Q2 2020 Civista Bancshares Inc Earnings Call
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Good day and welcome to this Vista Bancshares' second quarter 2020 earnings Conference call, all participants will be in listen only mode.
Would you need assistance, placing all conference specialist by pressing star Keith.
After today's presentation, there will be an opportunity to ask questions to ask a question you. My press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead Sir.
Good afternoon.
<unk> President and CEO. So that's the bancshares and I would like to thank you for joining us for second quarter 2020 earnings call.
I'm joined today by Richard gotten senior Vice President of the company Chief operating Officer.
Okay and shop Archer Senior Vice President of the company and Chief lending Officer.
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 the future performance and financial condition [laughter] Bancshares warrant.
That involve risks and uncertainty.
Various factors could cause actual results to be materially different from any future results.
Or implied by such forward looking statement.
Factors are discussing the company's FTC filings, which are available on the company's website.
The company disclaims any obligation to update any forward looking statements made during the call.
Definitely 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 our website contains the financial and other quantitative information can be discussed today.
As well, it's a reconciliation of the GAAP to non-GAAP measures, we will well before this call and make it available on so that's the bancshares website, let's see I VB Dot com.
Again welcome to suggest the Bancshares' second quarter 2020 earnings call I wouldn't like to begin by discussing our results which were issued this morning at the conclusion of my remarks will take any questions that you may have.
This morning, we reported earnings for the second quarter, 2000, $26.5 million or 41 cents per diluted share and $14.3 million or 88 cents per diluted share for the six month ended June Thirtyth 2020.
This represents a decrease in net income from 2019 of $2 million for the quarter and $3.7 million for the six month period.
The covert 19 pandemic has had several effects on our balance sheet an income statement. During 2020, our balance sheet has grown as a result of a paycheck protection program or PPP.
The makeup of our income statement shifted as well.
Arduous change our income statement is an increase in provision for loan losses due to the economic uncertainty created by Coven 19 stay at home orders and increased unemployment.
Without the increase in provision our net income would have exceeded 2019 levels.
Our strong capital position and continued ability to generate core earnings allowed our board of directors to approve our quarterly dividend during the second core of 11 cents per share, which represents a dividend payout ratio of 26.8%.
In these uncertain economic times, it's difficult to predict future performance, but our strong capital and liquidity should allow semester to maintain this that dividend level unless we experience a further deterioration in the economy for an extended period.
Our return on average assets was 0.93% for the quarter and 1.07% year to date, all our return on average equity was 7.91% for the quarter and 8.7 <unk> percent year to date.
Despite the lower interest rate environment net interest income for the quarter was $22.1 million, which was consistent with the linked quarter and the prior year. Our net interest margin did contract to 3.61% compared to 4.1% for the linked quarter and 3.84% year.
To date.
If we removed the impact of the P.P.P. loans, we originated that carried 3.46% yield our margin would've improved by 22 basis points to 3.83% for the quarter and by 12 basis points to 3.96% year to date, which are inline with what we model.
At the end of the first for.
During the quarter non interest income was consistent with that of our first quarter at $6.9 million and increased $1.8 million or 34.3% over the same quarter in the prior year.
During the first six months non interest income increased $2.3 million or 20.6% over the prior year.
Mortgage banking continue to be the largest driver of these increases.
Second quarter gain on sale of mortgage loans were 1.4 million were 173.4% greater and during the linked quarter and $1.7 million or 307.4% greater than the second quarter of the previous year. Similarly, the year to.
They gain on sale of mortgage loans was 2.2 million or 248.5% higher than the previous year.
During the quarter, we sold $91.5 million in mortgage loans at an average premium of 247 basis points compared to 35.4 million in the linked quarter and $27.9 million in the prior year.
Year to date, we sold $126.8 million compared to $44.4 million in the previous year to date, our mortgage pipeline remains very strong.
The other significant significant driver of our non interest income was swap fee income, which increased $426000 for 126% from the linked quarter and $749000 over the prior year second quarter Similarly swap fee.
Tom was $1 million greater year to date compared to the same period in 2019. These increases continue to be fueled by the low interest rate environment.
And by more favorable pricing from our third party swap that which we were able to negotiate late in the first quarter.
We continue to be disappointed and controlling non interest expense, which increased only 1.4% from the linked quarter and 2.9 million or 8.7% year over year in both instances the only significant fluctuation was in compensation expense, which centered on annual pay increases that go into effect April.
