Civista Bancshares, Inc.
Q1 2021 Earnings Call Transcript

Published: 23 Apr 2021

[Operator:]

Good afternoon everyone and welcome to the Civista Bancshares Incorporated Q1 2021 Earnings Conference Call. All participants will be in a listen-only mode. Please also note, today’s event is being recorded. At this time, I would now like to turn the conference over to 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 first 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:]

Our first question today comes from Terry McEvoy from Stephens. Please go ahead with your question.

[Terry McEvoy:]

Hi, good afternoon, guys.

[Dennis Shaffer:]

Hi Terry.

[Terry McEvoy:]

First off, thanks for running through the inflow of stimulus funds. I thought that was a typo when saw billion. So, thanks for addressing that in the prepared remarks.

[Dennis Shaffer:]

We thought it was a typo when we saw--

[Terry McEvoy:]

Your surprise was larger than mine, I'm sure. I guess first question the -- could you just maybe run through where you are in the expense side for the digital investments on online and mobile banking? And I guess will it be fully offset with the branch actions? And I guess what I'm getting at is looking ahead, should we expect to step-up in expenses at all because of technology spending?

[Rich Dutton:]

Terry we're at right now, we still haven't expensed anything with regard to what we're rolling out in June and later this year. But we continue to operate under our current, I guess, Jack Henry contract. And we're trying to time those up so that when the new expenses roll on to the books, the Jack Henry, we will have some reduction or Jack Henry contract. But I think net-net, starting sometime in the second quarter, certainly the third quarter, it's going to increase by about $200,000 a quarter. And we can -- we'll work it down, but I think that's the way it looks right now, that’s helpful.

[Dennis Shaffer:]

And the branch closures, we net us about $200,000 in total savings for the year, Terry. They were relatively small branches. We didn't have a lot of employees there. So, it will offset it'll obviously helps a little bit.

[Terry McEvoy:]

Thank you. And then as a follow-up, as I read in the release, the 3.4% loan deferral is call it about maybe about two times what I've kind of put together for just other banks across the country. And I know you addressed it in terms of kind of some seasonality in some of your customers, but maybe just expand on that of those hotels that you're expecting to have just stronger occupancy and maybe just provide a little bit more color there?

[Rich Dutton:]

We do have a number of hotels, I think the income drivers of those hotels are primarily the destination related to Cedar Point Kings Island as well as the islands of and then also mostly leisure. So, we expect that it's been creeping up as we go. And we expect those payments to start to resume. So, we think probably half that number should be -- half that $70 million should go out in the second quarter, early in the third, but that -- it's really more timing as it relates to the revenues and the original payments.

[Dennis Shaffer:]

Yes, and Terry, we're hearing some positive comments from some of our hotel operators. But we do want to see a couple months at least that they return back to kind of pre-pandemic revenue type. So, even though we're hearing positive comments, we also want to see a couple months or maybe even a quarter of revenue numbers, at least, that they're -- that they return to those somewhat close to those pre-pandemic levels.

[Rich Dutton:]

The bookings and reservations are strong right now.

[Dennis Shaffer:]

Yes. So, we're really optimistic there. But I think just being -- we're trying to be a little bit conservative. We don't want to upgrade and then the next quarter after -- downgrade again, so we're just trying to be a little bit conservative there.

[Terry McEvoy:]

I appreciate that. Thank you and enjoy the weekend.

[Dennis Shaffer:]

Thanks Terry.

[Operator:]

Our next question comes from Nick Cucharale from Piper Sandler. Please go ahead with your question.

[Nick Cucharale:]

Good afternoon, guys. How are you?

[Dennis Shaffer:]

Nick, how about that operator getting your name right too?

[Nick Cucharale:]

Yeah, amazing. Just to follow-up with the expenses after the digital commentary, where do you see the overall run rate in future periods? And what type of year-over-year growth are you expecting?

[Rich Dutton:]

So, Nick, where we're at, I guess, again, the first quarter, we got a fair amount of commissions and incentive payments went out. And as you'll recall, each year in April, we have our merit increases. That's almost a push. We've got a run rate going forward to probably $18.9 million a quarter is kind of where we're at. How that stacks up year-over-year I don't have that number in front of me, but I'll bet your calculator can figure that out for me.

[Nick Cucharale:]

Yes, that's plenty from what I'm looking for. Thanks. And then I -- go ahead. I'm sorry.

[Rich Dutton:]

No, go ahead.

