Q1 2022 Civista Bancshares Inc Earnings Call
[music].
Before we begin I would like to remind you that this conference call may contain forward looking statements with.
With respect to the future performance.
And financial condition of the Vista Bancshares, Inc.
That involve 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.
The press release also available on the company's website contains the financial and other quantitative information to be discussed today as.
As well as the reconciliation of the GAAP to non-GAAP measures.
This call will be recorded and made available on this the Vista Bancshares' website at Www Dot C. I V B dot com.
If you require operator assistance. Please press Star then zero.
At the conclusion of Mr. Shapers remarks, he and the service the management team will take any questions you may have.
Now I will turn the call over to Mr. Schafer.
Good afternoon. This is Dennis Shaffer, President and CEO of Solicitor Bancshares, and I would like to thank you for joining us for our first quarter 2022 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.
This morning, we reported net income of eight and a half million dollars or 57 cents per diluted share for the first quarter of 2022. These.
These results include approximately three cents per share of expense related to our community Bank acquisition.
While these steel costs contributed to the 16, 2% decrease in our earnings per share when compared to the first quarter of 2021. The primary reason for the decline was lower mortgage production.
During the first quarter of 2022, our net loans exclusive of P. P. P grew by $48 million or at an annualized growth rate of 10%.
We continue to be on track with the commuter bank transaction that was announced earlier this quarter. We view this as a low risk transaction with significant upside that will expand our footprint into northwest, Ohio, and the Toledo, MSA and look forward to welcoming our new shareholders employees and <unk>.
Customers into the service the family we expect this transaction to close at the end of the second quarter.
We continue to be active in repurchasing common shares during the quarter, we repurchased 183357 shares at an average price of $24.17 per share.
We continue to view share repurchases as an integral part of our capital management strategy.
At March 31st 2022, we had $4 $9 million remaining in our current repair purchase authorization plan.
Our return on average assets was 1.87 for the quarter compared to 1.47% for the linked quarter and a return on average equity was 9.89% for the quarter compared to $12 four 9% for the linked quarter.
Now, let's turn our attention to our performance for the quarter and for the year.
As I stated we were extremely pleased with our loan growth for the quarter excluding.
Excluding the impact of PPP loans, our loan portfolio grew by an annualized rate of 10%. This despite having 42 and a half million dollars in loan pay offs during the quarter.
At the end of the quarter, we had 15 and a half million dollars in PPP loans remaining our strategy of originating P. P. P loans to only our customers in those referred to us by known referral sources resulted in no fraud to date in the P. P. P loans that we originate.
Got it.
We have just $583000 in P. P. P fees remaining at quarter end and anticipate the forgiveness process to be essentially complete by the end of the second quarter.
Despite solid loan growth, our net interest income declined $391000 or one 7% from the linked quarter, primarily due to the increased interest expense related to our subordinated debt issuance in November and declined 896000.
Dollars or three 8% year over year for the same reason.
Our net interest margin for the quarter was 3.38% compared to 3.42% for the linked quarter.
While accretion of P. P. P fees boosted our first quarter margin by 16 basis points excess cash generated by our income tax processing program negatively impacted our first quarter margin by 23 basis points.
We expect our margin to expand as the PPP loan process concludes and the liquidity generated by our tax programs subsides, assuming interest rates continued to increase our asset sensitive balance sheet should yield further expansion of our margins.
During the quarter non interest income increased 300, $832000 or 12, 2% in comparison to the fourth quarter of 2021 and declined $1.5 million or 16, 8% year over year.
The primary driver of the increase over our linked quarter was our income tax refund processing program, which continues to be an important contributor to our noninterest income during our first and second quarters. Each year income from that program. During the first quarter was consistent with the prior year at 1.9 million.
Service charge revenue declined by $234000 or 12, 9% compared to our linked quarter and showed an increase of $323000 or 25, 7% over our first quarter of last year the decline in service charges for the.
Linked quarter is due to the timing of when service charges were earned on tax program related accounts. These charges are related to services, we provide to the tax software providers. The service charges associated with this business we're around $270000 in the fourth.
