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Edited Transcript of CIVB earnings conference call or presentation 26-Jul-19 5:00pm GMT

Q2 2019 Civista Bancshares Inc Earnings Call

Sandusky Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Civista Bancshares Inc earnings conference call or presentation Friday, July 26, 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

* Paul J. Stark

Civista Bancshares, Inc. - SVP

* 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 - VP & 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

* Nicholas Anthony Cucharale

Sandler O'Neill + Partners, L.P., Research Division - Director

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Civista Bancshares, Inc. 2019 Second Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to President and CEO, Dennis Shaffer. 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 second quarter 2019 earnings call. I am 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 during today's call, including the question-and-answer period, you may hear forward-looking statements related to the future financial results and business operations for Civista Bancshares, Inc. Our actual results may differ materially from current management forecast and projections as a result of factors over which the company has no control. Information on these risks and additional information on forward-looking statements are included in our news release and in the company's reports on file with the Securities and Exchange Commission. We will record this call and make it available on Civista Bancshares website at civb.com.

Again, welcome to Civista Bancshares Second 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 questions -- any questions that you may have.

This morning, I am very pleased to announce that we reported another quarter of strong core earnings, with net income for the second quarter 2019 of $8.5 million or $0.51 per diluted share and $18 million or $1.08 per diluted share for the 6 months ended June 30, 2019. If we add back the $3.2 million in pretax nonrecurring expenses related to our acquisition of United Community Bancorp that were included in the comparable periods for 2018, our diluted earnings per share would have been $0.44 for the quarter and $0.99 for the 6 months ended June 30, 2018, which means our 2019 diluted earnings per share would have increased by 15.9% for the quarter and 9.1% for the year-to-date.

Our return on average assets was 1.58% for the quarter and 1.65% year-to-date, while our return on average equity was 11.01% for the quarter and 11.98% year-to-date. Our core earnings continue to be driven by our strong net interest income. Net interest income for the quarter was consistent with the linked quarter and increased 47.2% over the prior year. Our net interest margin remains very strong at 4.49% compared to 4.45% for the linked quarter and 4.47% year-to-date. If we were to eliminate the impact of accretion from purchase accounting adjustments, which accounted for 25 basis points of margin in the second quarter and 23 basis points year-to-date, our margins still would have been very respectable 4.24% for both the quarter and year-to-date compared to 4.21% and 4.13% a year ago.

There has been a lot of discussion about the Federal Reserve possibly cutting rates. If the Fed does reduce rates, we do anticipate a slight decline in our margin, but we believe it will be minimal.

We increased noninterest income $714,000 for the quarter and $1.4 million for the first 6 months of 2019 compared to the same periods last year. These increases are primarily due to increases in service charges and interchange fees as a result of the UCB merger. Comparing to the linked quarter is a bit more challenging due to the seasonality of our tax refund processing business. Removing the impact of the tax business, we increased noninterest income $470,000, with the largest increase being from gain on sale of loans.

We continue to be disciplined in controlling noninterest expense, which increased only 1.2% for the linked quarter and $8.1 million or 32.4% year-over-year, which we are pleased with given that the acquisition of UCB increased our size by approximately 36%.

Our loan portfolio increased $25.6 million during the second quarter and $36.8 million year-to-date. That equates to an annualized growth rate of 6.5% for the quarter and 4.8% year-to-date. Our growth came in virtually every category except Farm Real Estate and Consumer loans. Like most of the Midwest, we experienced a very wet spring that delayed construction projects, and we had $65.1 million in loan payoffs during the first 6 months of 2019, both of which had a negative impact on our loan growth. That said, we have a very strong loan pipeline of $126.6 million in approved, undrawn construction loans. We anticipate growing our portfolio at slightly above a mid-single digit annually for 2019.

On the funding side, our deposits increased $52.8 million since the beginning of the year. This increase was primarily the result of a $28.5 million increase in noninterest-bearing demand and an increase of $43 million in interest-bearing demand accounts. These increases were partially offset by a $19.3 million decline in brokered deposits. We also reduced our wholesale funding by paying off $17.3 million of short-term FHLB advances.

Our asset quality remains strong, which translated into another quarter without the need to make a provision. Our nonperforming loans declined to $8.4 million from $9.9 million at the end of 2018, which represented 0.38% of total assets. The ratio of allowance for loan losses to loans was 0.86% at June 30, 2019, compared to 0.88% at December 31, 2018. The allowance for loan losses to nonperforming loans increased to 164.69% at June 30, 2019, from 137.87% at the end of 2018.

We continue to be disciplined in how we originate loans and believe this is reflected in our continued strong credit metrics. We have been working diligently to implement the new CECL standard. With the recent FASB proposal to delay CECL, we believe we will qualify for the delay until 2023.

