Civista Bancshares, Inc.
Q2 2021 Earnings Call Transcript

Published: 23 Jul 2021

[Operator:]

Good afternoon and welcome to Civista Bancshares Second Quarter Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now, I would like to turn the conference over to Mr. Dennis Shaffer, President and CEO. Please go ahead.

[Dennis Shaffer:]

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our second 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.

[Operator:]

First question comes from Terry McEvoy of Stephens. Please go ahead.

[Terry McEvoy:]

Good afternoon. Maybe let's start with the margin. I want to make sure I understand the message correctly. Should we think about the second half of this year, the margin increases beyond the balance sheet actions that were last quarter? And if so, can you just run through again, what do you think drives that core margin expansion?

[Rich Dutton:]

So Terry, this is Rich. That transaction occurred late in May. So we really didn't see that entire impact obviously on the quarter numbers or even the six month numbers. And I would expect through our modeling, if we said 17 basis points of growth in the margin for the – over a 12 month period or annualized, we're looking at probably 10 more basis points over the year. Does that make sense related to that?

[Terry McEvoy:]

Yes, I got your answers.

[Rich Dutton:]

Okay. Yes. So beyond that, did you have another question or did I answer what you were asking me?

[Terry McEvoy:]

I guess beyond the transaction that occurred in the math just ran through, was there some – were you implying that there's additional margin expansion above and beyond there as you reduce funding costs and those come down lower?

[Rich Dutton:]

Well, certainly there's some room to bring the funding costs down. Don't forget about that kind of stimulus. I think the technical term is snafu. That will occur right at the beginning of the year. So we had 16 basis points of drag our six month margin for that. And that will continue to diminish as the year runs out. And also the tax, the excess tax cash that had another 15 basis points of drag on our six month margin. And again, that number will continue to decline and as the cash rolls out.

[Dennis Shaffer:]

So we've – Terry, if I have a little bit more noise and most because of the tax program, because of the stimulus error that was in there. Then we did the balance sheet transaction. So, and plus we collect a lot of PPP fees in the second quarter. So there is quite a bit of noise in there.

[Terry McEvoy:]

Thanks for clearing all that up. And then just as a follow-up. The outlook for mid-single-digit loan growth this year, it looks like the Non-Owner Occupied CRE was really the bright spot in the second quarter. Do you think that's going to be the driver of growth in the back half of this year and maybe talk about just market competition in terms of pricing within that loan category?

[Chuck Parcher:]

Yes. Terry, this is Chuck. Obviously we're – that's our bread and butter in that Non-owner Occupied real estate. We have still really good demand. We've got really good pipelines right now. We've been a little softer on C&I really more so from a – from just the amount of cash that companies have from all the government stimulus. We had a few loans payoff just because they had a lot of excess cash. And I was looking at our loan utilization revolving lines and the commercial side. It fell from 36% at 12/31 to about 30% little bit under 32% at 6/30. So we're hoping maybe we get some drawback on some of those lines. But all-in-all, you asked me about competition. I think it's as competitive as ever. I think, most of – almost all banks are much like us have a lot of cash on the balance sheet. So every deal seems like it's competitive, but we've been – we've done a pretty good job of holding trying to keep margin where we like it at. Have we lost a few more deals than normal? Probably, yes, but where that pipeline is out right now, we really feel comfortable with that mid-single-digit going through the end of the year.

[Terry McEvoy:]

Great. Thanks for that and enjoy weekend.

[Operator:]

Thank you. Our next question comes from Nick Cucharale of Piper Sandler. Please go ahead.

[Nick Cucharale:]

Good afternoon, everyone. In terms of the accommodation deferrals, do you have a breakout of those hotels that are leveraged to business travel versus those that are more destination or vacation oriented?

[Paul Stark:]

Yes, this is Paul Stark. Virtually all of the hotels are more leisure travel than business. We don't really finance too many of that are focused on business. That's not to say there's not some that are mixed. So and for the most part a lot of those, I think over half of our deferred – deferrals are on hotels. Almost of that 50, just for a little more color of the 50 that's outstanding about $26 million of that have already resumed payments. They're just catching up on interest. So we were taken as a conservative line on that and continuing to call those deferrals. So they're all heading, I should say, all had been, most of them are headed in the right direction.