Quarter of 2021, and we're $156000 during the first quarter of 2022. These fees are charged annually and are typically charge late in the year.
Interchange fees at $1.1 million were consistent with our linked quarter and that of the prior year.
Mortgage banking continues to be a significant contributor to our noninterest income however, like much of the industry. So this the experienced a decline in mortgage loan originations.
First rates increase in the inventory of homes available for the purchase continues to be tight.
First quarter gains on the sale of mortgage loans were $936000 a decline of 36, 2% from our linked quarter, which was $1.5 million and a 66% decline from the prior year, which was $2 $7 million.
We sold $38 $2 million in mortgage loans during the first quarter of 2022 compared to $54 8 million during the linked quarter.
The average premium recognized on the sale of loans declined 23 basis points from 2.68% to $2 four 5% compared to the linked quarter.
Wealth management revenue of $1.3 million was consistent with that of the linked quarter and an increase of $131000 or 11, 4% over the prior year as gains in new accounts were offset by declines in the overall market.
We continue to view the expansion of these services across our entire footprint as an opportunity to diversify and grow noninterest income.
Noninterest expense increased $1 $1 million or five 6% year over year, which was primarily attributable to annual compensation increases that go into effect each April . Additionally.
Additionally, noninterest expense increased $3 $1 million or 18% compared to the linked quarter. As a result of increases in compensation expense data processing marketing and professional fees related to our community Bank transaction.
Compensation expense, which increased $2 $1 million accounted for the largest portion of the linked quarter increase in noninterest expense payroll taxes are typically higher in the first quarter and increased 411000 from the linked quarter. Similarly contributions to our employees 401K .
These are higher in the first quarter and increased $104000.
Health insurance and incentive incentive expense also increased over the linked quarter by $604000 and $647000, respectively. As we true up accruals at year end, and then resumed our normal accrual levels in the first quarter of this year.
Data processing expense increased $257000 over the linked quarter.
Due to $215000 in conversion fees associated with the pending community Bank acquisition.
Professional fees increased $589000 over the linked quarter due to $268000 in legal and investment banking fees associated with our pending community Bank acquisition. In addition to acquisition related professional fees $91000 of the linked quarter increase in professional fees.
This was the result of reversing accruals at the end of the prior year to bring them in line with our actual expense.
With the legal close of our community Bank transaction planned for the end of the second quarter and the system conversion scheduled for October we anticipate recording most of the additional deal cost during the second and third quarters.
Marketing expense increased $214000 over the linked quarter, which was directly attributable to reversing our accrual by 214000 in the fourth quarter to bring our budgeted marketing expense in line with our actual marketing expense.
Our efficiency ratio was 65, 2% compared to 56, 2% for the linked quarter and 57, 4% year over year.
If we had adjusted for one time deal costs, our first quarter efficiency ratio would've been 63, 7%.
Turning our focus to the balance sheet.
During the first quarter, our total loans grew by $23 million backing out $27.7 million of PPP loans forgiven during the first quarter, our loan portfolio portfolio grew organically by $48 million or at an annualized rate of 10%.
While non owner occupied CRE loans led the way, we had good demand and owner occupied CRE residential real estate and residential construction loans in every market across our footprint.
Along with strong first quarter loan production, our Undrawn construction lines ended the quarter at $122 million, giving us confidence that we will grow our loan portfolio at a mid single digit rate for 2022.
As I stated earlier mortgage loan production is down. However, we are optimistic that our pipeline is solid with very few refinances. We are seeing a lot of pre approvals, but unfortunately, not enough inventory to keep up with the demand.
On the funding side total deposits increased $198 $4 million or eight 2% since the beginning of the year.
Increases in balances related to our income tax processing program of $199 million made up virtually all of this increase although we did see some movement from time deposits into money market and interest bearing demand accounts.
Noninterest bearing demand accounts continued to be a focus making up 37, 6% of our total deposits at March 31st as we continue to attract the operating accounts of our business customers.
Turning to asset quality the segment with the largest number of criticized loans remains hotels and lodging at the end of the quarter total criticized hotel and lodging loans were $48 $6 million. Most of these operators have experienced increased occupancy from leisure travel during the <unk>.