Again, we are pleased with another strong quarter fueled by solid core earnings and are confident our disciplined approach to managing Civista and our long-term focus on driving shareholder value will continue to yield positive results.

In closing, while the lending and deposit 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 will 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 Nick Cucharale with Sandler O'Neill and Partners.

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Nicholas Anthony Cucharale, Sandler O'Neill + Partners, L.P., Research Division - Director [2]

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So first, Dennis, I appreciate your commentary on the margin. Can you give us a -- some color on deposit pricing in your markets? Have you seen some easing? Or is it still as competitive as ever?

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

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There has been some easing, I would say. I mean you still see some outliers. I mean you can pick up the Cleveland Plain Dealer or The Columbus Dispatch, and you will still see somebody advertising a 3% CD rate or a 2.75% money market rate. So you still see some outliers. We tend to kind of ignore the outliers, really focus in on deepening relationships and we've stayed pretty disciplined on our pricing. We handle most pricing -- a lot of the public funds things were handling -- handled on a one-off basis. So -- but there is still a little bit – it is amazing to me to still see, given the factors, all this talk about a rate reduction, you're picking up the paper -- the Sunday paper and you're seeing rates like that.

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Nicholas Anthony Cucharale, Sandler O'Neill + Partners, L.P., Research Division - Director [4]

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Okay. Great. And then on expenses, just a modest rise this quarter. Do you expect the $16.6 million to be a good run rate going forward?

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

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Yes. We do. And there are still maybe a couple of open positions. We have always got open positions, but I think, $16.6 million, $16.9 million is kind of what we're modeling for the balance of the year, Nick.

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Nicholas Anthony Cucharale, Sandler O'Neill + Partners, L.P., Research Division - Director [6]

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Okay. That's helpful. And then lastly, guys, with your capital levels very strong, could you share with us how you are thinking about your priorities for capital deployment?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [7]

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Sure. While we continue to position ourselves, we want to be a consolidator of choice. We feel leveraging our capital and acquisitions similar to our most recent UCB transaction provides us the best return to our shareholders at this point. That said, we do have the stock repurchase plan in place, and while we currently view that sort of as a defensive tool, should we continue to create capital at the rate we're creating with our earnings, we might see a scenario where we get a little bit more aggressive in our efforts to repurchase shares. But predominantly right now, we still would like to be in the M&A game and be a consolidator of choice.

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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 wanted to spend a little bit more time on the margin. As I think about your NIM on the way up, it's not like you guys were super tied to LIBOR or anything, it was more, at least, as I recall, more to favorable positioning of the balance sheet, the short-duration asset book, long-duration liability book. So I mean is it -- when I think about your comments that the NIM should be modestly compressed, I mean that's up front, right? But as we move into what is potentially a more down rate environment longer term, how do you expect your margin to perform?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [10]

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Well I think -- I guess short term -- I don't know what you're looking at long term, but short term, I'm looking at the next quarter or maybe the -- potentially the next 2 quarters with a 25 to 50 basis point decrease, I think it's going to contract -- it's going to minimally contract less than 5 basis points. I think there are things that we can do. You have to -- we don't have a lot of CDs. So anything that we do, if we get a 0.25% reduction in our rates, we can reduce particularly some of the public fund stuff, some of the private banking stuff that we have out there. We can make reductions to that pretty quickly. We've already lowered kind of our CD forecast going out, but that doesn't -- that's what's new we were putting on the books. But I think it puts 0.25% to 0.5%. There are certain things that we can do. We've run some models, and it shows less than 5% -- I mean it's 5 basis point change in the margin.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [11]

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Mike, kind of where we look at it and I think it makes sense, I mean if you kind of look at the way our margin behaved going up over the last 18 months or 2 years, I mean I don't see those kind of cuts near term. But I think if we get a 25 basis point cut here next week and maybe one more before the end of the year, I would think that our margin going back down would behave kind of like it did going up. I mean really, we don't see huge movements. There will be compression. But again, like Dennis said, we don't see anything -- I don't know if significant is the right word, but there are not going to be big movements in our margin.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [12]

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Yes. That's kind of what I was going after -- consistent with what I was thinking as well.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [13]

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The new loans -- Mike, the new loans that we were putting on for April, May and June, our core portfolio on the lending side is 5.05%. We've been putting consistently new loans on -- above that rate, slightly above that rate, 5.0%. I think June was 5.08%, May was 5.06% and April was 5.20%.

So they've been above what the portfolio -- the loan portfolio is. So...

