Q3 2021 Civista Bancshares Inc Earnings Call
[music].
Good day and welcome to the service just Bancshares' third quarter 2021 earnings call.
All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.
I would like to turn the call over to Mr. Dennis Shaffer, President and CEO. Please go ahead.
Yeah.
Good afternoon. This is Dennis Shaffer, President and CEO of <unk> Bancshares, and I would like to thank you for joining us.
For our third quarter 2021 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 this conference call contains forward looking statements with respect to the future performance and financial condition.
<unk> Bancshares, Inc.
These risks and uncertainties.
These 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 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 and non-GAAP measures.
We will record this call and make it available on so this the bancshares website at Www Dot C. I V B Dot com.
Again welcome to service the Bancshares' third quarter 2021 earnings call.
At the conclusion of my remarks, we will take any questions you may have.
Let me start off by noting several significant accomplishments or transactions that occurred during the third quarter.
This morning, we reported net income of $9 $6 million or <unk> 64 cents per diluted share for the third quarter of 2021, and net income of $29.6 million or $1.90 per diluted share.
For the nine months ending September 32021.
Our earnings per share for the quarter increased 33, 3% compared to the third quarter of 2020 as well as 39, 7% compared to the first nine months of 2020.
This is a direct result of our continued focus on growing and diversifying our revenue streams and the disciplined approach that we take in managing the company.
Earlier this month, we announced a 14 cent quarterly dividend, which represents an annualized yield of 241% based on our September 30th market close of $23.23 and a dividend payout ratio of $21 eight 8%.
We also continue to look for ways to make our balance sheet more efficient late in September we began redeploying $50 million of excess liquidity from cash into investments, which we expect.
Two result, and $850000 of additional interest income on an annualized basis.
We continue to be active in our repurchasing common shares.
During the quarter, we repurchased 404620 shares year to date, we have repurchased 909859 shares or five 7% of the outstanding shares at December 31 2020.
Finally last Friday, we filed a $100 million shelf offering which was a renewal of our existing shelf that was set to expire at the end of November.
Now, let's turn our attention to our quarterly numbers.
We were extremely pleased with our loan growth for the quarter, excluding PPP loans, our loans grew by 3% or 12% on an annualized basis.
The category that we saw the largest increase in with commercial real estate.
We originated 3700 loans for nearly $400 million through the Sba's Paycheck protection program at September 30, we had 772 PPP loans remaining with balances of $83.3 million.
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All of our first round loans had been processed with all but nine of the first round loans totaling $2 7 million, having been forgiven and.
In addition, 52% of our round two loans have initiated the forgiveness process.
We anticipate having approximately $20 million of PPP loans remaining at the end of the year and hope to have them all forgiven or in pay out by the end of the first quarter of 2022.
We continue our focus on managing COVID-19 loan deferrals as well as asset quality as a whole our deferrals have continued to improve from three 6% of total loans at December 31, 2020 to less than 1% at September 30th.
Due to our efforts of working with customers and the strength of our borrowers we have not experienced any defaults attributable to the pandemic and delinquencies remain at historically low levels.
Net interest income increased $592000 or two 5% over the linked quarter and increased $2 $4 million or 11% year over year net interest income for the first nine months of 2021 increased <unk>.
$5 9 million or eight 9% compared to 2020.
Our net interest margin was 362% and 348% for the quarter and for the first nine months of 2021, respectively.
Both measures are lower than the comparable 2020 period, but higher than the linked quarter as the impact of our second quarter balance sheet restructuring contributed a full quarter of impact.
As we shared in our first quarter earnings release, the increase liquidity, we experienced as a result of the federal government stimulus programs and the excess cash created by our tax.
Processing program, both continue to have a negative effect on our year to date margin.
We continue to see decreases in our funding costs due to the lower interest rate environment funding cost went down by $306000 compared to the linked quarter and $1 $2 million when comparing the third quarter of 2021 through the third quarter of 2020.
And $3 million when comparing the first nine months of 2021 to the same period of 2020.
Our yield on earning assets is comparable to the prior year quarter and increased by five basis points over the linked quarter as new loan rates remained stable in the balance sheet restructuring transactions. We executed in May took full effect our yield on earning assets for the first nine.