Last four quarters, despite the lingering effects of Covid COVID-19 on business travel, we anticipate continued leisure demand going forward, resulting in further reduction in our criticized portfolio.
While there continues to be uncertainties associated with the economy, we continue to see improvement throughout our footprint and our customers financial positions. As a result, we did make a $300000 provision during the quarter, primarily attributable to growth in our loan portfolio.
Rather than economic stress. In addition, we will.
Realized $92000 in net recoveries during the quarter.
The ratio of our allowance for loan losses to loans was 134% at quarter end compared to 1.33% at year end 2021, our allowance for loan losses to nonperforming loans also improved to 501.5% at the end of the quarter.
Up from 496, 1% at the end of 2021.
As a reminder, serviced a met the guidelines for the delayed implementation of seasonal and are on track to adopt the new allowance mythology, beginning in 2023.
The anticipation of a higher interest rate environment and the pressure has had on the bond market resulted in a 29 and a half million dollar decline from December 31, 2021 to the end of the quarter in other comprehensive income related to our investment portfolio.
As a result, we ended the quarter with tangible common equity of 785% compared to $9 two 5% at December 31 2021.
We continue to be comfortable with the credit quality and duration of our security portfolio at the end of the quarter.
We continue to create capital through earnings. Our overall goal is to have adequate capital to support our organic growth and potential acquisitions two important parts of our capital management strategy continues to be the payment of dividends and share repurchases. We continue to believe our stock is a value.
And as previously discussed have taken advantage of the recent market conditions to remain active in repurchasing shares.
As I indicated earlier, we continue to be on track to close our transaction with community Bank and their subsidiary the Henry County Bank members of both companies have been meeting and anticipation of legally closing the transaction at the end of June and successfully integrating our systems in October we look forward to welcoming their.
Orders and customers to our service the family as we grow into northwestern Ohio, and the greater Toledo MSA.
In summary, despite some of the noise in our numbers. We are pleased with another quarter of solid earnings continued loan growth and solid credit quality.
<unk> economic and geopolitical uncertainties, we are all facing and their impact on our local and larger economies we remain optimistic.
This is across our footprint continue to have strong balance sheets, our loan pipelines are solid and we are well on our way to the successful integration of the Henry County Bank into the service the family.
Thank you for your attention this afternoon and now we'd be happy to address any questions that you may have.
Okay.
We will now begin the question and answer session.
To ask a question.
You May press Star then one on a touchtone phone.
To withdraw your question.
Press Star then two.
At this time, we will pause momentarily.
To assemble our roster.
Yes.
The first question comes from Terry Mcevoy with Stephens. Please.
Please go ahead.
Thanks, Good afternoon everybody.
Hi, Terry maybe first question, if we kind of exclude P. P. P. And then the tax refund deposits could you just talk about the core net interest margin trend is in short term interest rates go higher and what percentage of the portfolio was variable rate and help us kind of understand the impact on a core basis of rising rates.
<unk>.
Curious rich and I'll go through kind of the analysis that we had in the last couple of more.
Three eight.
Mark.
How about 16 basis points of that.
Okay.
So if you back that out.
Right.
And then we had another 23 basis points.
The liquidity generated from a tax program.
When you run all that through I would say a normalized margin for services.
Q1 was $3 45.
Yes.
Yes.
I think the number that we shared.
Last quarter.
A fair amount of expansion.
But the way we.
Get better carry.
Yeah, that's that's better okay.
Any important earlier anyway.
Here you were just quiet okay. Okay. So our model indicates that for every quarter basis point increase in short term rates, our margin will expand by about five and a half basis points.
And I'm not sure what the rest of it and then.
Yes.
The portfolio about third of the portfolio of 33% of the portfolio Terry will adjust and 30 day every 30 days or less.
Perfect.
And then is 39 per se if you add another 6% adjust in a year or less okay.
Okay. Thank.
Thank you for that.
And then maybe as my follow up are there parts of the portfolio, you're just watching a bit closer given inflation and supply chain issues in and maybe how do you. How have you thought about the impact of higher rates on your non owner occupied CRE customers.
