Good afternoon and welcome to Civista Bancshares Second Quarter Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] 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..

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.

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 of Civista Bancshares, Inc. that involves 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 available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. We will record this call and make it available on Civista Bancshares’ website at www.civb.com.

Again, welcome to Civista Bancshares second quarter 2021 earnings call. At the conclusion of my remarks, we will take any questions you may have. Let me start off my remarks by noting several significant accomplishments or transactions that occurred during the second quarter.

This morning, we reported net income of $9.2 million or $0.59 per diluted share for the second quarter of 2021 and net income of $19.9 million or $1.27 per diluted share for the six months ended June 30, 2021.

Our earnings per share for the quarter increased 45.1% compared to the second quarter of 2020, as well as 43.9% compared to the first six months of 2020. This is a direct result of our continued focus on growing and diversifying our revenue stream and the disciplined approach that we take in managing the company.

On June 9, we successfully launched the new Civista Digital Banking, which provides a better customer experience in both the mobile and online platforms. We will also be rolling out online account opening and improving our in branch account opening process later this year.

We also took steps to restructure our balance sheet and improve our margin as we seem to be in another lower for longer interest rate environment. During the quarter, we paid off some long-term FHLB advances, which will reduce our interest expense by $1 million on an annual basis.

We paid a penalty of $3.7 million to do that, but we were able to offset that penalty with gains on the sale of our VISA B shares of $1.8 million. We also put some additional cash to work and investments. The whole effect of these transactions will be seen more in our third quarter margin.

However, we did see nice uptick of 23 basis points in our margin this quarter compared to the linked quarter. Finally, our Board of Directors approved a 17% increase in our quarterly dividend on July 9 to $0.14 per share, which represents a dividend payout ratio of 23.7%.

We continue to be opportunistic in the execution of our stock repurchase program. Now let’s talk a little bit about our quarterly numbers. Our loan growth for the quarter excluding PPP loans was 2.9% or 11.6% annualized. The two categories that we saw the largest increases in real estate construction and Non-owner Occupied commercial real estate.

Our loan pipelines continue to be strong. Our mortgage banking business continues to drive non-interest income generating gains of $2.2 million this quarter, nearly keeping pace with the $2.7 million gain that we recorded in the linked quarter. 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 3.6% of total loans at December 31, 2020 to 2.5% at June 30. Many of these borrowers have seasonal businesses, which did not resume operations until late in the spring and continue to deal with the shortage of people returning to work.

We anticipate more of our seasonal borrowers exiting their deferrals in the third and fourth quarters of 2021. 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 as historically low levels.

Net interest income for the quarter was consistent with our first quarter and increased $1.8 million or 8% year-over-year. Net interest income for the first six months of 2021 increased $3.5 million or 7.9% compared to 2020. Our net interest margin was 3.53% and 3.41% for the quarter and for the first six months of 2021 respectively.

Both measures are lower than the comparable 2020 period, but higher than the first quarter of 2021.

As we shared in our first quarter earnings release, the increase liquidity we experienced as a result of the federal government stimulus program and the excess cash created by our tax processing program, both had a significantly negative impact on our margin.

Our second quarter margin has rebounded and we expect that it will continue to improve further due to the balance sheet restructuring, I previously mentioned. We continue to see decreases in our funding costs due to the lower interest rate environment.

Funding costs went down by $240,000 compared to the linked quarter at $852,000 when comparing the second quarter of 2021 to the second quarter of 2020, and $1.8 million when comparing the first six months of 2021 to the same period of 2020. We expect to see more decreases as a result of the balance sheet restructuring.

Our yield on earning assets is down for the quarter and for the first six months of 2021 compared to the same periods in 2020. The largest reason for the decrease in the comparable quarters is the increase in interest bearing cash. The average balance of interest bearing cash increased, which reduces the overall yield due to the low rate that we earn.

As part of the balance sheet restructuring, we put some cash to work during the second quarter. The yield is also down for the six month comparable period as interest rates began to tumble late in the first quarter of 2020.

During the quarter non-interest income declined $165,000 or 1.8% in comparison to the linked quarter and increased $2.2 million or 31.7% year-over-year.

However, if we back out the effect of the $1.8 million gain on the sale of our VISA B stock, non-interest income would have declined $2 million or 21.2% in comparison to the linked quarter and increased $386,000 or 5.6% year-over-year.

The first quarter of the year includes a larger portion of the tax processing fees that we earn, which was the primary reason for the decline in fees from the first quarter to the second quarter.

For the first six months of 2021 non-interest income increased $4.5 million compared to 2020, we’re moving the gain on VISA B shares, the increase is $2.7 million, most of this increase is due to the gain on sale of residential mortgage loans. Mortgage banking continues to be the largest driver of our non-interest income.

Second quarter gains on the sale of mortgage loans were $2.2 million, down slightly from our linked quarter of $2.7 million and consistent with the gains we recorded in the prior year for the quarter. For the first six months of 2021, we recorded gains of $5 million compared to $3.1 million in 2020.

We sold $69.2 million of mortgage loans during the second quarter of 2021 and $147.8 million during the first six months of 2021, while both measures our increases compared to 2020, second quarter volume is down $9.4 million from the linked quarter.

We reduced our pricing in the second quarter as demand softened resulting in a decline in the average premium recognized on the sale of loans by 35 basis points from 3.55% to 3.20% over the linked quarter. Service charge revenue increased $387,000 for the quarter and $175,000 for the first six months of 2021 compared to 2020.