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [14]

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Well, the other piece of that too is, Mike, when you look back -- well, this is Chuck. The nice part is a lot of the stuff that's roll on as we put on the books at 3 and 5 years, they were done at rates similar to what they are today. So we're not seeing a decrease in the roll, and some of those things roll from -- on a 5.5% or whatever, they were rolling relatively consistent with where they were when they were originally onset.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [15]

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Helpful. And then on the M&A front, I mean, it seems like -- I cover a few of your competitors in the area, and there's a lot of acquirers. The sellers, unfortunately, seems to be a much shorter list. And obviously, with UCB, you've kind of moved over a little bit into the next door. And I'm just curious as you see your M&A pipeline, where are the majority of the opportunities? More specifically, do you see yourself maybe broadening the footprint, maybe not jumping to new markets here and there, but just looking maybe less so in the core Ohio footprint, where it seems like some of the sellers have been a bit stubborn to move and maybe looking at other areas where there are other opportunities?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [16]

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Yes. I would say, we've been pretty consistent with finding that market and it's not only Ohio, but Southern Michigan, south of Detroit, maybe we have to expand that slightly, Indiana, all up and down that border. They may -- there may be more opportunity in those markets. So we continue to have dialogue. We have seen a couple of opportunities. But there've been smaller deals that really didn't meet any of our metrics. So yes, we've just passed on those deals.

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Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [17]

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Okay. And then just lastly, in the noninterest income side of things, can you just maybe give us a couple remarks of -- I think the mortgage gain on sales was a little better this quarter and the wealth was up year-on-year again. Just maybe some outlook thoughts on both those line items would be helpful.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [18]

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Yes. I think the mortgage piece -- Chuck, you can chime in, but I think that's been fairly consistent for us.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [19]

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Fairly consistent. We're really still -- we're still predominantly a sale provider, not a refinance provider. We have started to see a little bit of refinance business with this last kind of decrease in rates. But we're still probably -- not probably, in that 78% purchase business, 78% to 80% usually, on a monthly basis. So -- but we're hoping that if rates do continue to fall a little bit, we might pick up a little bit more of purchase business there. We've been consistent, and we've had nice production across all our markets. And actually, the bringing on of UCB has added to our mortgage business quite a bit as well.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [20]

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Yes. And on the wealth side too, Mike, I think we'll see -- continue to see a little bit of slight improvement there. Again, we -- the UCB addition, we were successful in hiring a proven producer out of that market that was one of the larger competitors. He's already moved over now $75 million in assets. So I think he'll continue to bring in some new business. Where we really -- or I think I see uplift or where we can gain some penetration there is on the treasury management side. We've added 2 new treasury reps both in Cleveland and Columbus. Those were areas we really were trying to cover with one guy. I think we're going to see some nice uptick there just because our lenders now have proven treasury professionals to take out on the calls with them. So I think you'll see a little bit of uptick there and in the private banking realm as we deepen these relationships. Our private bankers continue to bring in some nice deposits for us.

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Operator [21]

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(Operator Instructions) 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 [22]

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So I just wanted to follow up on Mike Perito's question earlier. Rich, when you talked about the impact on your margin from a 25 and 50 basis point cut, you said it was a 5 basis point contraction. Is that from second quarter to the third quarter? Or is that from the -- is that a year-over-year comparison? I just wanted to get some clarity there.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [23]

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Yes, Kevin. No, obviously, we need to make a little because what we did, we modeled. We said, okay, we follow the Blue Chip rate forecast. And what they are telling us the last time they issued one was that we can expect a 25 basis rate cut next week when they meet and then another rate cut in December. We modeled that. And when we modeled that, the impact through the balance of the year is something less than a 5 basis point contraction in our margin.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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So that's first -- second half versus first half of the year?

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [25]

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Yes.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [26]

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Correct.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27]

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Got it. Okay. I just wanted to make sure that I was hearing you correctly. And then how should we think about the tax rate going forward for the rest of the year?

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [28]

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So the effective rate that we had this quarter is probably more indicative of what you'll see the rest of the year. We had so much income in the first quarter, it kind of meets the impact of our tax preference items, if you will. So that kind of drives our effective rate up a little bit. But I think what we have this year, and I'm trying to find my number in front of me. But what...

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

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15 -- 15.1%.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [30]

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Yes. So 16% is probably a good effective tax rate for us.

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Kevin Kennedy Reevey, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [31]

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That's helpful. And then earlier in your comments, you mentioned $126.6 million pipeline. Is that just commercial? Or is that commercial and everything else? And is that what it is today or what it was going into the second quarter?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [32]

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Kevin, that $126.6 million is -- that we referred to is the availability on our construction portfolio at 6/30. So that would include both our commercial and our residential -- on the books residential availability on those lines of draw. Our total pipeline -- go ahead.

