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Edited Transcript of CIVB earnings conference call or presentation 3-May-19 5:00pm GMT

Q1 2019 Civista Bancshares Inc Earnings Call

Sandusky May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Civista Bancshares Inc earnings conference call or presentation Friday, May 3, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles A. Parcher

Civista Bancshares, Inc. - SVP

* Dennis G. Shaffer

Civista Bancshares, Inc. - President, CEO & Director

* Richard J. Dutton

Civista Bancshares, Inc. - SVP

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Conference Call Participants

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* James Prescott Beury

Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts

* Kevin Kennedy Reevey

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Civista Bancshares Incorporated 2019 First Quarter Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [2]

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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 2019 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 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. A press release available on the website contains the financial and other quantitative information to be discussed today as well as a 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 First Quarter 2019 Earnings Call. I would like to begin by discussing our results, which were issued this morning. At the conclusion of my remarks, we will take any questions that you may have.

This morning, we reported another strong quarter of core earnings with net income of $9.5 million or $0.57 per diluted share. This is a direct result of our strong net interest margin, our continued focus on growing our noninterest income streams and our disciplined approach in managing the company. The integration of the customers and employees that came to us through our transaction with United Community Bancorp, or UCB, also continues to be a focus.

Our continued ability to generate strong core earnings allowed our Board of Directors to approve an increase of our quarterly dividend during the first quarter from $0.09 to $0.11 per share, which represents a dividend payout ratio of nearly 20%. Our return on average assets was 1.72% for the quarter compared to 1.70% for the previous year quarter, and our return on average equity was 13% for the quarter compared to 15.37% for the previous year quarter. Return on average tangible common equity was 17.65% from the quarter compared to 18.91% for the prior year quarter. This represents a 6.75% decline, which is comparable to our estimates for the UCB acquisition.

The increase in our core earnings continues to be driven by increases in net interest income. Net interest income grew by 4.7% over the linked quarter and 47% year-over-year. Our net interest margin remains strong at 4.45% compared to 4.38% for the linked quarter and 4.05% year-over-year. We've had significant improvements to interest income compared to both the first quarter of 2018 as well as the linked quarter. We are seeing increases due to both volume and rate compared to both period. The increase in average earning assets is due to both the UCB transaction as well as the strong loan growth we experienced in 2018 and early 2019. The increase in yields is due to both our positioning over the past few years to be asset sensitive as well as accretion income. Accretion income accounted for approximately $992,000 or 22 basis points in the first quarter of 2019.

Likewise, changes in our interest expense were attributable to increases and average interest-bearing liabilities and the average rate paid on those liabilities. In past years, we experienced a decrease to our net interest margin in the first quarter due to the impact of excess cash from our tax refund processing program. In recent years, we have been successful in positioning our short-term borrowing need to take advantage of the influx of cash from our tax program. During the first quarter of 2019, the average noninterest-bearing deposits related to the tax refund processing program were $240.1 million. This allowed us to pay down $66.5 million of Federal Home Loan Bank borrowing. Identifying growing sources of noninterest income also continues to be a focus. During the quarter, noninterest income increased $1.4 million or 30% in comparison to the fourth quarter of 2018 and increased $668,000 or 12% year-over-year.

Service charge revenue was in line with our linked quarter at $1.5 million and up $322,000 or 28.4% over our first quarter of last year, which is consistent with the new retail and business customers that came to us through the UCB transaction. As expected, interchange revenue declined $124,000 or 12% compared to the linked quarter with the postholiday season decline in debit card activity. When compared to our first quarter of last year, interchange revenue increased $352,000 or 63.5%. These fluctuations were largely the result of our nearly 15,000 new debit card customers gained at the UCB transaction that increased our outstanding debit cards by 70%.

Wealth management revenue declined $261,000 or 23.6% compared to the linked quarter. This was the result of a change in the way we recognize revenue related to our wealth management services from 1 month in arrear to current, which resulted in recognizing an extra month of revenue during the fourth quarter of 2018. Wealth management revenue of $847,000 was in line when compared to our first quarter of last year. We continue to view the introduction of wealth management services in the Southeastern Indiana and the expansion of those services across our entire footprint as an opportunity to grow noninterest income.

Our mortgage business continues to provide consistent results even in what has been an uncertain rate environment. Our income tax refund processing program continues to be an important contributor to our noninterest income and is concentrated in the first and second quarter of each year. Income from that program was $2.2 million, which was consistent with the prior year.

