Civista Bancshares Inc (CIVB) 2018 Q3 法說會逐字稿

Good afternoon, and welcome to the Civista Bancshares, Inc. Third 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.

Thank you. Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares. I would like to thank you for joining us for our third quarter 2018 earnings call. I'm joined today by Rich Dutton, SVP of the company, and Chief Operating Officer of the bank; and 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 conditions 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. A 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 civb.com. Again, welcome to Civista Bancshares' Third 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 that you may have.

Probably the most significant item that happened during the third quarter was the closing of the acquisition of United Community Bancorp or as we refer to them as UCB. We closed the acquisition on September 14. We also converted and integrated all systems during that weekend. While there were -- there are still more integration tasks to occur, the last portions -- the largest portions are complete. While the completion of the acquisition is a significant accomplishment and many of our third quarter numbers are affected by it, we were able to generate very strong core earnings.

During the quarter, we incurred several costs related to closing the acquisition. As such, our discussion today will refer to both the actual GAAP results as well as our core results. We recognized only 2 weeks of benefit from our expanded operations, so while our balance sheet reflects the addition of UCB, the additional income we expect to come from the acquisition is not yet fully reflected in our numbers.

This morning, we reported a net loss for our third quarter of $3.6 million or $0.31 per diluted share. This includes $8.8 million in nonrecurring acquisition and integration expenses as well as a $392,000 loss on the sale of securities, which was part of a portfolio repositioning transaction we executed during the third quarter.

Our core adjusted earnings were $4.8 million or $0.37 per diluted share for the quarter. For the 9 months ending September 30, 2018, we had net income of $5.8 million or $0.51 per diluted share, which also included year-to-date nonrecurring acquisition and integration expenses of $12 million. Our core adjusted earnings were $16.8 million or $1.37 per diluted share year-to-date.

After adjusting for nonrecurring acquisition and integration expenses and the repositioning expense, our return on average assets was a negative 0.83% for the quarter and 0.54% year-to-date, but these calculations would have been 202 basis points higher for the quarter or 1.19% and 91 basis point higher for the year or 1.45%. And our return on average equity was negative 6.62% for the quarter and 4.55% year-to-date, again, adjusted would have been 1,615 basis points higher for the quarter or 9.53% and 763 basis points higher or 12.18% year-to-date.

The increase in our core earnings continues to be driven by our net interest income. We have stated for some time that we are positioned for rising rates and our results for 2018 continue to bear that out. Net interest income grew by 15.7% for the quarter and 13.6% year-to-date. Our net interest margin remains strong at 4.15% for the quarter and 4.14% year-to-date compared to 4.08% and 3.93% in 2017. While UCB's low-cost deposits were a welcome addition to our balance sheet, we continue to monitor our deposit balances and our funding costs. We believe our modeling continues to be reasonable. Between January 1, 2017 and September 30, 2018, the federal funds rate increased 150 basis points, while during that same period, our average cost of interest-bearing liabilities increased only 12 basis points. While we anticipate a modest increase in deposit costs short term as we assimilate the UCB deposits, we look forward to continued expansion of our margin as we redeploy assets into loans through our franchise.

Noninterest income continues to supplement our overall operations. While we show an increase of $589,000 or 4.6% in noninterest income year-over-year, we did disclose a decline of $177,000 or 5.1% for the quarter. Both periods reflect the $392,000 loss on the sale of securities. We recognize the loss as part of a repositioning transaction we executed during the quarter. As a result, the after-tax yield on the securities replaced increased by 146 basis points.

Otherwise, the largest drivers on our noninterest income have been increases in both our wealth management fees and our swap fees. Wealth management revenue increased $86,000 for the quarter and $328,000 year-over-year. Our average assets under management increased from $447.4 million during the first 9 months of 2017 compared to $474.2 million during the first 9 months of 2018. We continue to view wealth management as an opportunity to grow noninterest income and look forward to expanding these services into our new market.

Swap fee income was $92,000 during the quarter and $305,000 year-to-date. In the current rate environment, more of our borrowers want to lock in fixed rates. Also, our mortgage business continues to provide consistent results even in this rising rate environment.

Noninterest expense increased 9.8% for the quarter and 5.9% year-over-year, adjusted for the $8.8 million of acquisition expenses incurred during the quarter and the $12 million year-to-date. We experienced a number of small increases for various costs. The more significant increases related to cybersecurity and wealth management software expenses.

We continue to be pleased with our loan production across our footprint. After adjusting for the addition of $299 million in net loans from UCB, our legacy loan portfolio has grown $36.7 million or an annualized rate of 12.5% for the quarter. The majority of the growth came in owner-occupied commercial real estate and in real estate construction loans. We continue to be predominantly a commercial real estate lender, and our pipeline for the balance of the year remains strong.

