Q1 2020 Earnings Call

Thursday

Thursday Thursday

Dead dead dead dead dead.

Dead dead dead.

Thursday

Good afternoon, welcome to the civista bank shares first quarter 2020 earnings car. All participants will be in listen-only mode. Could you need assistance, please sing the conference specialist by pressing the star key followed by zero. After today's presentation. They'll be an opportunity to ask question to ask a question. You may press start and one on your touchtone phone to withdraw your question, please press * then two, please note that this event is being recorded. I would now like to turn the conference over to mister Dennis Schaefer president and CEO, please go ahead.

Good afternoon. This is Dennis Schaefer. And I would like to thank you for joining us for our first quarter 2020 earnings call. I am joined today by Rich Sutton SVP of the company and Chief Operating Officer the bank check Parcher STP of the company and chief lending officer in the bank and other members of our executive team before that. 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. Bank shares ping pong risk and uncertainties various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements dead.

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 install 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.

For this call and make it available on for this the bank shares website at www.cibc.com again, welcome to civista bank shares quarter 2020 earnings call at the conclusion of my remarks. We will take any questions you may have

before we get into the results of the quarter. I would like to take a moment to acknowledge the health care providers First Responders essential workers and everyone on the front lines of this battle we find ourselves in I would also like to acknowledge the way our team has risen to the challenge by assisting retailing small business customers across our footprint. We began this year's expecting one of our biggest challenges would be the uncertain interest rate environment and the pressure it would place on our margin the covid-19 pandemic has introduced additional challenges bath banking industry could not have anticipated. So this is meeting these challenges from a position of excellent asset quality from Capital levels and a diverse Revenue stream while the length and the depth of the economic uncertainty across our footprint and the country is unclear. I am confident in our ability to meet these challenges from a position of strength.

This morning we reported net income of 7.8 million dollars or forty seven cents per diluted share. This is a direct result of our Strong net interest margin are connecting focus on our on growing and diversifying non-interest income streams and are disciplined approach and managing the company. Our continued ability to generate core earnings am allowed our board of directors to approve our quarterly dividend during the first quarter of eleven cents per share which represents a dividend payout ratio of 23% in these certain Economic Times. It is difficult to predict future performance, but our strong capital and liquidity should allow civista to maintain this step dividend level unless we experienced a first generation in the economy for an extended period of time.

Our return on average assets was 1.22% for the quarter compared to 1.37% for the linked quarter in our return on average Equity was 9.47% for the quarter compared to 9.4% from the linked quarter.

Net interest income increased $893,000 or 4.2% over the link quarter and $396,000 or 1.8% year-over-year given the changes that were occurring in the interest rate environment our net interest margin remains strong at 4.10% compared to 15.18% for the link order in 4.45% year-over-year.

the increase

And that interest income is a result of an increase in average earning assets for partially offset by a decrease in average yields additionally our cost of interest bearing liabilities decreased compared to the link order and increased year-over-year interest income increased $481,000 or 2% over the link order and $480,000 or 1.7% year-over-year.

During the first quarter the non-interest bearing deposits related to our tax refund processing program averaged over a $311 which allowed us to pay down eighty four point five million dollars and fhlb borrowings that were outstanding at your end also included in our margin are fifteen basis points of accretion in the quarter wage compared the 14 basis points for the link order and 22 basis points year-over-year.

It's part of our normal process. We periodically model non-parallel shifts and interest rates given the recent drop in the feds Target rate. We rear and those models to see the impact of the one hundred fifty basis point Decline and rates might have on our margin that modeling indicates a 35 basis-point contraction in our margin to put this in perspective during 2019 the FED cut their target rate fifty basis points over a ten month period in our margin excluding accretion contract basis home during the quarter non-interest income increased twenty point two million or 22.2% in comparison to the fourth quarter of 2019 and increased $592,000 or 9.4% year-over-year. One of the largest drivers of the increase is Mortgage Banking are for Thursday.