Months of 2021 declined 42 basis points compared to the same period in 2020 as interest rates began to tumble late in the first quarter of 2020.
Backing out the effect of the one $8 million gain on the sale of our visa B stock that occurred in the second quarter non interest income declined $814000 or 11, 2% in comparison to the linked quarter and incur.
Greased $2 $3 million or 11, 4% year over year.
The decline in tax program fees from the second to third quarter is typical and the decline in gain on sale of mortgages is reflective of a slowdown in refinancing across our footprint.
These declines were partially offset by an increase in service charges.
Adjusted year over year increase was the result of increases in virtually every category of non interest income, particularly gains on the sale of mortgage loans service charges interchange fees and wealth management fees as we continue to focus on growing our noninterest income.
<unk> streams.
Mortgage banking continues to be the largest driver of our noninterest income, although refinance activity slowed considerably civilly.
Third quarter gains on the sale of mortgage loans were $1 $6 million down from our linked quarter of $2 2 million as refinances began to decline in home inventories continue to be tight across our markets for the first nine months of 2021, we.
<unk> gains of $6 $6 million compared to $5 $5 million in 2020.
We sold $56 $9 million of mortgage loans during the third quarter of 2021 and $204 $7 million during the first nine months of 2021.
Third quarter volume was down $12 $3 million from the linked quarter as demand for refinancing continued to soften the average premium recognized on the sale of loans decreased from $3 two 8% for the linked quarter to 283% for the current quarter.
Service charge revenue was a bright spot increasing $202000 for the linked quarter and $280000 for the first nine months of 2021 compared to 2020.
Interchange revenue was consistent with our linked quarter and increased $150000 for the quarter and $663000 for the first nine months of 2021 as consumers seem to be maintaining the online and cashless retail buying habits.
That began during the economic shutdown.
Wealth management revenue continues its strong contribution to our noninterest income increasing $230000 for the quarter and $654000 for the first nine months of 2021, we continue to bring in new accounts as well as benefiting from strong <unk>.
The actual markets.
The reduction in swap fees as a result of our decision to book selected five and seven year fixed rate loans on our balance sheet.
Given the current rate environment, we have elected to book the higher fixed rate loan that we might otherwise have swapped to a lower variable rate loan.
Adjusting for the $3 8 million dollar federal home loan bank prepayment penalty, we incurred in the second quarter non interest expense for the linked quarter would've increased $704000 or three 7% and $3 9 million or seven 3% year over.
Year the year over year increase is primarily attributable to a two and a half million dollar increase in compensation expense.
The largest components of which were eight.
$832000 increase due to normal pay raises.
A $984000 increase in commissions paid to our mortgage mortgage originators.
And at $300000 increase in health insurance claims our efficiency ratio for the quarter was 62, 2% compared to our adjusted ratios of 59, 5% for the linked quarter and 59, 9% year over year.
Turning our focus to the balance sheet.
Year to date, our total loans declined by $52 $7 million, which includes hunt.
$134 million reduction in PPP loans, excluding PPP loans, our loan portfolio would have grown by $81 $3 million or five 9% annually.
Third quarter growth was consistent with that of our second quarter at $55 $3 million or 12% annualized.
<unk> for commercial real estate loans across our footprint continue.
Real estate construction loan demand continued the trend that started during the second quarter.
We are encouraged by the loans booked during the second and third quarters as well as the strong demand across our footprint and undrawn construction lines totaling $128 million, which are near an all time high while we continue to battle loan payoffs on completed projects reduce.
Outstandings on operating lines of credit and increase liquidity of our customers. We continue to expect that we will grow our loan portfolio had a mid single digit rate for 2021.
On the funding side, we experienced growth in every category, except time deposits with total deposits, increasing $245 $4 million or 11, 2% since the beginning of the year.
Noninterest bearing demand accounts, which made up 34, 2% of our total deposits at September 30th grew by $111 $7 million compared to December 31, 2020, while balances related to our income tax processing program made up <unk>.
$31 $5 million of the increase $48 $9 million of the growth came from non interest bearing business accounts and.
