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Edited Transcript of CIVB.OQ earnings conference call or presentation 5-Feb-21 6:00pm GMT

·43 min read

Q4 2020 Civista Bancshares Inc Earnings Call Sandusky Feb 6, 2021 (Thomson StreetEvents) -- Edited Transcript of Civista Bancshares Inc earnings conference call or presentation Friday, February 5, 2021 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * 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 & COO ================================================================================ Conference Call Participants ================================================================================ * Bryce Wells Rowe Hovde Group, LLC, Research Division - Research Analyst * Joseph Plevelich Boenning and Scattergood, Inc., Research Division - Director & Senior Analyst * Michael George Schiavone Keefe, Bruyette, & Woods, Inc., Research Division - Associate * Nicholas Anthony Cucharale Piper Sandler & Co., Research Division - Director & Senior Research Analyst * Russell Elliott Teasdale Gunther D.A. Davidson & Co., Research Division - VP & Senior Research Analyst * Terence James McEvoy Stephens Inc., Research Division - MD & Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day and welcome to the Civista Bancshares Fourth Quarter and Year-End 2020 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I would now like to turn the conference over to Dennis Shaffer, President and CEO. Please go ahead, sir. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [2] -------------------------------------------------------------------------------- Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter and full Year 2020 earnings call. I am joined today by Rich Dutton, Senior Vice President of the company and Chief Operating Officer of the bank; Chuck Parcher, Senior Vice President 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 our 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 civb.com. Again, welcome to Civista Bancshares' Fourth Quarter and Full Year 2020 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 you may have. This morning, we reported earnings for the fourth quarter 2020 of $10.2 million or $0.64 per diluted share, which represents an increase of $2.5 million over the prior year fourth quarter. Our full year results were net income of $32.2 million or $2 per diluted share for the year ending December 31, 2020, which is a slight decrease of $1 million compared to 2019. Our pretax, pre-provision earnings for 2020 was $47.2 million compared to $40.6 million for 2019 and represented the highest pretax preprovision earnings, our company has ever achieved. Our strong capital position and continued ability to generate core earnings allowed our Board of Directors to approve an increase in our quarterly dividend by $0.01 to $0.12 per share earlier this month, which represents a dividend payout ratio of 24%. As we noted during our last call, our strong capital position allowed us to resume share repurchases during the third quarter. During the fourth quarter, we repurchased nearly 47,500 shares at an average price of $14.72 per share. Shares repurchased during 2020 totaled 826,947 shares or approximately 5% of the outstanding shares at December 31, 2019, for $13.4 million. The weighted average price for the year was $16.16 per share. We view share repurchases as an integral part of our capital management strategy. As of December 31, we have $11.5 million available from our repurchase authorization, which was approved last May. Our return on average assets was 1.44% for the quarter and 1.17% for the year. While our return on average equity was 11.79% for the quarter and 9.57% for the year. Despite the continued low rate environment, net interest income for the quarter increased to $23.5 million, which was $1.5 million greater than the linked quarter and $2.3 million greater than the prior year. While our margin did contract in 2020 to 3.7% compared to 4.31% for 2019. It did rebound to 3.69% compared to 3.44% for the linked quarter. Our PPP loans and the accretion of deferred fees associated with them provide positive net interest income in dollars, but they do have a negative impact on our margin. PPP loans made up 11.7% of our average loans earning 3.9% for the quarter and 8.8% of our average loans earning 3.7% for the year. Without the PPP loans, our margin would have improved by 5 basis points to 3.74% for the quarter and by 16 basis points to 3.86% for the year. Noninterest income totaled $7.7 million for the quarter. This is an increase of $880,000 compared to the linked quarter and a $2 million increase compared to the same quarter in the prior year. Year-to-date noninterest income increased $5.7 million or 25.6% as well. The low interest rate environment continues to drive the mortgage markets across our footprint. During 2020, mortgage banking was the largest driver of noninterest income. Fourth quarter gains on the sale of mortgage loans were $3.1 million or 26.9% greater than the linked quarter and $2.1 million or over 200% greater than the fourth quarter of the previous year. Similarly, the year-to-date gain on sale of mortgage loans was $8.6 million or 216.3% higher than the previous year. During the quarter, we sold $91.8 million in residential mortgage loans at an average premium of 334 basis points compared to $84.1 million in the linked quarter and $45.2 million in the prior year. Year-to-date, we sold $304 million in mortgages compared to $125.8 million in the previous year. As we head into 2021, our mortgage pipeline remains very strong. Other significant drivers of noninterest income were service charges on deposit accounts, interchange fees and wealth management fees. Service