14 represent a $496,000 or 150% increase over the previous year as the Strong Mortgage demand that we saw during the previous quarter faith in you during the quarter. We sold 18.9 million more mortgage loans than the first quarter of 2019 the average premium on the sales loan also increased 34 basis points service charge Revenue declined by $194,000 or 11.7% compared to our linked quarter off and is comparable to our first quarter of last year.

As expected interchange Revenue declined $149,000 or 15.2% compared to the linked quarter with the post-holiday season 2 pints in debit card activity or interchange Revenue was comparable to our first quarter of last year Well management Revenue increased $69,000 or 7.4% compared to the linked quarter and $159,000 or 18.8% year-over-year as the assets under management declined by 14.1% off to 495 point four million dollars.

this was

During a period when the S&P 500 Index declined 20%

while we continue to view the expansion of these Services across our footprint as an opportunity to diversify and grow non-interest income. Our fees are primarily based on the value of our clients portfolios are impacted by the greater economy. Our income tax refund processing program continues to be an important contributor to our non-interest income and is concentrating on the first and second quarters of each year income from that program during the first quarter was 1.9 million dollars. That was a reduction of $300,000 from the prior-year which which is in line with what we indicated during our previous call.

Swap fees increased $108,000 compared to the link or and $265,000 year-over-year as commercial borrowers took advantage of the interest rate in births to lock in lower rate.

Success increase $728,000 or 423% compared to the linked quarter and one point four million dollars or 8.6% off over year in both cases. The increases are primarily the result of increased compensation expense while our headcount remain stable when comparing linked orders it did you say 22 ftes or 5% from the first quarter of 2019 our average Merit increases which occur each year in April averaged 3% in 2018 and account for a $186,000 of the year-over-year increase in our employee health insurance for 2020 increased by 9% which account page 131000 of the year-over-year increase

Or efficiency ratio was 60.7% compared to 62.9% or the linked quarter and 58% year-over-year our loan portfolio grew by thirty four point two million dollars or at an annualized rate of 8% with the majority of the growth coming from both owner and non-owner-occupied Commercial Real Estate in real estate construction loans while we saw growth in virtually every Market the Cleveland Columbus and Cincinnati MSA continue to be strong drivers of our growth.

We were pleased with lower production across our footprint during the first quarter looking forward to the rest of the year. It will be difficult to project how our loan portfolio will grow until we begin to see some normalization of our markets are growth and essentially our entire portfolio comes from organic production. We have no exposure nationally syndicated loans off. We like knowing who our customers are and having the ability to work directly with our borrowers should conditions dictate. We believe that we have greatly enhanced for credit underwriting over the last ten years. Our loan portfolio is Diversified router footprint with none of our operating markets holding more than 25% of our assets. Furthermore. There is no one industry that represents concentration risk.

That's it.

As a percentage of total Rose 7.04% of our portfolios and guests lodging 2.01% in restaurants 2.85% in entertainment and recreational in a broad sense, 19.03% or portfolios and Retail with 4.03% of that mixed retail office, 2.3% mixed retail residential and the remaining 12.7% being strictly retailed. We have no exposure to what we call Big Box retail.

On the funding side or deposits increased 313.2 million dollars or 18.7% since the beginning of the year the primary driver for the increase deposits related to our tax refund program which increased three hundred and seven point five million dollars during the quarter as I mentioned in discussing our margin, we manage our home funding in anticipation of the free funding we take in during the tax refund processing season. We use the tax funds to pay down Full Sail funding in other short-term borrowings off.

Our non-performing loans, we're eight point six million at the end of the first quarter compared to nine point 1 million at the end of 2019 which represents a .33% off the total assets the ratio of our allowance for loan losses two loans increased 2.97% from your end, which was 86% while our allowance for loan office to non-performing loans also increased to 197.97% at the end of the first quarter from 160 1.95% at the end of 2019.

Well these reflect very strong credit metrics by historical standards given the uncertain nature of our current economy. We will continue to monitor our portfolio and the economy and make further adjustments as our model dictates in future quarters given the uncertainty currently being driven by covid-19 and its impact on the economy. We did make adjustments off the factors in our allowance for loan loss model as a result. We recorded a two point 1 million dollar provision expenses for the quarter. We were fortunate to meet the deadlines for the delayed implementation of Cecil and will not be required to adopt it until 2023.