[Nick Cucharale:]

And secondly, I just wanted to get your take on loan growth, which took a little bit of a breather. Was this a function of a strong fourth quarter and the pipeline's building back up? I'm just trying to get a sense of the outlook for loan demand across your geographies?

[Chuck Parcher:]

No question. From that perspective, Nick, this is Chuck. We did have a really big fourth quarter as you know. We had a few payoffs that we expected in the fourth quarter that leaked into the first quarter. So, pay off a little higher than that than they normally are. Our pipeline is was -- it was okay coming into the year, but it's really strong right now, in the last 30 to 45 days, we've seen a really big uptick in loan demands. We feel good about that. We've got a lot of construction projects we need to fund over the summer. So, I still feel like we'll end up in that mid-single-digit growth rate for the year. In Dennis' comments, he mentioned, our lines of credit is based on the PPP funding got paid down a little over $20 million. If you kind of look at the numbers in our release, you'll see that our residential mortgages went down by another $11 million as we continue to refinance kind of some of the stuff on the books and ends up being again on health category. So, we have a little pressure as far as on that on balance of the first quarter. We feel like we'll grow through that in the next three quarters.

[Nick Cucharale:]

Okay. And then lastly, just the gain on sale margin in the mortgage business improved again. We touched on this last quarter's call, but do you see that as sustainable in the near-term?

[Chuck Parcher:]

No, I see that coming down not dramatically, but I don't see that 355 number being sustainable. I think we'll continue to move down probably a little closer to 3 in that 3 number, especially in the second quarter.

[Dennis Shaffer:]

If the mail starts to go down, I think you'll have to be a little bit more competitive there. So, but pipelines are still full right now. So--

[Nick Cucharale:]

Make sense. Thanks for taking my questions.

[Dennis Shaffer:]

You bet.

[Operator:]

And our next question comes from Michael Perito from KBW. Please go ahead with your question.

[Michael Perito:]

Hey guys, good afternoon.

[Dennis Shaffer:]

Hey Mike.

[Michael Perito:]

Good. Thanks for taking my questions. I want to start on the technology investments. I was curious if maybe you guys could give us a little bit more insights into kind of some of the goals, whether it be financial or just conceptual that you're trying to achieve what these upgrades and how we should think about kind of what the platform will look like versus what it is today once the rollouts are completed?

[Dennis Shaffer:]

Yes, I think financially the big thing what will -- and all the benefits kind of is in the back end. So, you absorb most of the costs going in and then you hope to open more accounts, you hope to get a little bit more interchange fees, get your cards top of mind and the digital wallet and things like that. So, that's where we hope between service charges and interchange fees to recognize revenue there. The whole goal of this is really to just improve the overall customer experience. We feel that one -- the design and the platform is going to be as good as anything out there right now. I mean, we're going to be able to link other accounts -- currently, you can't -- you can only see Civista accounts, you'll be able to -- if you use a particular reward card, you'll be able to link that. You'll be able to link if you have a CD at another financial institution. So, you'll be able to get one financial snapshot. You'll be able to kind of do some budgeting things and stuff through the app. The big left -- I hope is that we'll be able to also do online account opening. I read something just the other day that 55% of the accounts that banks opened last year were opened online and we don't have that capability. So, eventually, we'll have that capability towards the latter half of this year 2021, the accounting is kind of in our second phase of this. We will also improve just the time we do it in the branch to open an account. They'll be able to do it much quicker, much easier. So, I think there's a ton of benefit benefits for our customers from the customer experience standpoint.

[Chuck Parcher:]

I want to add to what Dennis said, I think, once we're on the new platform, we're also expecting quite a big list in our treasury area. We're going to get a lot of improvement in the reporting side of that and feel like we got a lot of growth opportunities there.

[Michael Perito:]

That's really helpful and to make you feel a little better, Dennis, that number is jaded by the fact -- by the market share, right? So, 55% of like, the largest banks in the country, are opening their accounts online, but we estimate that numbers less than 5% or 6% for the community bank. So, -- but put certainly makes a lot of sense. And I think that that's a good direction for you guys to be moving. Maybe just to piggyback on that and a couple of the earlier questions. I just wanted to make sure Rich, I had the expense side, right. So, it sounds like there's probably $400,000 or $500,000 of elevated expense in the first quarter and that drops to like $18.9 million. And then from there there's probably just some normal growth, low single-digits on merit increases annually, stuff like that. But in third and fourth quarter, you expect on top of that to be another couple hundred thousand a quarter related to tech is that kind of capturing it holistically, fairly?