Commissions attributable to increased mortgage loan activity and overtime associated with commercial loan modifications and our participation in the SBH PPP program.
Our efficiency ratio was 61.7% compared to 60.7% for the linked quarter and 61.2% year over year.
Excluding PPP loans, our loan portfolio increased $22.3 million during the second quarter and $56.4 million year to date.
That equates to an annualized growth rate of 5.1% for the quarter and 13.2% year to date.
Our growth came in every commercial category.
Our loan pipelines are strong and we have $119.1 million and approved Undrawn construction loans at June Thirtyth.
While we continue to be pleased with our loan production across our footprint. It is difficult to project, how our loan portfolio will grow until we begin to see some normalization in our markets our growth and essentially our entire portfolio comes from organic production.
As I have outlined in prior calls we have no exposure to nationally syndicated loans, we like knowing who our customers are and having the ability to work direct directly with our borrowers should conditions dictate.
During last quarter's call, we address sophisticated participation in the SPD PPP program I can report that we originate in nearly 2300 loans for $257.6 million. This resulted in $9.8 million in deferred fees that will be earn.
Over the lives of these loans. However, we are most proud of the fact that we were able to help nearly 2300 small businesses throughout our footprint and over 36000 employees that are employed by them.
In regard to co in 19 loan modifications, we took a very proactive approach for the first round a modification.
Centrally calling all of our loan clients that were in good standing offering the deferral interest and or principal payments for 90 days.
Year to date, we modified 723 commercial loans totaling $417 million, which represents 25.6% of our commercial loan portfolio.
We are meeting with all of these customers now to determine who will use an additional 90 days or relief.
Based on our very preliminary discussions, we anticipate that approximately $150 million of our commercial loan portfolio will need some form of additional relief.
We believe that we have greatly enhanced our credit underwriting over the last 10 years, our loan portfolio is diversified throughout our footprint with none of our operating markets holding more than 25% of our assets. While we do heavy concentration in commercial real estate, we do not believe in any single industry represents.
A significant concentration risk.
As a percentage of total lows net of our PPP loans, 7.05% of our portfolio is in gas lodging, 2.01% in restaurants, 2.75% in entertainment and recreation and abroad sense, 18.91%.
Of our portfolio is in retail with 4.07% of that being mixed retail office, 2.25% mixed retail residential and the remaining 12.59% being strictly retail we have no exposure and what we called Big box retail.
On the funding side, our deposits increased $390.5 million or 23.3% since the beginning of the year. While we saw increases in every deposit category. The most significant increases came in argument demand accounts, where the proceeds from the PPP loans.
For deposit.
In addition over $85 million of our deposit growth team and personal checking and savings accounts.
The increase in deposits allowed us to reduce our reliance on our FHLB advances by $101.5 million or 44.8% since December 31st.
In addition, we borrowed $183.7 million from the PPP liquidity facility to assist with funding the PPP loans originated during the quarter.
These borrowings care, a low rate of 35 basis points and also provide for advantageous regulatory capital treatment of the PPP loans.
Our nonperforming loans were 7.8 million at the ended the quarter, a 14.6% decline from year end, which represented 0.28% of total assets a ratio of allowance for loan losses to loans increased to 1.01% from year end, which was 0.8.
The 6%.
Note that if we back out the PPP loans this ratio would have been 1.16%.
Our allowance for loan losses to nonperforming loans also increased to 262.13% at the end of the first quarter from 161.95% at the end of 2019.
While 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, making further adjustments to our model.
As our model dictates given the uncertainties associated with the cobot 19, and its impact on the economy, we did adjust the qualitative factors in our allowance for loan loss model.
As a result, we have recorded a 3.5 million dollar provision expense for the quarter and a $5.6 million sense for the year.
As a reminder, we did meet the guideline for that for the delayed implementation of Cecil and will not be required to adopt it until 2023.
In spite of the challenges of the current environment. We are pleased with another quarter fueled by solid core earnings. The Kobin 18 pandemic continues to affect our nationwide economy.
Hi, which comprises most of our footprint we were under a stay at home work for much of the second quarter. This presented challenges to many of our customers and the communities. We serve I am proud of the way. So this in our employees had met these challenges I have received many notes of thanks to the way our employees were able to.