On the funding side, while our deposits increased $372.8 million since the beginning of the year, $475.9 million in deposits came to us from UCB. While core deposits in our legacy markets were stable during that period, brokered deposits declined from $120.7 million at December 31, 2017 to $18 million at September 30, 2018. Each year, we manage our wholesale funding in anticipation of the free funding we take in during the tax refund processing season.

While our asset quality remains strong, continued growth in our loan portfolio led us to record a $390,000 provision during the quarter. Our asset quality metrics continue to be solid. Our nonperforming loans increased to $10 million from $9.5 million at the end of 2017, which represented 0.48% of total assets. The ratio of allowance for loan losses to loans was 0.88% at September 30, 2018 compared to 1.13% at December 31, 2017. The decline was due to the addition of $299 million in net loans from UCB, which included a credit mark of $4.6 million or 1.4%. The allowance for loan losses to nonperforming loans decreased to 132.86% at September 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.

As we move into the fourth quarter, we will continue to be focused on integrating our new customers and employees from UCB to Civista. We remain confident in the benefit Civista shareholders will realize as a result of the UCB transaction. It accelerates our growth and provides the efficiencies that come with greater scale. In addition to being a natural extension of our footprint, our entry into Southeastern Indiana and the Cincinnati MSA gives Civista a presence in each of Ohio's top 5 MSAs.

As we stated over the past several months, UCB's low-cost core deposit relationships will provide funding for commercial lending across our footprint, and we are already leveraging our commercial lending expertise over what UCB's management had already started. As our organizations come together, we are most excited with the extension of partnering with an organization and people that value community banking and being a positive member of our local communities the way Civista does. I am confident that this is a cultural fit that will yield significant economic benefit to our customers and shareholders for years to come.

While we remain focused on integrating our newest customers and employees, our team continues to service customers throughout our footprint, and I believe our results are reflective of their efforts. We are pleased with another strong quarter fueled by solid core earnings. 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) First question today comes from Nick Cucharale, Sandler O'Neill & Partners.

So first I wanted to start on the strong loan growth this quarter. Were there any particular markets that stood out to you or was the growth pretty broad based?

It was pretty broad based. Nick, it's Chuck Parcher. It was broad based. Yes, we did have a really nice uptick in the Columbus market in September, but as far as the whole quarter, I'd say it was pretty broad based.

Nick, Chuck might also comment. We have had a lot more payoffs this year than we have in the previous year.

Yes, we feel really good about, I guess, the production engine that we've got going right now. If we look at -- we track a report called large payoffs every month. And through the first 3 quarters in 2017, we had about $33.8 million of large payoffs and through the first 3 quarters of 2018, we had $102.3 million -- or $103.2 million of large payoffs. And when I say large payoffs, those aren't payoffs that we're losing to the competition. That's usually one of two -- and the bulk of those are either successful projects that have been done that've taken to the permanent market or successful projects that our customers have sold to another individual that we did not get the chance to get -- do the refinancing on.

Okay. Great. And then I -- Dennis, I heard your commentary on the strong pipeline. Is it around the same level as last quarter? Or has it depleted a little bit just due to the strong growth this quarter?

I'll let Chuck.

Yes, it's actually relatively close to where it was kind of in the last quarter. Yes, and as I look at them -- just looking across the numbers here, Nick, it's really very close to where we were at.

So we couldn't be more pleased with our loan production right now. I mean, we're staying very disciplined. There are really strong relationships. It's given us a little bit -- the acquisition gave us a few -- a little bit of higher lending limits. Internally, we were able to raise that a little bit. And we've gone as we stated earlier, in some cases, to some of our better borrowers. So really, we have $70 million more of payoffs, and we've grown our loans by 6% on an annualized basis. So we are really pleased with the loan production right now.

Okay, great. And then just switching over to the expense base. I know the systems conversion happened in mid-September, like you mentioned. But I was hoping you could just help us think about how far along you are with the cost saves and the timing of future extractions?

Yes, I mean, we got some run rates and stuff, so. Rich, do you want to comment anything on that?

Nick, this is Rich. Yes. The significant expenses have all been realized. There'll be some dribs and drabs that come through, but the conversion -- the systems conversions, ATM systems conversions, everything that was big is done. As far as run rates will work -- and again, we closed it right before the end of the quarter, we're still trying to get our arms around kind of forecasting. But if you go back and look at last quarter and take out the onetime stuff, that was about $12.7 million, I think, what I'd call pure noninterest expense. And if you look at this quarter, it was about $13.4 million of kind of clean noninterest expense. And I think internally when we're looking at the pieces and this is high, high, high level, we're comfortable in looking at our rate of about $15 million for the next quarter in kind of noninterest expense costs, if you will.