We did repurchased 646703 shares of our common stock during the quarter for $11 ending the quarter with tangible common equity ratio of 9.82% compared to 11.08% at December 31st, 2019 the extra $311 million dollars of liquidity that our income tax tags and processing business generated during the quarter reduced our teams. Will Common equity ratio by 140% or 1.4% The statement is constantly the capital of King. We have performed some stress tests on our capital and feel that we are in a strong position in spite of the challenges of our current environment. We are pleased with another phone or a fuel by solid core earnings the covid-19 pandemic has had a Rippling effect across the nation wide economy. You know, Ohio we are currently in a state wage.

until at least May 1st

Many of our employees have been working and either split operations or from home and our branches have been at a drive-up only status for some time and civista. We have a long history of working with customers and good times and challenging times that philosophy is served as well over time and is still prevalent today. We have been assisting our customers through payment deferrals s p e loans and other accommodations

Today, we have four hundred and thirty two loans, totaling $262 million dollars that have been modified as part of a r covid-19 relief efforts nearly ninety percent of those loans are receiving a 90-day deferral of both principal and interest all of these deferrals meet the requirements to not be treated as several debt restructurings through the first round of payment Protection Program. We processed and received approval for 1271 loans totaling nearly $187 off all this will provide us with approximately 7 million fee income. The the more important statistic is that it allows approximately 26542 months there jobs. We will continue to prudently work with our customers to help them where we can we feel that as part of being a Community Bank as the slogan says we are all in this together dead.

Well the next few months will it down leak test the banking industry and the larger business world? So this is entering this. With excellent asset quality strong Capital levels and a diverse range. Thank you for your attention this afternoon, and now we'll be happy to address any questions that you may have.

We will now begin the question-and-answer session to ask a question, please press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up the handset before pressing the key to withdraw your question plus * then two at this time. We will pause momentarily to assemble our roster.

Our first question is from Nick Corelli from Piper Sandler. Go ahead good afternoon anak. I wanted to start with the loan notifications here. I appreciate the the additional disclosure this quarter more of a clarification. There's obviously a lot of uncertainty given that pandemic but up the 411 million and deferral request since March 13th. Is it your expectation that substantially all of these requests are granted. Yes, I would. Yeah, we've kind of took the stance we're going to give most of our customers that that ninety-day kinase Blanche on that neck and then and then review it at the end of ninety days to see where they stand and what we're going to do from there. So we're pretty much set up to do that. Okay, I think I'd add to that is that they have to be curved in order for us to yeah. Yeah. Yeah and all of the ones we have modified today to have been correct.

Yes. Okay. Great.

And then secondly and the non interest-bearing Deposit. They got the typical boots from the tax business. As you mentioned. Just looking at the the end of. Numbers that looks to be about $308 million. This quarter is $189 million in the first quarter of nineteen. Is this a structural change in the business or more just a timing issue an issue with oil change this tax season of the last tax season again the taxpayers and take advantage of that program. We file only what the money quick and it happens with the month of July.

Okay, I appreciate the caller and then in terms of the name the dentist the thirty five basis points that contraction you were referring to it. Just wanted to gauge what the time. Was there.

This is Rich. And what we did is we went back and looked at where we were sitting in the first quarter and said, okay, let's take a hundred and fifty basis points contractions a little can do the non parallel shift and that came in and get it about a 35 basis-point contraction and that would be if it all happened at once and instantaneous. Yeah.

Okay, and then decrease in income is done relatively steady, since you change your modeling assumptions a few quarters ago. How are you thinking about the name in the in the coming quarters for the balance this year at fifteen basis points of quarter is probably what we expect and again, the only wildcard would be prepayments. But again, I think it's been you know for fifteen basis points for the last two or three quarters and that's kind of what we see on the next two or three for sure. Okay, but referring to the core margin, what is your outlook for that? Okay. I'm sorry. I guess but I did a pretty good job of it you did you did.