[Dennis Shaffer:]

Yes. And then Nick, I would say that Chuck and Paul and their teams had both been out and making calls of a lot of those clients and a lot of the stuff we're hearing is pretty positive. We just want to make sure that revenues have kind of bounced back for some of those, but we want to see kind of a little bit of sustainability to that. So our approach is, you'll be a little bit slower and make sure that revenue is being able to be sustained. And as I mentioned in my comments, I think that we do anticipate hopefully in third and fourth quarters that we see more upgrades to the criticized portfolio and deferral number to continue to go down.

[Nick Cucharale:]

That’s great color. So it’s fair to say that occupancy and average daily rate have been trending positively.

[Dennis Shaffer:]

Yes.

[Nick Cucharale:]

Okay. And then with respect to swap fees, slow down relative to 2020 levels. I know they can be volatile, but are you expecting a pickup in this line item or staying at this level for the time being?

[Dennis Shaffer:]

I would tell you – next Chuck, I would tell you what probably be pretty close to the same level through the back half of the year, unless we see some major change in the yield curve. And right now, it makes more sense for us to go a little longer on some in-house mortgages than to take that LIBOR plus 2.25% to 2.50% range and put on the balance sheet right now.

[Nick Cucharale:]

Okay. That’s fair. And then lastly, the tax rate bumped down a little this quarter, what are you expecting on a go forward basis?

[Dennis Shaffer:]

I’m not sure. What did it bounce down to, but going forward, I think 13%, 14% is probably a good run rate going forward.

[Nick Cucharale:]

But an effect on a gap effective tax rate basis.

[Dennis Shaffer:]

Yes.

[Nick Cucharale:]

Thank you. Thanks for taking my questions.

[Dennis Shaffer:]

You bet.

[Operator:]

Thank you. And our next question is from Tim Switzer of KBW. Please go ahead.

[Tim Switzer:]

Hey, good afternoon. This is Tim Switzer on for Mike Perito. You guys have pretty strong capital levels on right now. And there’s still a good amount of buyback authorization from the board around $7.4 million. So I was wondering, do you guys expect to kind of keep a similar buyback pace for the rest of this year? I’m assuming the environment, continues going well. And then you have any plans at all to maybe hold on to a bit more capital in preparation for any M&A opportunities that may come up.

[Dennis Shaffer:]

Yes, I think that from the capital level, we’ve kind of publicly stated from the TCE standpoint. Anyways, we’ve been trying to manage the company to about a 9% level there. We’re above that. So I think we’re about 9.5% or so. So we’ve been fairly aggressive, we think we’re undervalued. And because of that, I think we view the stock repurchase program as a good way to deploy some of that capital. So yeah, we’ve probably been a little bit more aggressive than we have and as long as our earnings stay, where we are and probably continue to stay fairly aggressive on that front.

[Tim Switzer:]

Okay. And any plans at all the whole.

[Chuck Parcher:]

I just want to add. Dennis was right. Our TCE is 9.5%, but if you normalize it for all the PPP and the tax money, we’ve got it up closer to probably 10.1, I think another 60 basis points higher than that. So like Dennis said, we’ve got plenty of capital, if you will, to continue to repurchase shares.

[Dennis Shaffer:]

As far as holding it on for acquisitions, it just depends on the deal. I think Tim, the size of the deal, the percentage of stock and cash into that deal. So that’s kind of a hard question to answer, but we have kind of been on that higher end one, because our earnings have been so strong. But two, we would like to do a deal, get a deal or two done in here. So that’s why, but our capital position we think is very strong.

[Tim Switzer:]

Great. Thanks. And then I had a quick follow-up on your adjusted expenses this quarter pretty solid. You have good efficiency ratio sub-60%, despite some of your tech initiatives. So do you think you can kind of maintain the efficiency ratio near the 60% level going into 2022 and I guess sort of what is your expense trajectory going to look like? What’s your as you expand your tech capabilities here?