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

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And -- I'm sorry, how does that compare to what it was the comparable -- how does it compare to what it was the prior quarter at the end of 3/31?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [34]

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I'll give you 2 numbers. At the same period last year, that number was $69.5 million. And at the beginning of the year, it was just roughly over $100 million. And I think that number has ballooned up a little bit because of 2 reasons: obviously, one because of -- we've got some increased production from UCB for bringing UCB on in the production we're getting down in that Southeast Indiana, Cincinnati market; and then the other reason I think it's so large is, as you know, in Ohio, we had a very wet spring, and some of the construction projects were just behind where they would normally be at this time, which has caused that availability to draw. But we feel like we're really positioned well for growth in the second half because we have that excess availability on that portfolio right now.

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Operator [35]

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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 - VP & Analyst of Banks and Thrifts [36]

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Couple of questions. So first on the NIM this quarter. You had 25 bps of accretion in there from purchase accounting. I was wondering out of that 25 basis points, my back-of-the-envelope math says that's something like $1.2 million, $1.3 million. Out of that, how much of that is kind of scheduled accretion? And how much was like prepayments? I'm kind of trying to think about the run rate of what to expect the accretion impact could be going forward.

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Richard J. Dutton, Civista Bancshares, Inc. - SVP [37]

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I'm not sure exactly, Scott. I know in the first quarter, it was 23 bps, I think. And in the second quarter, it was 25. Something probably -- between 20 and 23 is probably a decent number for the rest of the year. I can -- I'll find that number out and give it to you. I don't know.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - VP & Analyst of Banks and Thrifts [38]

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Excellent. And then in terms of the loan growth this quarter, you were really strong in most categories. You may have mentioned this, but was there anything specific driving the reduction in your nonowner occupied book?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [39]

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Not really. I think there's nothing in particular that was driving that, to be honest with you. It's kind of where the mix came in this quarter.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - VP & Analyst of Banks and Thrifts [40]

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All right. And in terms of the growth on the positive side, what was the geographic breakdown of kind of where you saw the bulk of the growth?

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [41]

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I would tell you, it's across the board, but from a purely -- you said point to point, I'd say the 2 markets we grew the most were Cleveland and that Cincinnati, Southeast Indiana marketplace. Columbus, we had a lot of production, but we're doing a lot of development lending down there. So the fact is we're putting it on, we're even -- it's even being taken out to the permanent market or it's being sold. So the 2 markets where we got the most stickiness, I guess, from a balance perspective are Cleveland and that Greater Cincinnati market.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - VP & Analyst of Banks and Thrifts [42]

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Okay. Excellent. So yes, period end, more Cleveland and the Southeast Indiana. But looking at average balances, you're getting a good contribution from Columbus as well in a short time.

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Charles A. Parcher, Civista Bancshares, Inc. - SVP [43]

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Yes. From a production perspective, I don't have that number right in front of me, but those 3 markets are very similar from a production perspective. It's a little bit different thing in Columbus.

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James Prescott Beury, Boenning and Scattergood, Inc., Research Division - VP & Analyst of Banks and Thrifts [44]

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Excellent. That's really helpful. And then just one more for me kind of a higher level. I know this is a difficult area for you to talk about on a go-forward basis. But I guess kind of quarter in, quarter out, with your growth, trying to be conservative on the provision line item, but you had a quite a long trend of coming in with 0 provision. So with a stable to improving credit quality metrics in mind, realistically, like when do you expect a modest provision to kind of come into the P&L here with your growth expectations?

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [45]

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Well, we keep modeling it -- we keep saying we're going to contribute each quarter. I mean that's how our model is built out. It's designed as we grow to continue to put in. We follow our ALLL model. And so far, it's not allowed us to put anything in. There are some qualitative adjustments there that we've tried to look at to see where we can tweak those. But again, I think, from a coverage ratio of our nonperforming loans, we cover our nonperforming loans 165 -- yes, 165% or so. So Paul, do you have anything to add?

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Paul J. Stark, Civista Bancshares, Inc. - SVP [46]

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Yes. Scott, this is Paul Stark. I think really the biggest shift is improving asset quality to kind of offset the growth rate this quarter. But I think we continue to grow. I don't how much farther we can get as far as the portfolio, but we've made a good run so far, and we'll continue to work at it. So I don't know. I think the answer to your question is that we'll look at it quarter-to-quarter and do what makes sense.

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Operator [47]

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(Operator Instructions) Okay. If there are no further questions, I would like to turn the call back over to Mr. Dennis Shaffer for closing remarks.

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Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [48]

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

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Operator [49]

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