So if we ended the quarter at them, I got to put to a different page fourteen. Yeah, it's a silver if it was for 10 for the quarter. I think over the bowels of the year off something approaching, you know, Thirty basis points of contractions not out of the realm.

Okay, and that's point-to-point from the first quarter to the fourth quarter you're saying right? Okay, great. And then lastly and then I'll jump out I see you are pretty active on the buyback this quarter and exhausted the repurchase program shortly after birth. And is it your expectation that you re out the authorization or is it more of a wait-and-see approach? It is expectation that we knew that being said. I think that you know, they'll probably a suspension there for a period of time until we we get a better handle on the the overall credit, you know portfolio. We want to get some comfort level and and see, you know get get a clear picture as to what's going on with the economy right now, you know with business is still being shy, you know, we don't know how long that's going to laugh or what impact these relief programs are going to have. So do you expect it though to be to to re-up it, but there's going to be a probably a pause until we have a game.

Comfort level with one the economy and two

You know the credits in our portfolio.

Great. Thanks for taking all my questions.

Our next question is from Michael perido from KBW. Go ahead. Hey, good. Good afternoon, guys, how is everyone doing? Good. How you doing? Yeah, well hang it in doing. You can thank you. Thanks for the time. This quarter is always up for the extra disclosures. I did what she asked on the credit side the hotel and restaurant exposure that you outlined dentist. How much of that is going to be in deferral by by your estimation, you know in the next week or so. I mean, is it majority or or how does that look at this point Chucky answer but I would assume I would tell you the majority for sure as we're looking through it. Yes, I I don't have any exact percentage on that but it is it is a majority that look through the list.

I know you guys making any assumptions this point or any specific reserves against that portfolio is it seems to be kind of you know, particularly stressed even if there is some type of recovery, you know, I mean, there's kind of questions as to how fast those guys will be able to return to some type of normal operating. What are you guys thinking at this point in that regard Paul starts on the line and I'll have Paul give his thoughts and I've got a couple of thoughts ahead pull. Yeah, the the answer is I think it's really early to tell and and some of that's going to depend on the financial reserves that the sponsors have to keep this moving wage. I think our assumption is it will be a little bit longer. Um, uh build back. What we did is we didn't we were in a couple of different scenarios, but but right now given the deferrals and bring the cash is being put out there. We did. We just increased our our queue factors for that as opposed to trying to make any specific allegations as we get more information over the next ninety days will will be better off.

position to do that

Yes, Mike, most of our provisioning expense was really, you know, we just adjusted the qualitative Factor surrounding the economy itself off a little bit more clarity as we go along here and you know, and we we see one opens and what doesn't.

Okay, so the majority of the the whole Reserve build rather and the first quarter was really General Reserve bills. And and I guess what were some of the economic assumptions that you guys made to drive those qualitative changes. Well, I think some of them were were you know businesses have gone, you know, they don't have any income because no income for businesses business has have additional expense related to the covid-19. The unemployment rate is extremely high and then the amount of payment deferrals or the request that we're coming in for birthdays or relief. I think those were really the for driving factors behind that as well as lack of personal travel because of the, you know, closing down and and being wage being homebound. Are you guys able you know, just put the question is just you know, we're trying to compare kind of what you're reserved trajectory. How compares to ours are you guys able to birth?

Are some of the GDP unemployment unemployment?

assumptions that you guys leverage and in making those decisions

I don't I don't I can tell you right now. These are general allocations based on the overall number. So we've got some local localized information. But but I don't think that that precise given the choice huge influx. Um, you know, most of these people went from standard Revenue good years to to pretty much a significant drop in revenue and a lot of restaurants to no Revenue. So I don't think we have our normal pattern. So I think as we looked at that yet the the the risk and how these people would be stressed, you know, we decided to be better to try to you know, an estimate thousand less than you know, I mean if you go back and take a look at unemployment in the losses that that you can derive out of that in the past under normal scenarios, that's pretty predictable. Unfortunately given where you are today. It's really a lot harder to do but yeah, it was difficult as we were ended there, but I don't think we're in a position to really spell that out as more of a a a. Well it was it was an estimate.