Assist our customers as a navigated through the early weeks of the crisis and how we are continuing those efforts today.
On March 19th due to the Coven 19, we limited our branch lobby services Dubai appointment only to help protect the safety of our employees and customers. After implementing a number of safety protocols to safeguard against the spread the virus, we began reopening our lobbies for walk in service during.
Limited hours on June 15, excluding our retail staff. We currently have approximately 60% of our employees working remotely.
The cobot 19 situation remains fluid and we will continue to modern access the information provided by our local state and federal agencies as we make decisions on how best to operate going forward.
While the next several months, we'll continue to test the banking industry in larger business World. So this is well positioned with a strong balance sheet strong capital levels and a diverse revenue stream.
Thank you for your attention. This afternoon and now we'll be happy to address any questions you may have.
Thank you. So we will now begin the question answer session to ask a question you made correct star and one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before Chris and the key.
To withdraw your question. Please press Star then too.
At this time, we'll pause momentarily to assemble a roster.
And the first question will come from Nick could Pirelli with Piper Sailor. Please go ahead.
Good afternoon gentlemen.
Neck and neck.
So I wanted to make sure I understood the commentary on the loan modification. It struck me that you guys were especially proactive with your borrowers which contributed to the mid twentys deferral rates as a percentage alone when you add back at the PBP.
Understanding the environment is uncertain is your expectation that 431 million number at June thirtyth come down meaningfully in the near term.
Yes, and all that Chuck elaborate a little bit, but yes I think.
I tried to address a little bit more common culture, we it's very preliminary.
We did a bulk of those are probably two thirds of those were those modification by mid April. So they are just now coming do.
So we've run some numbers to kind of project those that was the $150 million I was referring to in the comments Chuck you want to Chuck recall.
Nick.
Chuck we had all our lenders kind of go out and pull all the customers that took deferrals and obviously when we may continue to come up we continue to look at those.
But we're looking in that 10% range of as Dennis mentioned that around $150 million and even from that perspective, we've moved a lot of them that took full payment deferral in the first piece the interest only deferrals in the second piece. So when you think about that 150 million I would tell you probably 95 to 100 million if thats going to be interest only with the other 52.
60, being full PNM payment deferral.
Okay. Thank you for clarifying so.
You guys had a big four quarter per swap fees that you mentioned in the prepared remarks is customer appetite continue to be ended the quarter. Yeah. I would tell you a customer appetite is still a strong based on the rate environment today.
We are we have tried to widen those margins out some mix yeah. We were doing a lot of stuff pre big rate reduction in that LIBOR, plus two and a quarter to 50 range. We've kind of move that they'll go swap rates up the LIBOR plus 303, and a quarter you noted drug try to help save our margin and at the same time.
We're also examining whether we're better off putting those on short term and swaps are putting some you know balances on the books of Florida straight they got a 4% a five year fixed or seven year fixed up compare to that swap fee. So we're trying to blend that up at the customer demand to go along as definitely there and Nick We also have then.
Successful in kind of reinstating some floors, we've been able to push that up a little bit.
The that put.
And it kind of going away as rates have gone up as rates are coming back down we are.
We are implementing a few floors now.
But when you're widen the spreads and you start to put in floors in I think it will slow some demand because all banks haven't adjusted to that but we're getting our fares look at deals.
This is Chuck again, the one thing that Dennis mentioned of commentary, we did renegotiate our swap contract with our provider. So our cut of the of the swap fees a little bit higher going forward.
Okay, Great and then can you just help us think about how you're viewing expenses in the near term and just given the operating environment you see any opportunity for some cost savings longer term.
Nick This is rich I think the run rate what we did this quarter, while while maybe in the composition of it might change a little bit I think thats, a pretty good number over the next quarter and probably the next two.
What we're saying on.
Travel we're spending on.
And for oil services as the cleanup after exposure to the Coas and whatnot.
I think in terms of.
Big ticket items, I don't want anything changed dramatically, yes, Nick I would say that given the fact.
I think it gets increasingly more difficult for base going forward just just given the fact that we're going to be in this lower interest rate environments.
We've always been a shop as focused on revenue.
Growing the revenue side, which will continue to do what I think we do half as organizational uptake of harder look at some of our.
Some of that non interest expense.
And we're prepared to do that as an organization.
But.
Just the environment. We're in the early stages of this thing. So I just think we're going to have to look for every way both on the revenue and expense side.