Well I mean, we're watching it Terry I would have you know when you.
The first question are we watch that.
Certain part of the portfolio, we're still watching the hotel portfolio relatively closely we feel good about the numbers. We're seeing from that is as we're mostly leisure travel not at business travel.
So we're watching that probably closer than either piece.
We are doing.
I guess the right way to say it is we're looking at our portfolio closely as far as from an interest rate increase, but we don't really see any specific area that I would say is at risk I you know I've been watching our lines of credit pretty closely to see if they are beginning to be drawn on it and to be honest with you we have not seen any significant drop.
Roz on our operating lines of credit and our year to date in fact, they've actually diminished a little bit we're running about a.
Give or take 33% utilization on those lines of credit.
And we do part of our underwriting Terry does include we kind of stress the interest rate. So we underwrite it as the actual rate and then we do have a stressed analysis in there as well.
That's great. Thank you guys.
Thanks, Eric.
The next question comes from Ben Garlinger with lumpy group.
Please go ahead.
Hey, good afternoon, everybody Hi, Ben.
Uh huh.
Thanks.
10000 foot view.
Just from a macro perspective here relative to your clients paying and working with it seems like.
Cuomo economics are slowing a little bit equation is increasing but when do you think from boots on the ground perspective.
Are your clients.
What are the kind of the things that they're worried about or what are they trying to tackle in front of them at the house without kind of juxtaposing kind of slowing demand.
Ben This is Chuck I mean, I think everybody is is is worried about that I guess number one supply chain.
Number two labor as far as getting you know getting and retaining labor, but it's a tough labor market right now.
And then you know obviously the inflation effects that are taking place right now.
You know the interesting part is we've got some people that are our distributors and the retailers are dying for products. So you know from that perspective as long as they can get the product here. They can sell it almost whatever whatever price they want to do it.
So there's a lot of I guess theres concern, but at the same time I think our you know most of our clients are doing really well right now and feel like that the weather. This you know relatively well.
Gotcha, that's helpful and then.
When you think about the expense I know clothing to.
<unk>.
What do you think about the core.
Did you have anything in mind for Nevada half of the year and R&D investments.
<unk> said over time that we're not necessarily seeing it today in the numbers now.
Let rich answer that do you remember in that corporate expense number that the increase was a lot of it was related to accruals and some of the acquisition stuff, but rich you want to give them, maybe a better number there yeah. So Ben I think a good run rate for you guys to use the onboard is probably $25 million on the noninterest expense.
Remember, we've got our annual increases that go into effect April April 1st for our folks that's probably the big thing that you haven't seen yet, but other than that I don't know if we've got any significant investments other than the lumpiness that we've generated from the Henry County acquisition.
But I think what we've got.
In terms of the run rate.
What you see is what you get I guess is what I'm, saying.
Okay. That's that's helpful. I appreciate it.
That's all the next question.
The next question comes from Michael Perito with K B W. Please go ahead.
Okay.
Hey, good afternoon guys.
Right.
Hi, Thanks for taking the questions I wanted to start I apologize if I missed it but just on the noninterest income side. There were a couple of moving parts I heard you guys of course some of them in your remarks, but just are we fair to kind of be in the mid six ish range and then layering in the deal on top of that once it's closed or or would you frame it differently right.
I think that's probably a good place to be I mean, if you back out right because the tax program fees. That's the stuff that we had $1 9 million of that this quarter will have.
Another half a million or whatever.
In the second quarter, I think it all and we'll be at $2 9 million. So will that cause maybe another $1 million in the second quarter.
Other than that I think.
Yeah.
The Crystal ball is.
Ours is as good as anybody elses and what goes on with mortgage fees, but the rest of the stuff is probably.
Where you said I mean, a six or six and a half is probably a pretty.
Pretty good place to model.
And how do you guys you kind of talked about.
Okay.
State of the state of mind of the customer, but I mean, it sounds like the near term loan outlook you guys have decent line of sight on as we move into like the back half of the year like how do you guys think about the degree of confidence around the loan growth budgeting and you know, particularly as rates.