Yeah, the reserve build was Mike was about eight times. What was a year ago? So again just so much uncertainty around, you know, we're off that number provided to me, but when we felt that was pretty appropriate for the first quarter given that we were you know, the the stay-at-home workers could only been back two to three weeks. Yeah. No, that's fair. Okay and moving on just one last question just on any on expenses rather any thoughts Dennis Richard kind of expenses in the near-term here. I mean my guess is there some elevated personnel and stuff like that type cost with especially with the distress. The PPP lending is putting on on the franchise. But but any thoughts on, the new term extension directory could go in the second quarter and and that I guess I'll just leave it there.

Yeah Mike, this is Rich. And so if our non-interest expense for the first quarter was about Seventeen point eight million had a part of our normal business practices that we do Merit increases people first. So you can add about a $200,000 number to that they get you the $18 million. That's the only thing I know for sure, but I think we've got some some elevated expenses. Will that the covid-19?

We we really used people from you know from our retail section because we had closed some of the branches and stuff and really across all of our business lines. So we didn't really in incur a ton of additional expense from from the PPP loans. The mortgage volume is pretty high. So we have added some processors. We added those in power steering something. So you'll see that the full year of fact of that moving forward with our mortgage volume is nearly doubled where it was before so,

Okay, great. Thank you guys. Sorry go ahead. No choice the people who work on the the the loan portfolio, but that should be covered by the revenue that we're we're taking it from PPP.

Right. Okay, great. Thank you guys. I appreciate the color this afternoon and stay well.

Our next question is from Russell from d a Davidson. Go ahead.

Hi, good afternoon guys, just wanted to follow up on your comments with regard to internal stress test that you've been running all she said you're it gives you comfort in the capital position, which it certainly seems in excess. But uh, if you could just share some of the you know, related assumptions that you're performing and perhaps what you consider or model there with regard to potential stress loss rates within those hotel and restaurant segments.

And what would have been doing our Capital planning stress test? We really looked back and at the last recession took the amount of charge offs that we had during that time and Over a four-year period that we hadn't heard about fifty four billion dollars in losses. We really doubled that and assumed assume that we were still paying a dividend assume that there was some some loan growth really and we didn't know where to year. We condensed the period of time and that really showed that we could keep a capital level a tier one race level above 8% off so it could so this we could sustain about a hundred and ten million dollars of losses and our Tier 1 Capital would still be above 8% So that's double the loss.

Is that we had during the last economic recession condensed under a shorter period of time without us really pulling some levers that you would typically pull. You know, I'm slow loan growth. You may furlough employees you may cease your dividend and we didn't really we assumed that that was all still taking place and obviously name is Bill. There's levers you're going to pull so we felt pretty comfortable about that.

I appreciate the comments there guys, and then it kind of a ticky-tacky question but the loan loss Reserve at 97 basis points today if you consider Mark's Place in Prior deals is there much of a list to that? Where where would that number stand?

It's about 17 basis points the credit mark from our last really our last acquisition that we did about eighteen months ago. So, you know, it's the credit bar called has about sixteen basis points anything you want to add on that.

Well, no.

If you're talking about future, I think you know the the we don't know yet. I mean we really are going to we started the process of assessing on a credit by credit basis. And and I think everybody's going to be impact differently on that. But but I you know, if if we find that this is prolonged, I'm not sure what the definition of temporary is anymore. But basically as we look forward, you know, we may have to wage increase that depending on on what we see. Yeah. So this is the one that last acquisition it was about Seventeen dips, which you know takes us, you know with the 97 a 1:14 or so. We do expect provision to be elevated may be moving forward, but we're at this elevated level that we're at home. Hey, how about you know, but again because of all the uncertainty we just we just don't know yet.

Understood I appreciate that. Thank you for the help there. And then last question I had guys is there much in the way of overlap between the you know, roughly four hundred million years old and the hundred eighty-seven million of PPP. Yeah. This is Chuck Russell. Yeah, I would say that, you know, the bulk of it is probably overlap to be honest, We kind of took the we took the the the the taking care of our customers first motto on the PPP program. So we really got through almost all of our clients that asked for it took that first wave and I would tell you that I don't have a cross reference totally, but I would tell you it's pretty close to most of the people that took the federal took took the PPP loan.