charges decreased $1.1 million compared to 2019 levels. Overdraft income, which is included in the service charge category decreased $1.1 million during 2020. During the pandemic, customer behaviors changed and fewer customers overdrew their accounts. And we also waived service charges on personal checking accounts during the early stages of the pandemic to provide relief to our deposit customers. Our service charges returned to more normal levels in both the third and fourth quarters. Swap fee income was consistent with both the linked quarter and the fourth quarter of the previous year but was $943,000 higher when compared to the prior year. While noninterest expense was flat during the quarter and increased 5.6% for the year compared to 2019, we did see a decrease of 4.3% for the linked quarter. The year-over-year increase was primarily related to compensation expenses which centered on annual pay increases that go into effect each April, commissions attributable to increased mortgage loan activity and overtime associated with commercial loan modifications, increased mortgage activity and our participation in the SBA's PPP program. Our efficiency ratio was a very respectable 53.7% compared to 60.7% for the linked quarter and 59.1% year-to-date. At our current size and excluding income associated with PPP, we think of ourselves as a low 60s efficiency ratio organization. During 2020, our focus on controlling noninterest expense was aided by some of the COVID-related changes we adopted. Excluding PPP loans, our loan portfolio increased $58.4 million during the fourth quarter and $131.2 million for the year. That equates to an annualized growth rate of 13.1% and 7.7%, respectively. We are pleased with our loan production, which occurred in every market across our footprint and was spread across every commercial category. As the pandemic continues, it is difficult to project how the larger economy and more specifically, our loan portfolio will grow in future quarters. However, we remain optimistic. Our loan pipelines remain consistent with $126.8 million in approved, undrawn construction loans at December 31. With respect to PPP1, we originated over 2,300 loans for $259.1 million, resulting in SBA fees of $9.9 million. As of December 31, 2020, 322 loans with a principal balance of $37.5 million had been approved for forgiveness by the SBA and were forgiven. Of the $9.9 million in fees related to PPP1, we recognized $4.7 million in 2020, with the remaining expecting to be recognized in 2021. With respect to PPP2, we began accepting applications on January 15. Through the end of January, we had received 945 applications with 427 of those applications approved and funded for a total of $54.7 million. In regards to COVID-19 loan modifications, as the CARES Act was rolled out, you will recall, Civista took a very proactive approach, offering 90-day modifications on over 800 mostly commercial loans totaling $431.3 million, which represented 24.4% of our commercial loan portfolio at June 30. Since that time, we and our customers continue to gain a better understanding of the impact of the pandemic on their business. As a result, most have resumed making their contractual payments. At December 31, we had 55 loans totaling $73.8 million or 4% of total loans net of PPP loans in payment deferral programs. The largest concentrations of these loans are $43.6 million in hotel; $11 million in mixed retail office; $5.1 million in mixed retail residential; and $5.1 million in restaurant loans. All of these programs, the PPP1 and the PPP2 as well as the CARES modifications are part of our commitment to working with our customers and helping them as they cope with the pandemic. I couldn't be more proud of the efforts that all of our employees have put into these programs as well as just running the bank on a day-to-day basis to provide banking services that our customers need in these trying times. During the third quarter, we automatically downgraded each of the commercial loans that requested concessions beyond the initial 90-day modifications. This resulted in nearly $108 million increase in our criticized loans from second quarter to the third quarter. We continue meeting with our customers to better understand how they have been impacted by the ongoing pandemic and their plans for operating as we move forward. That said, our total criticized loan portfolio, which includes all classified and substandard loans increased by $10.9 million to $148.1 million at December 31, 2020. The largest segment of criticized loans are hotels totaling $74.2 million. While we have downgraded risk ratings on many loans, we have yet to see any specific defaults or increased loan losses. Given the uncertainties associated with the COVID-19 and its impact on the economy, we continue to review and refine the qualitative factors in our allowance for loan loss model. As a result, we recorded a $2.25 million provision expense for the quarter and a $10.1 million provision expense for the year. The ratio of our allowance for loan losses to loans increased from 0.86% at year-end 2019 to 1.22%. Exclusive of the PPP loans, this ratio would have been 1.36%. Our allowance for loan losses to nonperforming loans also increased to 343.05% at the end of the year from 161.95% at the end of 2019. While these reflect very strong credit metrics by historical standards, given the uncertain nature of our current economy, we will continue to monitor our portfolio and the economy, making further adjustments as our model dictates. As a reminder, we did meet the guidelines for the delayed implementation of CECL, and we'll not be required to adopt it until 2023. On the funding side, our deposits increased $510.6 million or 30.4% since