You know right now the forward curve doing like 100 basis points by the middle part of the year. So I'm just curious how you guys are thinking about the back half of the year from a growth perspective, as it stands today and and and given what we know just from the consensus outlook.
Mike This is Chuck.
We we kind of shot for or I guess it told you guys that would be you know mid single digits for the year I still think that outlook is pretty good obviously, we exceeded that in the first quarter and our pipeline is really strong right now and to be honest with you that the pipeline of deals that were actually looking at is probably at all time highs.
There are are affecting it a little bit as far as maybe the amount of money that some people can extract out of some projects.
Going forward just from a cash flow perspective, but we haven't seen demand diminish a lot.
And talking to our customers I think it's really just kind of what.
You know at Columbus, right now as it is really hard we've done we're getting great growth out of Cleveland, and we're getting great growth out of the Cincinnati area and we'd really don't see any one of those three cities flowing down that much we're hoping to we're hoping to start to get a little bit more demand out of Toledo with our acquisition and so I feel good about.
About demand right now I mean, you know I'll, let you know in 90 days I guess weather as rates go up but that does diminish but as we're looking at right now it's pretty strong and we're hoping to add another lender to just we had budgeted just ourselves in Columbus, because we are expanding with another office and Gahanna, Ohio, New Alban.
The area, which is really close to where intel's who knows.
Starting to make their investment and also in the Toledo market. You know we are we already had that budget. We're still moving forward with that because you know we think the Henry County Bank acquisition.
The acquisition will be a platform for us to do some lending there and with chucks background, having spent almost his entire banking career in Toledo, We just think.
There's opportunity there as well so we still feel pretty bullish.
On hitting that mid single digit number and continuing to do that over the next couple of quarters are you know just just with the with that and what and the things that Chuck mentioned.
Thank you.
You guys got it Mike before I, let you go are produced.
Yeah.
The tax income in the second quarter will be half a million dollars.
It is exactly the same as what it was last year.
So the better number exactly 806 months.
Yes.
The next question comes from Nick <unk> with Piper Sandler. Please go ahead.
Good afternoon, everyone how are you.
Yeah.
Just a follow up on your commentary with respect to the buyback you know in light of the reduction to tangible book value given the OCI Mark This quarter do you see any change to your anticipated level of repurchase or capital deployment more broadly.
No I think we will continue to be active with the buyback as as the market's down obviously, we're buying it cheaper and so we have a certain level that we are kind of set that target at and I think we continue we know that that'll prove.
Let's say the same so we think it's a great way to deploy our capital.
And I think we will continue to be active there.
Could you share with us where new loan yields are coming on relative to the portfolio rate.
Uh huh.
That's a great. That's a great question from from that perspective, Nick I think that's the hardest thing in banking right. Now is trying to price these loans as well as the rates are bouncing around but I would tell you, they're coming out a little bit higher probably than the.
Averaging in that Oh, I'd say 475 range on new stuff.
Give or take on a five year you know, we're starting to obviously quote some some rates are over five now and we've got some some some still to close that are in the pipeline that are probably in the mid to lower fours, but I would tell you. It's probably a good number is 475 right now and then we'll continue to push that up as the as the back end of the five and 10 year yields.
Get pressed up.
And then lastly, I just wanted to dig into the the loan growth guidance a little bit you guys are guiding to mid single digits. So typically the first quarter is a little bit softer for you guys, but a 10% annualized pace. As you mentioned is the mid single digit guidance, just kind of just exhibiting a little bit of caution in the back half of the.
Year, just without a knowledgeable yeah.
Sure.
The nice part is Nicky you know as I look at the numbers grew $48 million. This year in the first quarter of last year, we went backwards 26, and a half million. So you know you're in you're right usually the first first quarters.
Until we foster we're really excited about you know that that growth out of the box and I. You know I would tell you that we may press it up a little bit I'd like to get through another quarter to make sure demand stays where its at but where we're at right now.
The trajectory on its pretty good yeah. We just you know I think we are being a little bit cautious just because we hear you know people talk in 789 rate hikes, you know I think that'll eventually does slow things down a little bit so I.