As we go forward.
That's very helpful. And then just lastly, I see you noted that settlement impacting the.
And our teams line you have that amount of nothing to do.
I'm sorry, you asked that question Nick.
Yeah. There was a settlement that you mentioned in the earnings release, just impacting the ATM interchange line.
Do you have that amount I do it was $150000.
Terrific. Thank you guys for taking my question.
Thanks, Eric.
Our next question will come from Michael Sharon with KBW. Please go ahead.
Good afternoon, Thanks for taking my questions.
Hey, Mike Hi, Mike.
So can you tell your thoughts on the deployment of that but of the excess liquidity build in the corridor and the trajectory of the NIM for the remainder of the year.
In terms of excess liquidity.
I guess again I don't know how familiar you are with my with our balance sheet and the tax program and how that those funds flow in the first half of the year and out in the second half of the year, but my view I think we were down to just $50 million tax funds is for liquidity goes into Geely today hundred 80 ish million of fun.
Ending from the FDA pays a PPP loan facility liquidity liquidity facility. So those are the big I guess, the liquidity components Im not sure if you're alluding to something else, but in terms of the margin as we said at the end of the last quarter when we model now.
We thought that we would have about 30 basis points of compression.
And if you take out the PPP impact that's just about what we had I think we ended at 28 cases.
Right.
Our balance sheet is pretty assets it shouldnt things repriced pretty quickly so as long as our loan guys can continue to do that good job that they're doing a term lying on the asset pricing side.
We feel like Weve.
Borne the brunt of the compressed and we'll continue to contract, but nothing like it did in the second quarter right right. We just have so much more that reprices and again, we had the rate drops near the end of the first quarter. So we have a third of that portfolio.
So there will be compression moving forward as rich alluded to.
But we also had the PPP money a lot of that money got deposited into.
Some of our challenge that money will run is running out as we go. So and then you know I mentioned $87 million of personal deposit growth.
Some of that is most likely the impact of the code with 19, because people why we have a stay at home orders in place and people are spending money I think personal spending in Ohio for the quarter was down.
Who knows 670%.
So you know the.
That's that's a contributed to some of that build up of our liquidity.
Okay. Thanks, a lot of.
Thank you.
Can you also provide some.
Colour on the loan growth pipeline.
He and why you are expecting for the remainder of the year.
Chuck and Paul's all of Chuck Perjure, Chief lending Officer, Paul start Chief Credit Officer addressed that yes, our pipeline stay relatively strong throughout the entire time period.
Mike and.
Obviously, we had although a little bit of growth are quite a bit of growth in the commercial real estate bucket. We had quite a few project, we're taking place across the especially our Metro region.
And those and those projects continue from a construction perspective, just talking about this morning, I think we only had one construction project that I'm aware of that actually got stop during the whole coven process. So those those dollar routes continued to fund out.
Columbus has been a very hot market for us as far as from a construction area. You know, there's still a lot of demand there, especially on the multifamily side and the need for product. So we can see that to continue going forward, obviously like everybody else, we've kind of shutdown the hotel lending and the and the restaurant lending et cetera, but we still feel good about where pipeline that's looking.
From here into the into the next few months anyway.
And there are there have businesses at a flourish. During this time. It's it is kind of Landino you have about half the businesses that you know struggle and half from our aftermarket flourish.
Anything about this fall starting with anything about this the cycle is the fact that every company is being impacted differently and there's still a lot of liquidity and particularly in the investors and they're moving forward.
The other hand, you've got some others that are really struggling struggling to recover from that business disruption in the revenue disruption. So we're looking at each one separately, but it's amazing how strong parts of it remains.
That's that's all I hope that I'd say that I far might give you know what as I was looking some of the data you know we're getting growth out of every marketplace, which you know feels really good where let a little bit by Columbus.
So far year to date, but we've got growth in Cleveland, We've got growth in that southeast, Indiana, Cincinnati market and then we've got growth also in our in our legacy markets through the center of Ohio.
Thank you once again, if you have a question. Please press Star then one.
Our next question will be from Russell Gunther with D.A. Davidson. Please go ahead.
Hey, guys. Good afternoon, and this is Ryan on for Russell.
Right.
I just had a quick question on the 9.8 in deferred fees are you able to provide any thoughts on the recognition of the PPPC throughout the next couple of quarters.