And $28 $5 million from public entities, we also experienced a $92 $7 million increase in our interest bearing demand accounts driven by a $52 $1 million increase in public fund accounts.
During the pandemic, we automatically downgraded commercial loans that requested concessions beyond the initial 90 day modification period. Our total criticized loan portfolio, which includes all classified and substandard loans declined from $148 1 million at December 30.
<unk> 2020 to $106 1 million headsets.
32021.
The segment with the largest number of criticized loans is hotels and lodging totaling $61 4 million. Many of these operators have experienced increased occupancy from leisure travel during the third quarter of 2021, we anticipate further reduction in our criticized portfolio.
Leo as hotel revenues stabilize.
While there are still.
There are still uncertainties associated with the economy, we continue to see improvement in both the economy and our customers financial positions. In addition year to date, we have realized $710000 in net recoveries.
As a result, it was not necessary to record a provision expense during the quarter.
The ratio of our allowance for loan losses to loans increased from 1% to 2% at year end 2020 to $1 three 3% exclusive of the PPP loans. This ratio would have been 138% our allowance for loan losses to nonperforming loans.
Also increased to 503, 5% at the end of the quarter from 343, 5% at the end of 2020.
We ended the quarter with a tangible common equity ratio of 928% compared to $9, 98% at December 31, 2020, the extra 67 $5 million of liquidity related to our income tax refund processing business at quarter end.
Combined with the $83 $3 million in PPP loans had the effect of reducing our tangible common equity ratio by approximately 52 basis points.
We continue to create capital through earnings. Our overall goal is to have adequate capital to support our growth both organically and through acquisitions.
Two important parts of our capital management strategy are the payment of dividends and share repurchases. As previously stated, we recently announced our fourth quarter dividend of <unk> 14 cents per share. We also remain active in repurchasing our shares even with the recent increase in our stock price.
We continue to believe our stock is a value.
During the quarter, we purchased 404620 shares of our stock for $9 $2 million at an average price of $22 74 per share.
Year to date, we have repurchased 909859 shares or five 7% of our shares that were outstanding at December 31, 2020, we have approximately $11 million authorized to be repurchased under the current repurchase program.
In summary.
We are pleased with another quarter of solid earnings continued loan growth net interest margin expansion and improved credit quality.
While the economy has opened up during the first nine months of 2021 labor shortages and supply chain issues are affecting many of our customers.
Spite of these challenges we remain optimistic our loan pipelines are solid we expect that most of the remaining PPP phase two loans will be forgiven during the balance of 2021, we will continue leveraging our new digital banking platform and plan to rollout online account.
Opening during the fourth quarter, all of which will allow us to provide a better customer experience.
Thank you for your attention. This afternoon and now we'll be happy to address any questions you may have.
Well now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
Yeah.
First question comes from Param I got voice Stevens. Please go ahead.
Hey, guys good afternoon.
Yeah.
They're down in AG.
Terry.
Eric.
First first question quick first question is.
On the expenses the software maintenance expenses were up about $300000 year over year and I know you mentioned the new digital banking platform. So I guess my question is is that a good run rate to use going forward. I know you mentioned youre going to roll out the online account opening next quarter and maybe spend is spent some time if you could just talking about.
The new digital banking platform is.
Your customers are using it in some early feedback okay. Terry. This is rich we did have about $200000 was kind of a onetime non recurring expenses related to that that we did expense in the quarter.
So on a run rate I think I told you last quarter would be about $200000 a quarter and thats just about where we expect it to be going forward, but I think if youre looking at a run rate for expenses.
For Q4, and Q1 of next year $19 2 million is probably a good number.
And then on the on the online account opening and stuff Perry or initially roll that out it should rollout.
Area in the fourth quarter.
Well initially roll that out more marketing to existing customers within kind of our footprint in the neighboring bordering states.
And then.
Further expand upon that.
Once we see some patterns and analyze some some.
Usage and stuff like that but the initial rollout will be marketed and targeted towards existing customers to begin with.
So that we can analyze that data and the only thing I'd add there is that we don't anticipate any additional expenses attributable to COVID-19.
Back to the Atlanta account opening.
Great.
And then maybe as well.
A follow up.
Maybe just talk about the loan yield.