You may recall Civista suspended many of our service charges during the second quarter of 2020, as our customers dealt with the onset of the pandemic. Interchange revenue increased $233,000 for the quarter and $513,000 for the first six months of 2021, as consumers continued their shift to online and cashless retail buying options.

Wealth management revenue increased $284,000 for the quarter and $424,000 for the first six months of 2021. Our fees, our asset base and the pandemic negative impact on the markets adversely affected last year’s wealth management revenue.

Our income tax refund processing program continues to be an important contributor to our non-interest income during our first and second quarters each year. Income from that program during the second quarter was consistent with the prior year at $475,000.

We also had a decrease in swap fees as we reduced the loans, we entered into swaps as part of our asset liability management program. Non-interest expense for both the quarter and the first six months of 2021 included a $3.7 million prepayment penalty on long-term FHLB borrowing.

Our reported numbers show a 24% increase for the quarter and a 16.4% increase for the first six months. We’re moving the effect of the prepayment penalty the increase is 3.5% for the quarter and 6% for the first six months. Additionally adjusted non-interest expenses would have decreased 3.3% compared to the linked quarter.

While our efficiency ratio for the quarter was 67.5%, our adjusted efficiency ratio would have been 59.5% compared to 58% for the linked quarter and 61.7% year-over-year. Turning our focus to the balance sheet. Year-to-date our total loans declined $38.3 million. We had a net reduction of $64.3 million of PPP loans in the first six months of 2021.

Excluding PPP loans, our loan portfolio would have grown $26 million or 2.8%. Second quarter growth was $52.6 million or 11.6% annualized. Demand for Non-owner Occupied commercial real estate loans across our footprint continued. Real estate construction loan demand increased as the construction season fully opened up.

We are encouraged by the loans booked during the quarter, as well as the strong demand across our footprint and undrawn construction lines totaling $124 million, which are near in all time high. We expect that we will grow our loan portfolio at a mid-single-digit rate for 2021.

On the funding side, we experienced growth in every category except time deposits with total deposits increasing $213.6 million or 9.8% since the beginning of the year. Non-interest demand bearing demand accounts, which made up 35.5% of our total deposits at June 30, grew by $132.9 million compared to December 31, 2020.

While balances related to our income tax processing program made up $50.8 million of the increase, $73.2 million of the growth came from non-interest bearing business accounts, as our business customers deposited PPP loan proceeds.

We also experienced a $70.1 million increase in our interest bearing demand accounts driven by a $47.6 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 31, 2020 to a $118.1 million at June 30, 2021. The largest segment of criticized loans continues to be hotels totaling $65.8 million. Many of these borrowers are experienced increase occupancy in the second quarter of 2021.

And we anticipate further reduction in our criticized portfolio as hotel revenues stabilize. Year-to-date, we have realized $339,000 in net recoveries, while there are still uncertainties associated with the economy. We continue to see improvement in both the economy and our customers’ financial positions.

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 1.22% at year end 2020 to 1.30%, exclusive of the PPP loans, this ratio would have been 1.40%.

Our allowance for loan losses to non-performing loans also increased to 443.5% at the end of the quarter from 343.05% at the end of 2020.

We ended the quarter with a tangible common equity ratio of 9.51% compared to 9.98% at December 31, 2020, the extra $86.8 million of liquidity related to our income tax refund processing business at quarter end combined with $153 million in PPP loans had the effect of reducing our TCE ratio by approximately 60 basis points.

We continue to create capital through earnings. Our overall goal is to have adequate capital for growth, both organic and for acquisitions. Two important parts of our capital management strategy are dividends and share repurchases. As previously stated, we recently announced the increase of our third quarter dividend to $0.14 per share.

Additionally, during the quarter we repurchased 323,612 shares of common stock for $7.4 million for an average price of $22.80 per share. Year-to-date, we have repurchased 505,239,000 shares or 3.2% of our shares that were outstanding at December 31, 2020. We have approximately $7.4 million remaining of the current repurchase program.

In summary, we are very pleased with another quarter fueled by solid earnings, increased low growth, net interest margin expansion, and improved credit quality. During the first half of 2021, we have seen the economy open up and life returning to normal. We remain optimistic as the year progresses. Our loan pipelines are solid.

We expect that nearly all of the remaining PPP Phase 1 loans in many of the Phase 2 loans will be forgiven during the balance of 2021. We are continuing to rollout our new digital banking tools, which will allow us to provide a better customer experience. Thank you for your attention this afternoon.

And now I'll be happy to address any questions that you may have..

[Operator Instructions] First question comes from Terry McEvoy of Stephens. Please go ahead..

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?.

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?.

Yes, I got your answers..

Okay. Yes.

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

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?.

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..

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..

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?.

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..

Great. Thanks for that and enjoy weekend..

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

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?.

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..

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..

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

Yes..

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?.

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..

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?.

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..

But an effect on a gap effective tax rate basis..

Yes..

Thank you. Thanks for taking my questions..

You bet..

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

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..

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..

Okay. And any plans at all the whole..

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..

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..

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?.

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..

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..

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?.

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..

Okay, great. Thank you..

[Operator Instructions] Next question comes from Russell Gunther, D.A. Davidson. Please go ahead..

Hey, good afternoon guys..

Hey, Russell..

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?.

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..

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?.

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..

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

Thanks, Russell..

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..

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..

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