[Rich Dutton:]

So Tim, this is Rich. And the shorter answer is, yes. But I think if you’re – as you get familiar with the bank and when we were kind of front end loaded with the tax money. So we’ve got maybe more revenue in the first and second quarters. So on the loan point of our efficiency ratio for the year is the first and second quarters. We’ve always kind of said, we’re a 60%, 61% efficiency bank. There’s nothing new. I mean, we’ve made all the investments that at least that we think we’re going to make near-term for one of the things digital and whatnot. So I think a 60% or 61% is where you can think of us being.

[Dennis Shaffer:]

Yes. We’ll continue to invest into the company from a technology just to – I think, our mood is to continue to invest some of these earnings back into the company to keep us at the forefront in terms of technology and stuff. So that’s not going to slow, I will say that we really recognize like the digital – new digital product that we rolled out, a lot of that revenue happens on the back end of that. So we will just start to recognize that in terms of when we do the online account opening piece later this year that could bring more new accounts, which will bring more service charges. The digital piece should enhance our interchange collections and it should also expand our footprint. So all of those things I think will lead to increased revenues down the road for us.

[Tim Switzer:]

Great. And do you have any targets you’re willing to share on kind of how quickly you think you could accelerate your account growth at all or related revenues?

[Dennis Shaffer:]

No. We’ll be working pretty hard on that maybe the back half of this year, but really most of that effort right now, I mean, we’ve got some really conservative efforts, but we’ll spend a little bit more time on that back half of this year as we head into next year. So maybe able to share some things later, maybe in the fourth quarter with on that.

[Tim Switzer:]

Okay, great. Thank you.

[Operator:]

Next question comes from Russell Gunther, D.A. Davidson. Please go ahead.

[Russell Gunther:]

Hey, good afternoon guys.

[Dennis Shaffer:]

Hey, Russell.

[Russell Gunther:]

Just a few couple follow-ups here, first on the loan growth. So second quarter ex-PPPs turned out as strong, if not stronger than you guys were expecting. And so just curious as to your thoughts for the back half of the year, any potential for upside to that mid single digit number and just what the loan growth drivers on an organic basis are expect to be?

[Chuck Parcher:]

Russell, this is Chuck. We do – I mean, we might have a little upside. One of the things I’m watching pretty close as we’ve got quite a few construction – large construction projects that are coming to fruition and coming to an end. So we’re staring quite a bit of what I would call, payoff money in that third and fourth quarter, as those projects go to the permanent market. So we’re kind of tempering our record – kind of our record high pipelines right now due to some of that payoff down the road. So I’m still comfortable in that mid single digit number for the end of the year. But if some of those payoffs get pushed off into next year or a couple of extra projects come in, we could exceed that. But I’d tell you that we’re much more comfortable in that mid-single digit.

[Russell Gunther:]

Understood. I appreciate the color there. And then just last one as a follow-up to the margin discussion. So I think you guys mentioned an additional kind of 10 basis points from the balance sheet restructuring, talked about some other positive catalysts, like funding costs reduction and putting some of that excess liquidity to work. So could you guys share kind of the glide path as to where you think the margin shakes out over the next couple of quarters?

[Rich Dutton:]

Well, I mean, I guess the math on the back of my sheet says, normalize when you put PPP and whatnot. I guess, that’s the wildcard Russell, PPP and how quick that prepays. So I guess if you take that off the table, I mean, it could be a 3.7%, 3.8% kind of number. Well, it just depends on the PPP.

[Russell Gunther:]

Understood. Okay. That about where I was shaken up too. So I appreciate it. Thanks for taking my questions.

[Dennis Shaffer:]

Thanks, Russell.

[Operator:]

This concludes our question-and-answer session. Now I’d like to turn the conference back over to Mr. Dennis Shaffer for closing remarks. Please go ahead.

[Dennis Shaffer:]

Thank you. In closing, I just want to thank everyone for listening and thank those that participated in the call. Again, we are very pleased with our second quarter and look forward to talking to you again in a few months to share our third quarter results. So thank you for your time today.

[Operator:]

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