Martin competition, sure commercial and commercial real estate loans.
Sorry, Chuck I'd love to say that it's softening with us not the case.
As you know we've seen a little pickup in the treasury, but we have not seen the ability in the past that.
Sure.
Movement upward to our customers as far as the long rates yet.
We'll see that here going forward, but that has not been the case.
Competitive.
Really nice growth across most of our metro all of our Metro markets actually.
And Columbus, and Cleveland are ultra competitive right now.
Thanks, Josh I appreciate it guys.
Yes. Thank you thanks Terry.
Thank you next question is from Nick <unk> of Piper Sandler. Please go ahead.
Good afternoon, guys have already started.
Okay.
Just on the mortgage side, but what's the breakdown in purchase versus refinanced in the quarter.
Got it got September in front of me.
Santa Clara September was 64% purchase 36% refi and we've seen that.
Rotate filing across the numbers here.
It's pretty much it's pretty close to that I mean for the quarter as well I can give you an exact number after the fact, but I know I know last month. It was $64 36 of them and watch them pretty closely.
Okay.
And then I.
Appreciate.
The commentary with respect to the buyback and the increased dividend recently.
Can you can you talk about another prong of your capital allocation strategy, just your appetite for M&A in the landscape within your footprint.
Sure Nick.
We continue to have a number of ongoing talks with many of the smaller banks really across our footprint.
Discussions are probably a little bit.
More active than they probably in a normal and <unk>.
Probably are a few more of those discussions going on.
Our view really hasn't changed much we would like to do a deal we believe that getting a little larger lakes makes us a little bit more efficient.
We continue to be I think opportunistic but for us its got to be the right deal both in terms of creating.
Long term shareholder value.
And it needs to call for a line.
For both the buyer and the seller because those are the deals are are that are low.
First of all but I would say that.
These discussions are probably a little bit more active than they have been in the past.
Thank you for taking my questions.
Hey, Greg.
We're still there.
It was 69% purchase for the quarter.
Thanks, Brian.
Thank you next question comes from Michael Perito K BW. Please go ahead.
Okay.
Hey, good afternoon guys.
Hi.
Few questions.
Morning, just on the sides of the balance sheet.
The security portfolio.
Okay.
The prepared remarks.
Got it.
Pretty flat here.
Yes.
Hopefully that excess cash for a while.
Mid single digit loan growth expectation over the next handful of quarters is that generally how you're.
Looking at the total lack of space.
I would say, yes, yes, and Thats, where we wanted to go west into loan growth for sure.
And we did that.
Transaction and kind of bled over the end of the Covid I think we can.
$50 million earmarked to be invested in I think 43 of it get invested by September 30, and the rest of it.
But yes, I think again.
And kind of stabilized and certainly whatever excess liquidity any liquidity, we'd love to have to borrow money.
That's where the dollars are available.
Helpful. Thanks, and then.
On the expenses I think you said.
The $19 2 million was a better starting point to grow off over the next couple of quarters.
Just curious, though I mean, as we look at them.
Overall core expenses of I think like 77 on pace to do about maybe 70 $777 5 million.
How should we think about kind of year on year growth I mean, maybe oil too early in the budgeting process to ask but theres still a lot of labor pressures kind of an interesting market out there right now I mean is it do you think you know putting you up in that kind of $79 million to $80 million full year range for next year is too heavy or or do you think that there is.
And I've kind of headwinds out there where it pays to add 2% growth in there also that that run rate.
So youre right were or early in the budgeting process, but I think if you drew expenses in the 2% to 4% range just across the board Thats kind of the way, we're looking at and again very very preliminarily.
You alluded to interesting on the wages I don't know if thats. The agitated we would use but yes, it's out there for sure.
Yes.
The wage inflation is real.
In September we did pass on a dollar an hour increase.
All of our hourly nonexempt employees.
In the end it just means that.
Oh the cost eventually there gets passed on to the consumers of the banks have to figure out a way to operate more efficiently.
We know that consumer and business behaviors are changing and.
More customers are banking digitally so that's why we invested the dollars we did in <unk>.
<unk>, our mobile app for consumers and our Treasury management platform for our business customers and it's also why we migrated to this online account opening fees.