[Rich Dutton:]

Absolutely. And I think that's probably -- and that's our conservative best guess. I mean if we can get a little more aggressive with Jack Henry, that might be better than that. But if I was going to model it, I'd model it just the way you said.

[Dennis Shaffer:]

That’s pretty good. We just -- again, the revenue piece is from the tech piece, we won't start recognizing that till the latter half of the year and then really into 2022.

[Michael Perito:]

Got it. And then, lastly, just any thoughts, Dennis, on M&A in the Ohio marketplace? You've seen some other parts of the country really start to pick up here in northeast, southeast and just curious what you guys are hearing or if there's any insights on kind of case of conversations that you can share, maybe just remind us where your focus and appetites are?

[Dennis Shaffer:]

Yes. Sure, I think, our goal still remain independent bank, grow the organization. I think we've been proactive in some of our calling efforts and reaching out to organizations that we think would be a good fit or a good partner for our organization. We remain committed to kind of creating long term shareholder value. So, many of our discussions with other potential partners, really center around a lot of the social issues and really the culture of the bank, because we think we're going to be a little bit friendlier in our approach than some of our larger competitors if they would partner up with us. So, that's been really the focus. And I think people see that. So, we're hoping to gain some traction there. We again are focused on mostly Ohio, all but maybe Southeastern Ohio there. But mostly Ohio, Eastern Indiana from Indianapolis North and South, Northern Kentucky and Southern Michigan, and then I think Western Pennsylvania could be a possibility. There are some banks that may be good fits for us there. So, that’s fairly close to the Ohio border and that footprint and also may open up, so I think a couple of them -- the Pittsburgh market would be attractive to be in. So, I think those are really where we've been focusing a lot of our efforts. In Ohio, we haven't seen a lot of -- a ton of activity. I know people did their deal, but they've kind of stretched their footprint -- and expanded their footprint. So, -- but that was a deal that was just recently announced, but we haven't seen a ton within our footprint as of today anyways.

[Michael Perito:]

Great, yes. No, makes sense. Very helpful. Thank you guys for taking all my questions and providing the color. Appreciate it.

[Dennis Shaffer:]

Thanks Mike.

[Operator:]

Our next question comes from Russell Gunther from D.A. Davidson. Please go ahead with your question.

[Russell Gunther:]

Hey, good afternoon guys.

[Dennis Shaffer:]

Hey Russell.

[Rich Dutton:]

Hi Russell.

[Russell Gunther:]

I appreciate all the color on the puts and takes for the margin this quarter. Could you extend your thoughts to the upcoming couple of quarters if we assume some of those idiosyncratic events ease? And you mentioned some additional room on the funding side? How do you expect the margin to trend over the next remainder of the year legacy?

[Rich Dutton:]

Well, from where it's at right now, a little trimmed up, right 330. But I guess if you take kind of that noise out of that Russell, I mean I guess, add the 30 basis points that we have due to the stimulus kind of snafu. The tax money coming in. Again, over the last couple years hasn't had as much impact as maybe it did this year with a 14 basis point kind of compression that it caused. And that spins off as the year goes. So, that gets us back to kind of a 374 kind of margin and I suppose the $500,000 question is kind of how the PPP loans get refunded or forgiven, and how quick those fees roll through. And that's a hard one. So, ex that I kind of think that 370 is kind of a good number, and it drifts, maybe downward from there. But the PPP piece, I just -- it's hard to say how quick those get forgiven.

[Dennis Shaffer:]

And we're sitting on a -- there's a lot of liquidity that we're sitting on. And we're probably going to get more liquidity. Yesterday, I was on with a call with the Ohio Banker's League, and they were talking about more stimulus money. In the last stimulus bill, there's 11 -- over $11 billion that will be allocated to public entities in Ohio alone. And we've got hundred and some million dollars of so -- our villages and municipalities and cities, they're going to have more money. So, how fast are they -- how fast will that money flow out? Same thing with the schools, there's a billion and a half dollars, or something that the Ohio schools are getting and we've got a lot of those type accounts. So, that's one wildcard the -- and then, with then, I think, creates another wild card. And with the -- how aggressive our banks are going to be then lending money out, I think that forces people to get that money out quicker. So, you'll see some banks start getting very aggressive on loan rates. So, it's kind of a snowball effect, I think. But we're -- I think we're doing a pretty good job of trying to stay disciplined -- we'll -- where we can, we'll get right out of our customer and where some of those more competitive deals if we really want them, we're going to have to get a little thinner, maybe to get those.

