does. The more our 2 organizations interact, the more confident we become that this is a cultural fit that will yield significant economic benefit to our customers and shareholders for years to come.

While we are focused on integrating UCB, our team continues to service customers throughout our footprint, and I believe our results are reflective of our efforts. We are pleased with another strong quarter, 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 positive results.

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.

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

(Operator Instructions) The first question today comes from Kevin Reevey with D.A. Davidson.

So my first question is, once you close the UCB deal, where do you expect to see the greatest opportunities to grow your lending relationships?

Well, I think -- and I'll have Chuck chime in as well on this. But I think, first and foremost, I think, that Cincinnati market is an opportunity. They're going to able to do larger loans than they have in the past. They had already started that transition of hiring some lenders about a year or 2 ago. So there are some proven people in that market. But any deal that they had of size they were participating now, we should be able to keep some of that. And then I also think that we will also be able to take some of that excess capacity and then lend it into both Columbus and Cleveland particularly. We are seeing a lot of activity and a lot of good solid loan request come out of both of those 2 markets. So I'll ask Chuck to chime in as well.

Yes, like Dennis said, they do really have a nice core commercial lending team. We actually just hired another person for Cincinnati that we put on the Civista team to begin with to [begin] the training in our shop as compared to the training in their shop that we'll move into that market and be part of their team, come September. But we feel really -- we feel confident that we can expand the relationships that they have right now as well as Dennis mentioned, expand the relationships that the Civista team has right now with our increased loan authority and lending capacity.

And Kevin, there is a little disruption in that marketplace. There's been couple smaller shops, and so the first financial deal with MainSource that's -- we think that may present us an opportunity. Of course, MainSource has bought merchants and there's still a little bit of disruption there. So we think that we're primed to capitalize on some of that.

And post deal, it looks like you're going to be little over $2 billion in assets. Do you feel you have the infrastructure in place to grow from there? Or will you need to make additional investments in order to grow?

Well, we've always said we think -- we thought we had the infrastructure at our current size to get to $2 billion. We start getting much larger than that. We will have to add some support to continue the growth. And there'll be a one -- a few positions we may have to add, but we basically feel we have that foundation in place to handle being a $2 billion-plus organization right now.

(Operator Instructions) The next question comes from Michael Perito with KBW.

This is actually Adela on for Mike. My first question is about the NIM, trends were pretty solid this quarter. Do you have any updates on the near-term outlook from here once UCB closes?

Yes, I think, the NIM -- once the deal closes, their funding cost back at the beginning of the year was just 52 basis points and ours was about 28 basis points. So on a blended basis, it increased our funding about 2 basis points. Both banks, during the last -- next 6 months have held relatively steady. So our NIM will retract just slightly, I would think, but it's not going have a material impact. So we'll have to see. Our balance sheet is set up going forward to take advantage of rising rate environment, so about 26% of our book really adjust on a daily or every 30 days. So we have positioned our balance sheet to benefit from a rising rate environment. And I'll ask Rich Dutton to comment if he has other comments he'd like to add.

I think, Adela, I think, we're seeing the same thing that I think you've seen and heard from other banks. We're having some one-off pressure in some of our large municipal depositors and maybe even some of our larger individual depositors, and it's not impacted our cost of funds yet. And again, I think we've kind of trained our customers not to be rate shoppers, but we do anticipate some pressure to increase the funding side of our balance sheet though. But like Dennis said, the asset side of it is set up, we believe, pretty well to keep up with or maybe even outpace those increases. There might be some contraction in the NIM, but it's not going to be...

It'd be small.

Okay, great. And then if I could also ask, I know you said, the deal's expected to close on September 14. What's the expected conversion date? And are there cost save assumptions all the same here?

Yes. September 14, we're going to close and convert that weekend.

And then like Dennis said, our costs are in line with our purchase assumptions, and no surprises yet.

Right.

This concludes our question-and-answer session. And also concludes our conference. Like to thank you for attending today's presentation. You may now disconnect.