Future.
A big step forward for us so.
So to combat <unk>.
Net inflation I think banks are just going to have to figure out how to how to.
Kind of operate more efficiently and some of these areas.
That's what we'll be looking to address and tackle.
Okay helpful.
And then just lastly on the NIM I think you rich or Dennis I think you might have said there was like 850000 of interest income to come in from some of the liquidity deployment, but.
I think if you back out the PPP and the.
Accretion core NIM was about $3 two six up four bps quarter on quarter.
It seems like with the loan growth and the actions you took over the course of the quarter that should continue to move higher I guess my my broader question is with the long end, where it is in no help on short term rates do you guys have any thoughts about where that core NIM could trying to near term.
With the loan yield pressures youre seeing and just any insights there would be helpful. Starting point.
And I think you're right I mean, if it goes up or down can be basis points I mean I think.
And continue to monitor the excess liquidity to see if theres opportunities there, but really the things that we put in place when we would expect.
Pushed the margin up again basis points I think we said last quarter.
12 basis points to 17 basis points.
12 month period of 2017.
Kind of play out the way we wanted it to I think Chuck and his team are doing.
Doing the best they can to hold the line in.
I think we'll put on assets.
Right pretty comparable to what we had been in the prior quarter.
Less pressure there.
But apps.
Absent of any movement in interest rates larger scale, I think where we are is where we'll be.
Possibly we could trend up but it would be again basis and when you make all the adjustments.
Like I think.
For the year, it's been basis points contraction for us as opposed to <unk>.
Some of our competitors that I've looked at it they've had that or more in and in a quarter. So I think our adjustments have been you know we've been doing a pretty good job of holding the line, reducing our interest expense.
<unk> holding the line on loan pricing.
Helpful. Alright, guys I appreciate all the insights as always thank you.
Sure.
Again, if you have a question. Please press Star then one.
Next question is from Russell Gunther of D. A Davidson. Please go ahead.
Hey, good afternoon guys.
Okay.
Hey, Rob wanted to.
Hey, I wanted to talk about the growth outlook, So really strong results over the last couple of quarters understand.
Guide for the year mid single digits and implies kind of a like amount in the fourth quarter.
But as you look out into 2022, I mean is a is a high single digit pace achievable for you guys or what would cause you or.
Or the growth results to take a step back sustainably going forward from where you've been running the past couple of quarters.
Yeah, I mean, I think that mid <unk>.
Kind of always been that mid to high level single digits.
Gross shop Russell I think.
Think that's probably a pretty good forecast for us.
There's a lot of it depends on how fast some of our projects get completed and how fast they go to the Perm market, we've seen a whole lot more aggression out of the PON market lately taken those taking those projects off our balance sheet, a little quicker than they have in the past that might limit us a little bit from the growth cycle, even though all of our Boston Longwood.
I think youre probably in the right.
And the right thought process.
Mid to high single digits.
Price.
Somewhere in the center of that to be honest with you.
Okay, and then is that likely to remain commercial weighted or is there any increased appetite to portfolio single family Ramsey I know you mentioned the securities book, not really expected to build but.
This portfolio of single family at all incrementally more attractive here.
It's interesting.
It might help us a little bit as maybe we may not run off as one single family. I think this is your last I looked I think were down $18 million from the beginning of the year and single family as we've taken some of our on balance sheet single family product and moved it into saleable.
The market, though.
Maybe it will get a little bit more on taking the growth just by not doing as much of that as the refinance loan stuff.
That's kind of.
Somewhat reflective with our swap strategy as well I mean, we just have not taken.
We'd rather get the yield right now.
As opposed to really book those low low interest yield.
Deals single family deals so.
It is going to have all of those.
Entirely be that growth could come from that commercial book.
Great well, thank you guys and the rest of my questions were asked and answered I appreciate your help.
Thank you thanks Russell.
This concludes the question and answer session.
Now I'd like to turn the conference back over to Mr. Dennis Shaffer for closing remarks. Please go ahead.
Well in closing I, just want to thank everyone for listening and thank those that participated on the call again, we are pleased with our third quarter.
Look forward to talking to you guys again, a few months to share our year end results. So thank you for your time today.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.