Yeah, we've taken we take most of that will recognize most of that income as placed on the forgiveness piece.
In the fourth.
At quarter end first quarter of next year.
We will take that in over 24 months, So I think it equates to.
About 400000, maybe 410000 weren't about where my lawyer 10000, a month so.
But do we think that most of that will recognize in the fourth quarter of this year or first quarter of next year and we expect the majority of that to be forgiven.
Most of our lows, 80% of our loans had an average loan balance of around 120000 or so.
So.
There's been talk to that.
Anything under maybe 150 is a one page forgiveness type application some sort of easy process. So we do expect the bulk of those to be forgiven.
Got it. Thank you for that and then just one more on the retail.
Portfolio just was curious how those conversations with borrowers have been going in any more detail you're able to provide on either the coverage ratios. Your LTV is there.
As far as growth or as far as asset quality.
As far as asset quality.
Okay. So so far are as far as the the our retail portfolio. We don't have a large consumer portfolio most of it as he left and residential mortgages.
We've been really pleased with the performance of.
The payment streams on on the mortgage portfolio, our deferrals or less than that 100.
And lot of those are going back to payments out will be interesting to see what happens when the unemployment benefits the rich unemployment benefits phase out here pretty soon but thus far it's been less than 1% the deferrals.
Got it that's all I have thank you very much.
That's right.
Once again as a reminder, if you'd like to ask a question. Please press Star then one.
And our next question will come from Kevin Swanson with hub. The group. Please go ahead.
Hi, guys. Thanks for taking my question.
Hey, I'm just.
One follow up here on the PPP remind me again the percentage of a non clients you did with TPP.
And then I guess the follow up does that would be have you guys thinking about traction and keeping us clients for the bank and and what are you guys see as as kind of a offensive move utilizing that program. Thanks.
Yes. This is Paul a a as far as the origination of these I would say the vast majority of these customers, where our customers and we did take a portion.
Of loans that were not customers as well, but I you know the it's got a harder we didn't really measure that per se, but looking backwards that you know probably a 80% were customers a at least.
And then from the standpoint, a retention we did work on that.
We've been working really hard on that to be on for the Kevin's Chuck and we put together lift the of the target pieces and I will tell you even the noncustomers that we took the bulk of them. We're referrals from our C. O I sources, our accounting firms our law firms et cetera, they called US and said Hey, we you guys are doing it's very successfully we can't give you through the re.
No can you take care of these clients for us and because we were able to do that we did generate quite a quite a bit a goodwill across all our marketplaces and we've had quite a bit of success a right now more so on the deposit side and then the lending cyber working through very quickly and very you know I just looked at one of the there was probably a new $4 million client.
And.
Based solely on our PPP work and we've got a lot of those opportunities Bubbling up right now than I, probably have a little better idea of what those that those total numbers will be at the end of the third quarter to be honest with you and Kevin those those opportunities I mean, those deposit accounts of their opening are not just they said.
Opened the business deposit account, we've looked a lot of those people that with our retail managers, our private bankers and they are they are already we've we've I've gotten.
A lot of emails where people have opened their personal Jackson's and their money market accounts to see these wells the counts mortgage loans out of it. So we have really done a very good job, we know who those customers are and we immediately they were so happy that we were able to get them through the process and we we got.
87% of our clients through round one of the Ppps.
In in and there were a whole lot of banks that have that high as a percentage, but 87% of they are of the applications that we got we got free round, one and people were really happy and I think we've been able to parlay that into expanding some of these relationships with existing clients and these new clients and I can't I cant.
Emphasize enough the amount of goodwill, we we generated with the field wide basis I mean, they know they were kept saying hey, we've got a client that we really need to get through this even if we couldn't pick that client up upfront right away. We built the goodwill there, but we really build a lot of goodwill with all the accounting firms around the state.
That's great insight thanks, guys.
Once again, if you would have a question. Please press star then one.
This concludes our question and answer session I would like to turn the conference back over Dennis Schafer for any closing remarks.
In closing I, just want to thank everyone for listening and thank those that participating in the call again, given the low interest rate environment and the fact that a lot of the economy was shut down for a good portion of the quarter I was extremely extremely pleased with our second quarter results.
The balance of 2020, we know will continue to be a challenge. We do look forward to meeting that challenge eggs talking to all use all of you again, a few months to share our third quarter results. So thank you for your time today.
And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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