Noninterest expenses are up compared to the first quarter of last year as well as the linked quarter. The acquisition of UCB accounted for the increase in noninterest expense compared to the first quarter of 2018. Comparing to the fourth quarter of 2018 is difficult due to the noise that was included both from an acquisition standpoint as well as normal approval true-ups that typically happen during the fourth quarter of the year. The acquisition of UCB increased our size by approximately 38%.

Compensation expense and occupancy expense both increased in line with the increase in asset. Compensation expense was affected by 3 factors: the addition of the retained employees of UCB, 2018 merit increases and an increase in our health insurance cost. The 2018 merit increases, which took effect on April 1 of last year accounted for about $115,000 of the increase. Health insurance costs accounted for about $513,000 of the increase. Amortization of intangibles increased $207,000 due to the intangibles created from the acquisition of UCB. All other categories of noninterest expense increased between 20% and 25% and were in line with expectations.

We continue to be pleased with loan production across our footprint. Our loan portfolio grew by $11.3 million or at a rate of 2.9% on an annualized basis. While this growth is not in line with what we expect for the year, our first quarter is typically slower than what we expect the balance of the year. The majority of the growth came in both owner and nonowner occupied commercial real estate and in residential real estate loans. In addition to undrawn construction loans, our pipelines remain strong, and we continue to anticipate upper single-digit loan growth over the course of the year.

On the funding side, our deposits increased to $185.9 million or 11.8% since the beginning of the year. The primary driver for the increase was deposits related to our tax refund program, which increased $187 million during the quarter. As I mentioned, when we talk about our margin, we manage our wholesale funding in anticipation of the free funding we take in during the tax refund processing season. We use the tax funds to pay down broker deposits and other short-term borrowings.

Our asset quality remains very strong. As a result, we did not provide a provision expense for the quarter. Our nonperforming loans were $9.2 million at the end of the first quarter compared to $9.9 million at the end of 2018, which represented 0.40% of total assets. The ratio of our allowance for loan losses to loans was unchanged from year-end at 0.88%, and our allowance for loan losses to nonperforming loans also increased to 150.6% at the end of the first quarter from 137.8% (sic) [137.9%] at the end of 2018.

We are pleased with the benefits that the shareholders are already realizing as a result of our UCB transaction from the efficiencies that come with greater scale and the low-cost core deposit funding that we are using for commercial lending across our entire footprint. While we remain focused on integrating our new customers and employees, our team continues to service customers throughout our footprint, and I believe our results are reflective of those efforts. We are pleased with another strong quarter fueled by solid core earnings. We are confident our disciplined approach to managing Civista and our long-term focus on driving shareholder value will continue yielding positive result, so much so that our Board approved an increase in the quarterly dividend by 22.2% during the quarter.

In closing, while the deposit and lending environments remain competitive, we are confident that our continued focus on relationships will allow Civista to grow both loans and deposits without relaxing our standards.

Thank you for your attention this afternoon. And now we'll be happy to address any questions that you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Kevin Reevey with D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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So first question is related to the NIM, the NIM came in a lot better than what we were expecting, but given where the yield curve is and the Fed's comments on rates, how should we think about your NIM going forward both on a GAAP basis and on a core basis?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [3]

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Well, one, I think the NIM, we saw some expansion there and I think how we managed our -- how we got the tax money and we were able to pay off some of those broker deposits, so that obviously benefits us a little bit in the first quarter. I think going forward, I think if rates stay flat, we're going to see our NIM be flat or slightly compressed, maybe a little bit. There is some pressure on the loan side. It's very competitive out there. So deposits pressure is out there, but I don't think -- I think it'll be pretty consistent if rates stay flat to where we were in the first quarter.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [4]

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And Kevin, this is Chuck. We did get a nice balance on some of the stuff we approved in the fourth quarter of last year when the 5-year treasury got up to around 3%. Obviously, that's fallen 60, 70 basis points since that time period, but some of the stuff we closed in the first quarter, I will tell you, we got some exceptional margins on.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [5]

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Kevin, this is Rich. The only thing I'd add to that, again, Dennis indicated we had about 22 basis points related to the accretion on the purchase accounting adjustments. There were 9 basis points in there related to repayments or pay-down of loans. So probably instead of the 4.45% as the loan rate, maybe 4.36% would have been a more normalized rate for the year or for the quarter, just to kind of put that in perspective.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Great. And then, earlier you said that your pipelines were pretty strong. Where are you seeing a lot of the loan demand coming from? Is that more from your Cincinnati market? Or is it from other markets? And can you talk about the types of loans that you're seeing build up in your pipeline?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [7]