But the majority, Nick, is -- about 90% to 95% of those expenses, as Rich said, all those significant expenses are behind us. It was that far that $12 million that we talked about, ongoing expenses, it's really just integration, it's just people that we have down there. We still have people down there to help answer your questions, to train. So we'll have some additional ongoing expenses there, but all of the significant stuff is behind us.

That's great color. And then lastly, just on the net interest margin. I know there's a few moving parts here, but could you walk us through your outlook for the near-term and as we head into 2019?

Yes, well, simply the acquisition happened pretty close to the end of the quarter, we're still kind of modeling. But remember that the Civista balance sheet was set up -- or was positioned for some expansion in that net interest margin. I think you see that for 9 months results. We've had about 21 basis point expansion in that net interest margin. So we anticipate that we'll continue to have some expansion, but we have -- we're still working through the modeling since it happened so close -- the conversion happened so close to the end of the quarter.

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

So could you give us some more color on the repositioning of the securities portfolio in the third quarter? What type of securities did you sell and what did you buy and what was the duration of the securities that you bought?

Yes, Rich...

Flipping -- I'm flipping while we're thinking. I'm flipping to that page, Kevin. And it wasn't a lot. I mean, there were 3 securities. It was $12 million total. I think we picked up about 146 basis points. The duration of what we sold was about 4.3 years and what we ended up moving into was something close to 7 years. So we extended a little bit. But again, I think we're -- we forecasted the breakeven to be a little over 2 years, like, 2.2 years of breakeven and then the last 5, we would, obviously, earn more.

Yes, the overall duration of the portfolio, Kevin, just move -- even though we went to 7-year length on some of the new stuff, the overall duration only went up, I think, 2 basis points from 4.2 to 4.4 years.

And should we -- I'm going to say -- I was going to ask you should we expect any more securities repositionings as we go into the fourth quarter or are you pretty much done there?

We're done. We're pretty much done there.

And then given where we are in the credit cycle, you had some pretty strong organic loan growth it sounds like in owner-occupied CRE and construction. Are there any areas of -- any asset classes that give you a little bit of pause?

Chuck, you want to take that?

Well I still think we're watching at it relatively closely still. And we still feel like they've come out of the cycle. We're watching. We've kind of cut back a little bit on hospitality, not that we don't like hospitality, we just feel like it's not an area that we want to have an immense amount of growth in. Other than that, we feel pretty good about the rest of the portfolio. Obviously, like everybody else, we're watching certain aspects of retail. We don't really have any of the big box retail, et cetera, but with what's going on with some of the major retailers, et cetera, we're watching that to make sure we don't have any holes near those, I would call, regional malls or large big box areas. So -- but all in all, we don't have anything that we're really trying to avoid. Paul, do you want to comment?

No. This is Paul Stark. No, I think that's a good summary. I think -- we look at the markets and do independent analysis of the markets. And they're all pretty stable upfront. We really haven't seen a whole lot from the commercial real estate in the retail sector as far as the impacts. Really within our portfolio, pretty stable, not really seeing any other hotspots other than probably ag.

And we continue to manage that, Kevin. I think, if you recall from the past, all those sectors were pretty well diversified. So it's not like we have 50% in retail and only 5% in industrial. At least the industrial, the multifamily, the retail, the office piece of that are all -- are concentrations in that 10% to 15% range. So we're pretty well diversified in that book, and we have kind of concentrations thresholds set up to kind of manage to that.

Our next question comes from Michael Perito with KBW.

Apologies in advance, I'm on the car phone, on the roadside. I hope I'm coming through clearly.

We can hear you.

Perfect. So I had a couple. I missed the first few minutes of the call, so I apologize if you mentioned this. But Dennis, can you give us an update on how the commercial lending team in the UCB market is kind of staffed today? And what, if anything, you've done thus far? And what is on the horizon for you to do as you continue to try to bulk up the ability to lend in that newer market for you guys?

Sure. I'll let Chuck kind of comment on the staffing. I will tell you that they have integrated in very nicely. We saw a deal a couple of weeks ago from one of their lenders where they're able to expand on that relationship. They were limited by their loan limit and it's a C&I deal. And so they were able to expand on that. But I'll let Chuck kind of comment on the staffing and what else we need to do there.