the beginning of the year. While we have seen increases in every deposit category, $173.4 million of the increase came in our business checking accounts, where the proceeds from the PPP loans were deposited and $85 million of our year-to-date deposit growth came in personal checking and savings accounts. The increase in deposits allowed us to reduce our reliance on our FHLB advances by $101.5 million or 44.8% since December 31. In addition, during the second quarter, we borrowed $183.7 million from the PPP liquidity facility to assist with the funding of the PPP loans originated. These borrowings were repaid in November. In spite of the challenges that 2020 brought to all of us, we are pleased with another year of solid core earnings. I continue to be proud of the great team we have assembled and the quality customers that we have chosen to work with. Among our accomplishments during 2020 are helping our customers navigate through the first and now second rounds of the PPP process, our continued focus on improving customer -- our customer experience through a number of digital initiatives aimed at improving customer communications, adding better tools, which will enable a digital transformation for how we deliver treasury management services to our commercial clients as well as how we deliver our retail services to our consumers. We expect to roll out many of these new digital tools in the second quarter of 2021. All of these accomplishes happened while learning to work under conditions we had planned for, but never really thought we would endure, especially over the last 9 months. While the next several months will continue to test the banking industry and the larger business world, I am confident that Civista is well positioned with a solid balance sheet, strong capital levels and diverse revenue streams to meet the challenges that lie ahead. Thank you for your attention this afternoon. And now I will be happy to discuss any questions that you may have. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Today's first question comes from Michael Schiavone with KBW. -------------------------------------------------------------------------------- Michael George Schiavone, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [2] -------------------------------------------------------------------------------- So you guys still have the majority of your April share repurchase authorization outstanding. I think you said $11.5 million. And you were pretty active during 2020, which is a pretty challenging year. So is there any reason we shouldn't expect that strong pace of buybacks to continue in 2021? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. I think we view that as a great way to deploy our capital as long as our earnings remain strong, and I think we've got a pretty good comfort level with our credit quality. I think we'll continue to -- you'll continue to see some activity there with our share repurchases. -------------------------------------------------------------------------------- Michael George Schiavone, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [4] -------------------------------------------------------------------------------- Okay. And then on the NIM, can you tell us how much pressure you're still seeing -- still experiencing on the loan yields at this point? And then on the funding side, if there's any -- if there's still any opportunity to keep driving those rates down. Just overall trying to get an idea of where the core NIM might go from here, excluding PPP? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Okay. Yes, we've done a pretty good job of protecting the margin. I'll have Chuck Parcher, our Chief Lending Officer, comment on pressure on the loan yield. Rich Dutton can comment on maybe on the deposit side. So Rich -- Chuck, do you want to talk a little bit about? -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [6] -------------------------------------------------------------------------------- Sure. Yes, we're still seeing quite a bit of pressure, Mike, especially in some of the larger markets, the hotter markets, Columbus, being one of them, really competitive down there on deal flow. So we're seeing that pressure. We're seeing a little bit of pressure where people are going a little bit longer on balance sheet as well. So we're continuing to evaluate that. But if it comes down between growth and holding margin, we're trying to hold margin more so today than we are trying to excel growth from that perspective. -------------------------------------------------------------------------------- Richard J. Dutton, Civista Bancshares, Inc. - SVP & COO [7] -------------------------------------------------------------------------------- Mike, this is Rich. And on the funding side, I mean, we say it every quarter that there -- it's just going to be hard to eke out more basis points on the funding side. And it seems like every quarter, we find a way to do it. I'd have a hard time telling you that we're going to drop the funding costs much more than basis points again in the next quarter. I mean I think we're kind of at that point where we're going to be. And there is going to be some compression. But again, I think we saw the compression really in the second quarter last year on our margin and kind of held our own with notwithstanding all the noise of the PPP and the amortization of those fees through there. And we've kind of settled into a range where I think at 3 kind of 7, 4 range, if you kind of normalize it for PPP is kind of where we're at and where we expect to be. I mean it might drift down from there, but it's not going to be anything significant, I don't think. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And our next question today comes from Terry McEvoy with Stephens. -------------------------------------------------------------------------------- Terence James McEvoy, Stephens Inc., Research Division - MD & Research Analyst [9] -------------------------------------------------------------------------------- I guess when I think about the reserve build in the fourth quarter and then something in the text kind of caught my eye where you said you've yet to see any specific loan losses. Are you kind of suggesting through the reserve build in the comments that the charge-offs will likely trend higher a little bit from here? And maybe what are your thoughts on full year net charge offs? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes, I'll let Paul Stark, our Chief Credit Officer comment. I don't think we're implying that charge-offs will be any higher. I think the reserve build, ours has been kind of a slow build throughout the year. There's a couple of things that happened. Initially, when the pandemic broke, that second quarter, there were businesses that we completely shutdown. They had no revenue, unemployment was rising. We adjusted our qualitative factors in our reserve to account for that. We go into the third quarter and the beginning of the third quarter, deferrals are rising. So you've got higher deferrals. So again, we adjust our qualitative factors kind of to account for that. And then this last quarter, we feel we've got a really good handle on our book of business, deferrals are hovering right around that 4% range or so. And -- but risk rate changes. So we've had a number of risk rate changes. So we've had to adjust the qualitative factors as we've gone, but we still see 0 delinquency in our book. I mean, there's very little delinquency. So we don't see -- I don't think it much credit loss coming. And I'll let Paul add some color around that. -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [11] -------------------------------------------------------------------------------- We've covered most of it, but I think it's difficult to tell what's going to happen we get through this. I mean, obviously, this pandemic has extended out this temporary period. And so there's still a number of hotels, which is our biggest segment of the portfolio that we're working with that business travel and leisure travel should pick up, but it's not going to pick up as fast as the people originally thought. And so right now, we feel pretty good about their ability to sustain these payments as we helped modify some of these into interest-only payments. But at the end of the day, some may actually fall. But right now, I think we've identified everything we can, and we'll continue to work on this on a month-to-month basis. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [12] -------------------------------------------------------------------------------- And I think our deferral percentage, too, Terry, it was at a high point of 24%, a little above 24%, right around 4%, eked up just a little bit. I think that's related to some of the seasonal businesses we have within our footprint spread, since in our headquarters market here. We do some -- we have Cedar Point. There's all the islands, Lake Erie Islands and stuff. And there are some seasonal businesses there that I think we just extended out deferrals for. -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [13] -------------------------------------------------------------------------------- So yes, you got to keep in mind that the first round, we deferred over $400 million, the second round of about $125 million. And by the end of the month, by the end of the quarter, that's the $52 million you've seen that we're still in effect at quarter end. So in reality, we're looking longer-term now as this has extended. And so the number is high, but it's actually a reduction from the second quarter deferral program -- the second round deferral program, I should say. -------------------------------------------------------------------------------- Terence James McEvoy, Stephens Inc., Research Division - MD & Research Analyst [14] -------------------------------------------------------------------------------- That's some great color. And then just as my follow-up, a question on expenses. A fair amount -- as I look at the text here, there was some lower marketing, lower travel and just COVID positively impacted the expense trends. With the underlying assumption that things slowly return to normal. Could you just talk about what that means for expenses in 2021? And then the digital tool that was mentioned in terms of rolling out in the second quarter, will that have an impact on expenses as well? -------------------------------------------------------------------------------- Richard J. Dutton, Civista Bancshares, Inc. - SVP & COO [15] -------------------------------------------------------------------------------- Yes, Terry, this is Rich. And you're right. I mean the COVID and how fast the vaccine gets distributed and how the economy reacts to that is the big question. And so I think we're probably looking at a number of things kind of returning back to normal, and you're right, it's going to be travel, it's going to be education, it's going to be marketing, but how fast that happens, we're not sure. So I still haven't answered your question. Q2, which is the biggest part of our digital transformation is something that we did kick off in a big way during the fourth quarter. That's going to be about $200,000 of expense per quarter. And we're not going to roll that out until probably sometime mid- to late second quarter. And certainly, additional revenue that we enjoy from that transformation is not going to happen instantaneously, it's going to build. But certainly, we're looking at $200,000 of additional expense related to that per quarter. That's probably the biggest thing going forward. I think our insurance expense on the health care side, we saw a decent increase there. I mean, everybody saw, like, ours was probably less than most. But I think COVID has kind of taken a toll on the way the insurance guys are looking at that, and they came back with some pretty decent increases. I think we're expecting probably about a $350,000 per quarter increase in our health care for next year. Those are probably the 2 biggest things going forward that I do know. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes. We're taking a hard look, I think, Terry, at expenses. I mean, we identified a few things, I think that moving forward, that we'll be able to reduce expenses on, but we are making substantial investments into our digital technology and into technology that improves the overall customer experience and as Rich alluded to. You bear some of that expense and you don't recognize some of the revenue or even the cost savings until later on. One of the other projects besides the digital that we have going on was an upgrade in just all of our customer communications that we're sending out to our customers. And that's really upgrading that, and it's going to allow us also to electronically deliver statements, invoices. So that we'll eventually pick up post -- we'll be able to reduce postage expense. We'll be able to reduce paper expense. There's little things that will pick up with the digital technology that we talked about on the income side. We'll recognize some of that revenue in the latter half of the year -- starting in the latter half of the year because hopefully, we add more accounts with that and we pick up more service charge income. And our cards are loaded now to the digital wallet, we pick up more interchange income and stuff. So -- but we're going to continue to invest back in. So that's why in -- my comments, I said, we're probably going to be a low 60s percent efficiency shop because there's things we need to do to get us to that next level. So it does require investing back into the company. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- And our next question today comes from Nick Cucharale with Piper Sandler. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [18] -------------------------------------------------------------------------------- With the tax business jumping into full year in the first quarter, can you just share with us your expectations for that business and how it compares with prior years? -------------------------------------------------------------------------------- Richard J. Dutton, Civista Bancshares, Inc. - SVP & COO [19] -------------------------------------------------------------------------------- Nick, it's going to be exactly -- I mean our expectations are exactly what we did last year. And if you'll recall, I mean, we've got contracts in place, and I would expect that it would be spot on to what we did last year. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [20] -------------------------------------------------------------------------------- Okay. Terrific. And then within the mortgage banking business, you had a big gap up in the gain on sale margin compared to the third quarter. Was this mostly a function of mix? -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [21] -------------------------------------------------------------------------------- No. I don't think it was a function mix of that. Look at our mix, it's been pretty consistent all year long, Nick, it's just -- we had quite a bit of volume built up through the summer. Our refinance business got lagged out to about a 90-day lag as far as from originations closed. A lot of stuff has built up over time that we got done in the fourth quarter as we continue to pick that up. So we are -- with our pricing, we were getting a little bit more on a refi and on a purchase, and we did increase our pricing a little bit going from -- in the third and fourth quarters, that would have been beneficial in the fourth quarter. So that's a little bit of the gain on sale increase as well. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes, we were able to substantially increase the pricing -- and that's why I think we were at 336 basis points or something. If you would have looked at us 12 or 18 months ago, we were at 220 basis points or so. So I think we did a really nice job there. We -- Fannie increased what they were charging. And we were able to kind of pass that on and still really see no dip in volume and pipelines remain very strong. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [23] -------------------------------------------------------------------------------- Okay. That's great news. Okay. So even in spite of the strong loan growth and repurchasing 5% of the stock in 2020, your total risk-based capital level was largely unchanged from the end of 2019. So I heard your commentary on incremental repurchase. Can you refresh us on your capital priorities, and how you're thinking about an ideal level of capital? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Yes. I mean, we've always said we'd like to keep that capital ratio somewhere in the 9% to 9.5% range, maybe as we -- in the midst of a pandemic, you like to keep a little bit more but our thoughts really haven't changed too much on that. As long as our earnings remain as strong as they are, and our capital position remains as healthy as it is, and we feel comfortable with our credit quality, I think we'll deploy capital through the repurchase program. We think that's a great way to do that. We'll continue -- we think that we'll continue to remain committed to that dividend. I think we need to do that with the earnings that we're recognizing now. And then I think we continue to look at M&A opportunities. Some of that is talking and finding the right partners. I think we're taking a little bit more proactive approach to that and reaching out. But for us, I don't want to do a deal just to do a deal. It's got to make sense for this organization. It's got to make sense for our shareholders, and it's got to make -- it's got to be a cultural fit. Because deals -- a lot of deals that aren't cultural fit, they doesn't work. So -- but those are kind of how we look at deploying our capital. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- And our next question today comes from Russell Gunther with D.A. Davidson. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [26] -------------------------------------------------------------------------------- I was hoping to follow-up on the core margin commentary. That low 3.70% ex PPP. Can you spend a little more time on the glide path, and how you expect that to progress over 2021 and what the drivers are? I understand the funding is largely played out, but whether it's earning asset remix and timing. And I think some more clarity would be helpful because that 3.70% well above where consensus is coming into the quarter? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Well, I mean, that's what we did, right? If we reported 3.69% for the quarter, and we said that the PPP put a 5 basis point kind of drag on that. So I guess normalized, if you will. And I guess there's a lot of PPP noise and there will be for the rest of year, but 3.74% is kind of where we came in at. I think like Chuck said, the pressure is going to be how well we do and our lenders do, putting loans on the books at a reasonable rate. And as far as a glide path, I mean, again, I said, basis points, and it's not going to be -- again, if you look at the last year, Russell, we had a pretty significant contraction during Q2. And then kind of, let's say, leveled off, but it certainly was much more muted in terms of the compression that we had in the margin. And then from the second to third and then from third to four. And I think that's kind of, I guess, if you're looking for an indication of a glide path, that would kind of be where I'd guide you to. If we, I guess, if I go through that same math, I guess we had about a 10 basis point contraction from Q3 to Q4. Maybe that's a reasonable thing to look at going forward, but it won't be -- I wouldn't be surprised if it was more than that. How about that. -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [28] -------------------------------------------------------------------------------- Diligent here -- I was going to say, Russell, it's Chuck. We've been pretty diligent about -- in this low rate environment, building some floors in so that we can keep that, hold the margin a little bit. Like I said before, we're looking at going a little longer on the right deal, not all deals to pick up a little bit more -- a few more basis points on margin. Don't want to really sell the balance sheet short and long term, but we've got some opportunity with this widening of the 10-year to compare to the 5 to actually pick up some basis points that we feel are valuable. So we're looking at it every day, but we feel pretty confident that we can maintain the loan margin pretty well. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [29] -------------------------------------------------------------------------------- That's very helpful, guys. Certainly a better result and it sounds sustainable. So I appreciate the color there. On the loan growth side of things, understand the uncertainty in your prepared remarks. But maybe just talk a little bit about what your organic growth expectations are? What you'd expect to drive that, both from a mix and geographic contribution issue? -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [30] -------------------------------------------------------------------------------- I would tell you, we're still targeting that mid- single-digit loan growth piece, Russell, I feel like we may be a little soft in the first quarter. We know we've got a few large projects that will pay off. And we also have already seen the effects of every time we do one of these round of PPPs, but as that money comes in, it rolls out and paves down our commercial line in the credit. So we're already seeing some reduction in our commercial lines here in January and early February. So I think we'll see a little pressure from the growth perspective, first quarter. But long term, as I look at our pipeline, our pipeline today was bigger than it was at this time last year. So, it's got a little bit different mix to it. I would tell you, it's a little bit more construction, which also means that we'll see more of that growth batting out towards the mid- to back half as those things start to get built as compared to upfront. But we still feel confident. And in the markets we're in, we had a great year last year on the 3 Cs, Greater Cleveland, Greater Columbus, Greater Cincinnati. We had really nice strong loan growth across all those markets, and we don't see that diminishing here anytime in the near future. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [31] -------------------------------------------------------------------------------- That's great. Very helpful. And just one kind of follow-up, tangential to that. Do you able to share kind of the mix of your loan portfolio and how that breaks down within your more urban metro markets versus rural? What that contribution is from a commercial (inaudible)? -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [32] -------------------------------------------------------------------------------- I don't have that number right in front of me, Russell, we can probably get back to you on that. But I would tell you that it's -- I'm trying to eyeball just by looking at a couple of numbers here, but we're probably any more this is a (inaudible) 70% metro as compared to rural when I... -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [33] -------------------------------------------------------------------------------- That's great. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [34] -------------------------------------------------------------------------------- That's in terms of balances. -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [35] -------------------------------------------------------------------------------- In terms of balances, yes, not in terms of number of customers -- allocated number of customers in our rural legacy markets are number wise, bigger, but obviously, the loan volumes, the loan outstanding numbers are much bigger in the metro region. -------------------------------------------------------------------------------- Richard J. Dutton, Civista Bancshares, Inc. - SVP & COO [36] -------------------------------------------------------------------------------- Russell, we don't have it in front of us, but if you look at our investor deck, towards the front of that, where we've got that kind of map. I believe we've got a summary of loans by region, and it kind of shows you which ones are rural and which ones are more urban. But we'll be better prepared the next time you ask us that question. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [37] -------------------------------------------------------------------------------- But Chuck's right. It is a 70-30 clip on the balances. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- And our next question today comes from Joe Plevelich with Boenning and Scattergood. -------------------------------------------------------------------------------- Joseph Plevelich, Boenning and Scattergood, Inc., Research Division - Director & Senior Analyst [39] -------------------------------------------------------------------------------- A couple of quick questions. One, you commented about the 60% -- low 60% efficiency ratio. But I mean, it was such a strong fourth quarter, a lot of good stuff happening. But it seems like if you're still doing a pretty good job of controlling expenses with NIM being a little bit better than people thought and at least mortgage banking remained strong in the first half of the year. Is there a chance we could see actually a (inaudible) on the efficiency ratio here for the full year in 2021? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [40] -------------------------------------------------------------------------------- Well, we'll have to see. I mean, it's a lot of that depends on how quickly things return to normal because some of the expenses, I think that Rich talked about, travel and entertainment and things like that, that were virtually nothing, how quickly do they return and stuff. So there is a chance because if mortgage banking stays as strong as it was, we anticipate maybe that, that falls off some in the second half of the year. But right now, the pipelines are very healthy. So I think there's always a chance, but some of it -- some of that's kind of dependent on what happens with the pandemic and when things return to normal. Same with -- we're saving on business promo and things like that, and people aren't hosting events and stuff. And so there's a lot of expense savings, I think, that were related to the pandemic. -------------------------------------------------------------------------------- Joseph Plevelich, Boenning and Scattergood, Inc., Research Division - Director & Senior Analyst [41] -------------------------------------------------------------------------------- And you talk about how robust mortgage banking is. Any specific color on what the first quarter or first half might look like relative to the fourth quarter? Or it just seems like things came in so strongly in the fourth quarter. Just trying to get a sense directionally and absolutely kind of where the next -- couple of quarters might shake out? -------------------------------------------------------------------------------- Charles A. Parcher, Civista Bancshares, Inc. - SVP [42] -------------------------------------------------------------------------------- Our pipeline is really good still, Joe. So it's going to be hard to replicate the fourth quarter, obviously. But I would think the first quarter, and especially into the second quarter, it's just a matter of how fast can we process the loans to get them through the pipeline. So I would say it's going to remain very strong, first and probably second quarter as well after we get past that. And as you know, if the (inaudible) crafts see where rates are going to go. -------------------------------------------------------------------------------- Joseph Plevelich, Boenning and Scattergood, Inc., Research Division - Director & Senior Analyst [43] -------------------------------------------------------------------------------- And other 2 I had one just on the deferrals. You talked about how there's some seasonality and whatnot impacting the fourth quarter flows. I mean any kind of directional thoughts on what deferrals might look like at, say, the end of March here? And any concerns that you've seen a new surge in request or other kind of activity there. -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [44] -------------------------------------------------------------------------------- This