[Russell Gunther:]

That's very helpful guy. Thank you. And then just my last question, switching gears. Appreciate your answers to my question on M&A. With the renewed buyback program out there, just your appetite to repurchase the stock at current levels?

[Dennis Shaffer:]

Yes, I think we still have appetite there. I mean if we read all of the analysts' reports from all the different companies that cover us, most of them will say that we're a buy or an outperform. And we still think we're undervalued. So, we still think it makes sense to repurchase at this current level.

[Russell Gunther:]

Very good. Thanks guys for taking my questions.

[Dennis Shaffer:]

Yes.

[Operator:]

Our next question comes from Bryce Rowe from Hovde. Please go ahead with your question.

[Bryce Rowe:]

Thanks. Happy Friday. Good afternoon.

[Dennis Shaffer:]

Hi Bryce.

[Bryce Rowe:]

I wanted to -- hey. I wanted to ask about the allowance and some of the commentary around improving kind of potential improving economic situation, as well as credit. So, I mean, we're seeing the allowance continue to build a bit here. At what point do you think that the allowance peaks? And do we run into a situation where maybe you have to release really some of the allowance if conditions, in fact, to do continue to improve?

[Paul Stark:]

This is Paul Stark. As we look at this, obviously, vaccinations and the whole COVID situation is such a big key. And while we're seeing some good vaccination pace, it's starting to slow down. If you look at the borrowers and we've had two quarters worth of stability in terms of criticized loans, the -- we've been able to improve our non-performing somewhat, and that hasn't really changed because the COVID. But I think as we look at this, we're waiting to see the revenue stream resumed at normal levels. And the fact that we -- a big chunk of our criticize our hotels, that’s going to take a little bit longer, if you believe what you read is -- from the analysts and the hotels, recovery is going to be towards the end of the year. So, again, I think we're just trying to be cautious. And as we look at that, that's one of the reasons we slow down the provision because we are seeing improved bookings. But until that we assess the damage on the balance sheet to some of these companies, and see the revenues resume, I think we're going to maintain that cautious posture.

[Dennis Shaffer:]

Yes, our -- we did slow down the provision from what we put in the previous quarter and stuff. And as we talked earlier, I think some of those -- we just want to see some performance there. I think it looks like the conditions are improving and stuff. But our deferral number didn't move a ton. And we hope that -- to see some movement in that maybe the end of second quarter and that may cause. But remember, we were a slow build, we didn't go -- many banks were somewhere in that 151, 160 range, when you excluded the PPP. If you exclude ours, even what we put in today, were at 144. And we said we would be a slow build throughout that process, because we were doing it quarter-by-quarter and really assessing the economic factors because we're not a CECL -- we're not CECL and it's those qualitative factors. So, we've made adjustments each quarter whether as the economies worsened or has improved.

[Bryce Rowe:]

Okay. That's good commentary. I wanted to shift gears here and talk a little bit more kind of about the margin. Obviously, there was a question about the margin here earlier, but wanted to look at the funding side of things and where funding costs are -- transaction accounts from a funding cost are respectively low and likely can't go much lower. But we continue to see that the average cost of CDs work lower. And so kind of curious how you're thinking about the CD levels -- retention of CDs, and kind of where CDs or re-pricing or coming into the bank today?

[Dennis Shaffer:]

The CDs, I think, we don't have a ton of CDs in our portfolio. I think about 13% of our book is in CDs. Some of those were on 18 month specials, that seems to be the big thing we ran a year or more ago. And many of those, as Rich said, I think that's where the opportunity is because they went on our books. And some of those were on our books at the 161, 170, 180 and we're paying on an interest rate and today we're at 30 to 35 basis points. So, we think we'll be able to bring those down from what we've seen as things have been re-pricing, we really haven't lost too many of those. I don't think there's going to be a lot of options for other banks. Someone may pay 45 basis -- but everybody sitting on this excess liquidity, so it's not enough. Rates are so low, I don't think it's incentivizes anybody to move those. So, I don't think you'll see a big shift of what we're doing there in our CD portfolio. I think it'll stay fairly consistent. But I do think we'll be able to bring down those costs because there's still a number of those that need to re-price.

[Bryce Rowe:]

Okay. That's good Dennis. I appreciate it. That's all for me. Again, have a good weekend and appreciate the time.

[Dennis Shaffer:]

Thanks Bryce.

[Rich Dutton:]

Thanks Bryce.

[Operator:]

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to the management team for any closing remarks.

[Dennis Shaffer:]

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

[Operator:]

Ladies and gentlemen, that will conclude today's conference call. We do thank you for attending. You may now disconnect your lines.