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Yes. It's really been pretty good cross-sectional across our entire footprint, Kevin. It's -- just look at some of the numbers, what we closed in the first quarter, I think we had about $35 million closed in Cleveland, we had about $30 million closed in Columbus. The nice part was we had about $15 million to $16 million closed in our new market there in Southeast Indiana/Cincinnati, so we're already getting some traction there. So really, as I look across that we've got -- we've had nice demand across all of our footprint even in a lot of our rural markets. Our pipeline has been -- it's been good. I would tell you it's still a little more leaning towards commercial real estate than it is C&I. And we're feeling a little bit of pressure from competition, but all in all, our margins are holding pretty good. The biggest pressure we've got is really the -- where the treasuries are gone when we set those margins as an initial rate. So now we feel good about where we're at. I would tell you the pipelines are as good as they've ever been right now.

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Operator [8]

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Our next question comes from Michael Perito with KBW.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9]

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I just want to start on the expenses, you had a couple of comments in the prepared remarks, but as we think about the run rate moving forward, it seemed like that the health care benefits were maybe a little elevated. Can you give us a little bit more color about where you expect that to settle out as we move through the year now with the merit increases or in the run rate?

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [10]

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Yes. Mike, this is Rich. And again, we give merit raises in April. So we still got 1 more month coming up. And I think other than that, that's probably all the noise that you'll see out of the big change from first quarter to the second quarter and the balance of the year. I think if you looked at our noninterest expense run rate, it's somewhere around [16 -- 6.50%], that would be a good rate for the next quarter.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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Helpful Rich. And then, just on capital, the TCE is sitting here at 10%. You got the buyback out there. How are you guys thinking about that? I mean obviously, the returns in the quarter were really strong. I understand there were a couple of items like the tax revenue seasonality and then also the higher purchase accounting, which probably boosted that a little bit more than the normalized rate, but obviously, your ROE profile had really improved and the capital levels are already strong. So how are you guys thinking about deploying capital moving forward at this point?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [12]

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Well, I think we look at really 3 things. I mean we have 3 ways to deploy it and that's -- and number one for us is still going to be acquisition and growth. We would like to do a deal, and it's fairly quiet out there now, but I think we like what the last deal has done for us. We think there's a lot of positives by maybe possibly doing another deal. It's got to be the right deal other than -- and if it's not, we will continue to try to grow internally, build out some of our business units and maybe increase our presence in some of the markets that we're in. Obviously, we paid -- increased the dividend as well and then, as Rich mentioned, we have that stock repurchase program back out there. So those are really the 3 avenues, but first and foremost, I think we still view ourselves as an acquisitive franchise and would like to continue to grow through acquisitions and organically.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [13]

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Helpful. Then just lastly, can you just remind us on the capital side like in a perfect world where are those ratios would be ideally if we try to kind of isolate how much excess you're operating with to date?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [14]

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Yes, 9%-or-so -- we got 9% range. I think our TCE is around 10% today. So we think that optimal level is probably somewhere around 9%.

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Operator [15]

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(Operator Instructions) Our next question comes from Scott Beury with Boenning and Scattergood.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [16]

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Most of my questions have been answered actually. But on the deposit side, obviously you had the big inflows from the seasonality in the tax business. Excluding that, was there any really base like customer deposit growth during the quarter?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [17]

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No. We see some fluctuation in our deposits. In fact, our business deposits were down about $26 million, if you look at our -- between our checking and our savings deposits. So we went back to look to see what happened first quarter of last year, and it was like down the identical amount. So we continue to add business accounts, our commercial guys and the retail folks are doing a very good job of adding deposits. So -- but there was no real one big account that we added, but we have added a number of nice sized deposit accounts, with really no closing, and we lost no public -- we've had no -- the public funds that we bought from -- that we acquired in the UCB transaction and the public funds that we had, we've had nobody close any accounts. So that was a positive.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [18]

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And Scott, we have hired 2 new treasury people. One of them started here a couple of weeks ago in the Columbus market, and our other person starting in the Cleveland market in 2 weeks. So we're hoping to get a lift on the treasury/business deposit side with the add of those employees probably looking out into the second and third quarter.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [19]