I think we are a little bit cause, but we're off to a district fantastic start.
With our in our loan portfolio and the loan growth that we had in that first quarter because typically we get the checkpoints. We went backwards last year, where historically, we always go back words of that first quarter. So we.
We were really pleased with our loan growth for the quarter.
Right very helpful. Thank you for taking my questions.
Again, if you have a question. Please press Star then one.
The next question comes from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good afternoon, guys Hi, Ross.
Hey, circling back to the margin discussion I appreciate your thoughts on what every 25 basis point move means could you, let us know what you're expecting from a deposit data.
Our assumption in that five and a half basis points and maybe what you're thinking about first hundred versus next country.
Well I think it's pretty ratable, whether it's the first.
Probably not back up I mean, we won't we're laggards for sure.
Our non maturity deposit betas are just shy of 13 basis points.
Okay. That's what our model is we model.
But I mean, you've seen over the years, you've been telling us for a while I mean, we were pretty aggressive when rates are coming down and at least the last cycle we were.
Among the last going up and we never did get back and that's something that I think over time again don't forget we've got a big portion 30, 37% in noninterest DDA. So that definitely helps and those are primarily operating accounts of our commercial customers and they're not really rate sensitive.
Oh, yeah, and they're not going anywhere we've been tied up with Treasury services and whatnot. So so I don't know if I'm answering your question, but I mean I think.
Well, that's a good deposit beta for us and again I think.
It just depends on how quickly and how big the rate increases are before.
Moving along we'll be in the back of the bus as rates are going back up on the deposit side, but didn't you know we live in.
So we're less rate sensitive because we don't have a lot of C. DS and you know we're picking up some additional deposits.
With the Henry County Bank acquisition, and they're not very rate sensitive as well. So I think that first 100 basis points, we will be will definitely be a lagger.
I appreciate it guys. Thank you both.
And another question I had was just on the tax processing program and related revenue. Appreciate the look into next quarter, just remind us what type of line of sight you have into future revenue there.
A year, maybe even two.
So our deal if you will hasnt changed other than it's a three year rolling contract at the end of each tax season, usually in the latter half of the year. Once our partners are all kind of done their marketing, we kind of said what the revenues will be for next year, but but and added here. So.
We've been at that I think at least the last two years. The revenue has been identical I can't I don't know what it'll be next year I'll be able to say, yes later in the year, but we'll be in the business for at least two more years and probably 3%.
Yeah, No that's helpful.
Helpful reminder, thank you.
And then last one for me guys. You've described a pending transaction is a low risk deal just.
Just curious as to continued appetite for M&A here.
Just any general color on pace of conversations and what you'd be interested in.
Yeah, I mean, so much of it depends on our stock price and as we know we're a little bit undervalued, there, but we remain really active in our calling efforts. We think we've developed some pretty good relationships that target.
For us as a bank.
You know 300 million to a $1 billion, probably an asset size or something.
But that's probably the ideal range for us we think a maybe there's a little bit are you know less.
Less competition for that happen.
Dollar bank.
Because it becomes less significant for some of those larger players that are 789 million a $1 billion in asset size. So, but we would like to continue to grow I think that helps level out. Our you know our expenses a little bit late makes us more efficient as a <unk>.
Company and we've proven that we can integrate these deals really nicely from a cultural standpoint and that they work they work really well and I just keep pointing back to the last acquisition prior to this this.
The deal, we just announced the deal we did late in 2018.
We have 45% of the market share in deposit market share in Ripley and Dearborn counties in southeastern Indiana, which.
Which is three and a half hours from our.
Headquarters here and we've expanded that market presence, we havent gone backwards, we've increased that deposit market share. So I think we can integrate these deals really well.
Can decentralize a few functions and stuff. So we remain we would like to continue to grow and we remain diligent in our calling efforts and developing relationships.
I appreciate it guys. Thank you for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Dennis Shaffer for any closing remarks.
Well in closing I, just want to thank everyone for joining us today and for those that also participated on today's call and again look forward to updating you again in a few months to share our second quarter results. So thank you for your time today.
The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.
Yeah.
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