Yes, we feel really good about the staff from -- it's a good blend of staff from a balance of C&I and CRE. So we feel good about that. We actually hired one person on the Civista side in front of the UCB acquisition to give us one more lender down in the Cincinnati market. And he has already hit the ground running and has got a few deals approved, and I think a couple of them already closed. We've got another one of our legacy Civista lenders that we actually hired for mostly our -- kind of that in between Dayton and Cincinnati market, but he was a former U.S. Bank Cincinnati lender as well. So he's going to have a little bit more ability to call in that market. But we really feel like we're well-staffed there, and we'll continue to really monitor to see how many people we need down there. We've got total, I guess, now of 7 people that are running around Southeast Indiana and Cincinnati and feel like that's enough from a coverage perspective as we sit today.

And remember, Mike, the -- we're not only getting new loan generation from that area, but the higher lending limits will help us generate additional loan volume throughout our footprint.

So I mean, obviously, it sounds like the loan growth in the broader franchise is good. But as you think about this market specifically, do you think you're still on track to kind of get to the UCB's legacy loan-to-deposit ratio up a little bit over the next couple of years given the activity in staffing levels that you're seeing today and you have currently?

I really feel good about that. Because I mean, if you really kind of look at their franchise, I would say they were kind of on track with us, but just running a few years behind us. So I think, they had a really good staff in place and would have started to fill that loan-to-deposit ratio anyway. We'll just take -- actually accelerate that.

Yes, because remember their loan growth, the year we bought them, was really high. And we modeled it much lower. But they have really started -- so they were 2 years into that and they were shifting from -- remember, their portfolio had 50% in single-family or in the 4-family homes. So they were shifting that mix to begin with. We're going to just accelerate that for them, and I know Chuck's been very pleased with this team.

And I would tell you, I don't know if you realized or not, Mike, that they opened up a loan production office in Northern Kentucky, which we feel that Northern Kentucky market has been very high from a loan growth perspective and a growing perspective. We feel good about where we're positioned there as well.

Got it. Helpful. Helpful color, guys. And then just lastly, Rich, just any preliminary thoughts on -- as you budget for 2019, what type of tax rate you can expect now with a look at the deals kind of -- I mean, the deal close and the pro forma financials?

We did have a number of discussions around that, Mike, and I think what we're looking at is probably something in the 15% to 15.5% is what we're using going forward.

(Operator Instructions) The next question comes from Scott Beury with Boenning and Scattergood.

Most of my questions have already been addressed earlier in the call, but I was just wondering what was the fee income contribution from UCB in the quarter?

Well, it wasn't very much. We had 2 weeks of them being on our balance sheet. So I don't have an exact number, but it was relatively insignificant.

Well, yes. That's the point. It was so insignificant, we didn't really bother to look at it. We didn't -- from an income standpoint, an expense standpoint, in terms of operations, we didn't really even -- it was like it wasn't there.

Understood. So with that in mind, do you have any updates on what your outlook is and how we should maybe think about the fee contribution there with the full quarter run rate? Does something in the $250,000 to $300,000 range still sound accurate?

Yes, I don't think anything has changed from what we had originally modeled there. As I mentioned earlier, the closing happened so close to the end of the quarter that we haven't been able to fully complete the modeling that we want to do going forward with that to see. But I think it's probably going to be pretty close to what we modeled when we announced the acquisition.

Scott, I wouldn't expect a ton. One of the things that we did on our last acquisition and we're doing again this one, is we told all of their customers we think we got you in the right account and this is retail and commercial, but we're not going to charge you any service charges. There are very few -- 3 months actually through the balance of the year, we told them we weren't going to. Just to make sure we have them in the right spot and to not give them a reason to look someplace else. So we did that when we did the Dayton deal and that worked out well for us. And that's the same thing that we're doing on this one. So the lift that we'll see in service charges won't be in the fourth quarter from UCB, it won't until after the first of the year.

But some of the other services will take. We have hired wealth, that guy, it will take him a little while to get up and running, but he has an existing book of business. So -- and there'll be some overdraft income and things like that...

And we're trying to -- and one other things we're trying to do is rotating the mortgage. It is a lot of portfolio of mortgages. We're rotating them to do more sales on mortgages than on the books.

But we should have a better number once we complete our modeling, but again, I don't think it's going to be significantly different than when we announced the acquisition.

Understood. That's very helpful. And then just one other question was, what was the fair value on the securities that you sold during the quarter and reinvested in? Just a ballpark. I'm trying to think about the overall yield impact.

$12 million.

$4 million?

$12 million.

(Operator Instructions) There appears to be no further questions. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Thank you. Well in closing, I just want to say that I felt again, it was a very strong quarter as we were able to generate strong core earnings, and we successfully closed and converted on the United Community Bancorp acquisition. Very optimistic and encouraged. Not only that we'll be able to successfully integrate this acquisition, we're making progress every day, and I believe, it’s going to be a good fit for our organization. So thank you for joining us for today's earnings call.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.