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Yes, and then on lending side, I think the loan growth that we put on in the fourth quarter and the first quarter, that amounted to about $57 million of organic loan growth. Fourth quarter last year, we grew about $46 million, another $11 million, so that gave us a nice lift in net interest income.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [20]

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Scott, this is Rich. One more thing to just hack on to Dennis' comment, so the decrease that we saw in the business accounts, we saw the identical increase in our municipal accounts, [so that was a business improvement]. We're paying taxes to our municipal customers, and the dollars just went from one account to the other. So that was kind of a nice byproduct again from having a pretty decent sized municipal deposit portfolio, if you will.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [21]

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No, excellent. I appreciate that. So it sounds like just some ebbing and flowing between different accounts there, some seasonal trend. If you look out through the rest of the year, I guess adjusting out for the tax inflows, do you have any sense of where you see deposit growth? What's a reasonable target? I mean I think that you can still be a little bit tactical on the pricing side to kind of maintain the margin rather than a need to go chase out new money to support growth.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [22]

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Right, right, right. We think that's going to be mid to low single-digit growth on the deposit side. We do have a number of deposit initiatives, as Chuck was alluding on the treasury side. There are some checking promotions that will go on. There's a Bank-at-Work program that we're rolling out. So a number of initiatives that we're working on and rolling out to grow deposits because they're very valuable to us. But I would say that from a kind of projecting out, we're going to be at that mid- to low single-digit range.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [23]

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Excellent. No, that's helpful. And then on the fee income side, I think you might have addressed this already. But on the -- the wealth management line was a little bit -- it was down. I think you had some kind of specific items in the fourth quarter, if my notes are correct. But it's been kind of flat around that between $800,000, $900,000 a quarter. Do you see with an expanded customer base any really upside to that line item as we go through the year because I'm kind of looking at it and thinking that there was a market impact this quarter?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [24]

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Yes. There was an adjustment that we made from the fourth quarter, it was really why that revenue was down. But it's been very consistent if you looked at it. From first quarter year-over-year, it's been pretty consistent. We still think there is upside. We're just now introducing new services down in the Lawrenceburg. We've hired a pretty seasoned guy down there. He started to move over our book of business. So we see upside there just as we -- Chuck mentioned from the treasury side, we still need to build out our wealth platform throughout. So I think that's an opportunity for us, plus there's opportunity through our retail ranges. We historically have not done a good job selling the brokerage side through the retail branches. We've kind of more focused on a kind of higher net worth client, which is still going to be our focus, but I think there's opportunity on that brokerage side to deliver services through our retail branches.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - Analyst of Banks and Thrifts [25]

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Got it. Excellent. That's very helpful. And then just one last one from me. Credit is excellent, obviously, with the net recoveries during the quarter and your nonaccruals are down significantly. Just with no provision again this quarter, just kind of getting a sense of what the rest of the year is going to look like on the provision side. Do you have the period-end fair value mark that's remaining on the UCB loans?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [26]

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I think that the number was about between $3 million and $4 million on the credit market.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [27]

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It was about $4.2 million at year-end.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [28]

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Right, yes.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [29]

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So it's probably down slightly from there.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [30]

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But that portfolio has been performing pretty well. We felt it was in pretty good shape when we got it and don't really expect any clouds on the horizon.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [31]

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We'll continue probably to provide for any growth that we have, it's just we follow the model, and it hasn't allowed us to provide really too much, so -- but we will provide for growth going forward.

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Operator [32]

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Our next question comes from Kevin Reevey with D.A. Davidson.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [33]

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Just a housekeeping question. I noticed your tax rate was higher than normal. How should we think about the tax rate for the remainder of the year?

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [34]

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Yes, Kevin, this is Rich. That came in at an effective rate of about 16%, and that's probably a good rate. One of the byproducts of UCB acquisition was that the revenue that we earn in Indiana is subject to Indiana income tax. And that accounted for that kind of 1%, if you will, increase in our effective rate.

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Operator [35]

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(Operator Instructions) At this time, there are no further questions in the question queue, and this will conclude our question-and-answer session.

I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [36]

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Well, in closing, I just want to thank everyone for listening in today and thank those who have participated in the call. Again, I'm extremely pleased with our first quarter results and how we are integrating the UCB acquisition. I'm also very proud of the strong low-cost core deposit franchise that we've created through our disciplined relationship pricing approach. We look forward to continued success for the balance of 2019 and to talking to you again -- to you all again in the few months to share our second quarter results. Thank you for your time today.

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Operator [37]

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The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.