Okay. Got it. That's it guys. Thanks for all the help. I appreciate it. Thank you.

My next question is from Kevin Swanson from go ahead.

Hey guys.

Hey, most of my question. I answered. I just want to drill a more out there. Um, you'll have it prior to code that you guys had a nice growth plan. It was working. Well obviously right now to stamp is kind of changed a little sustaining businesses and and helping the community. But how do you think about positioning for office? Um, if the tide starts to turn thanks, you know it was this is Kevin and and wage is it's been interesting as we went through this program. We've actually because we were so successful in implementing it we have started to see some nice loan demand and some knife customer relations pieces at from from actually beating the all the all the Regionals and the national guys to the to the punch and even as we're looking into this into the second way. We've picked up even more people have asked us to implement it for them as compared to their their normal bank. The other thing that I I think that I've got a I feel good about looking forward is is right now to cmbs Market seems to be a little bit in in disarray. Yep.

You know some loan-to-value et cetera have have been pushed down. We're seeing a few of our of our really successful projects that probably would have went out to that Marketplace and been taken off our box coming.

Too often asking for some ten-year swap money and leaving them on balance sheets, which I think will help us growth-wise through the balance of the year as well now hard to predict. You know, what total demands going to be looking forward 90 days from now as we come out of the other side of this, but I'm still optimistic that will have some growth looking forward.

Okay, great. Thanks. So maybe just a follow-up to that, you know, obviously appreciate some of the uncertainty still remain have you thought about any changes to credit structure and underwriting given will be planned so far from the impact and and thoughts on some of the girls that you guys are seen we we have we've talked quite a bit about it and I guess I'll let Paul start jumping as well. But obviously work everything is a touch differently. You know, I'm sorry. We're not going to be jumping into the hotel Market anytime soon or anything like that. But Paul you want to talk a little bit about what we're looking at going forward.

I think I think the immediate need is to really have I mean we're looking every deal as they come through. And so the the biggest issue really is understanding any of these projects our customers as opposed to what kind of impact they've had what kind of liquidity they have its which is ever more important as well as do they have a plan and a strategy to work their way through this thing. There's still a lot of customers out there who have not been affected too much and but there's also some projects out there that that I think when they first came to us were expecting more of a normalized environments. So we've been very cautious as we approach those things. So in terms of wholesale underwriting changes, I don't think we've made any I think it's really focusing on a deal-by-deal at this point in time to reiterate what I had to do with hotels restaurants. Those are going to be tough field we would right right? Yeah. The one thing that has been interesting through this Kevin. I know some other banks have seen different results we have month.

Seen really any excessive draws on any of our lines of credit. Nobody's come in in any type of panic can try to draw a commercial lines up a home equity lines up. Those bounces have been pretty flat from the start of this announcement pandemic.

Yeah.

Okay. Thanks guys. Stay healthy.

Again, if you want to ask a question, please press * then 1 our next question is from Scott from Bowling. Go ahead.

all the all the detail regarding the

This is Rich. And really I don't know that the cares act had a whole lot of bearing on are effective rate. It was a whole lot more to do with the elevated provision and then the percentage of tax preference Revenue that we generate regularly. So I think going forward we've been kind of run out at about a 16% effective tax rate Todd Michael. I've been talking about it and given what we think we're going to do for the rest of the year. Probably sixteen is the high end of what we would guide you to but you know, probably a fourteen or fifteen percent effect is probably not a bad rate and and I have lost money. If you'd asked me that quarter ago know I know there are a lot of moving Parts appreciate the help there and EM. Yeah. Thanks for all the helpful insight.

This concludes our question-and-answer session. I would now like to turn the conference back to Dennis Schaefer for closing remarks. I just want to thank everyone for listening in thanks those who participated on the call again. We're very pleased with our first quarter resolves. The balance of 2020 will likely be a challenge. We know that we do look forward to meeting those challenges and to talking to you again the few months to share our second-quarter results. So thank you for your time today.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.