is Paul. It's hard to tell right now, I don't anticipate any spike up. I think these are a steady process of working with customers. And as things change, in terms of when they think revenues are going to start to return, hotels being a great example of that. Restaurants, when the restrictions are eased things like that. And these guys are actually very cooperative, and that's what we look for. And they want to start paying as quickly as they can. So most of our deferrals are actually just the principal type deferrals very few P&I deferrals. So I guess, I would see this thing as pretty steady. And some will be return to payments, and we'll probably have to defer some others. So it really gets down to what the individual business cycle is and what type of relief they need. But so far, we have not seen any defaults and we have not really seen anything that we think is going to evolve into a charge-off at this point. So we're encouraged by that. We're encouraged by the fact that we think unemployment is expected to improve over the next quarter. So again, we'll take it month-to-month. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [45] -------------------------------------------------------------------------------- And I would add that the one nice thing is back when we were originating hotel loans, we were very diligent about understanding the sponsors. And as we're going through this process and the meetings we have, most of our sponsors have the wherewithal to make those payments when called upon or tapped on the shoulder. So we feel good about the sponsors behind almost in our entire hotel book. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- And our next question today comes from Bryce Rowe at Hovde. -------------------------------------------------------------------------------- Bryce Wells Rowe, Hovde Group, LLC, Research Division - Research Analyst [47] -------------------------------------------------------------------------------- Just one more question on the hotel book before I move on to another question or 2. What is the weighted average LTV within that portfolio currently? -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [48] -------------------------------------------------------------------------------- Within the -- I don't have that in front of me. And we're talking about '21. Typically, I would give you a range, it's probably the 58% and 65% loan value. And it varies based on the situation. But most of them are the major flags and as Chuck indicated, real good, not only in capacity but willingness to support the loans. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [49] -------------------------------------------------------------------------------- And we've taken a number of those hotel loans through that SBA 504 program. So that you generally start out at like a 65% loan-to-value, a 50% loan-to-value because they put in -- they take 35%, and the borrower has to put in 15%. So we've done a number of them at that level as well. -------------------------------------------------------------------------------- Bryce Wells Rowe, Hovde Group, LLC, Research Division - Research Analyst [50] -------------------------------------------------------------------------------- Okay. That's helpful. I wanted to ask about the deposit side of things. And obviously, you've had some really nice growth in 2020. Curious on kind of the deposit mix and where you -- where you might see opportunities to potentially continue to lower costs there? I mean, you look in the average balance sheet schedule within the release, and it looks like the time deposits are still carrying 1.5% type of cost. So just maybe you could talk through the retention level of CD customers, what's maturing and what the current rate is for those maturing CDs? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [51] -------------------------------------------------------------------------------- Well, that's where the opportunity is, would be in that CD bucket. I think in our ALCO working group, we identified that we may be able to get about 5 -- 4, 5 basis points more eke out of that. Some of those rates, as you said, are 1.25, 1.5 still. Most of those were written for 18-month terms, so they'll be coming due sometime over the next 6 months or so. Current rates are down clear around 40 basis points. Surprisingly, we keep a good number of those CD customers. They're just loyal customers that the bank has and we still keep some of those. So I'm looking at our rate sheet today, our 18-month special is 40 basis points, and we have a 13-month special out there or -- is it 13 month? -------------------------------------------------------------------------------- Unidentified Company Representative, [52] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Yes, 13 months, we have 30 basis points. So those rates have dropped substantially. So there is room for improvement there. As far as the growth in those accounts, most of them have been core accounts. As we alluded to, $173 million in business deposit growth $85 million in personal checking accounts. And the nice thing about that is we -- some of that noninterest income growth was in our treasury management services and that's just recurring income that we're going to get every year. So we have very little reliance on CDs so -- and I think we're going to continue with the same strategy. We want to add as many core accounts as we can because that's where we got opportunity on the noninterest income side in terms of interchange fees, in terms of service charges and we think that's very valuable. That's why we've been able to push up over the last 3 or 4 years our noninterest income. -------------------------------------------------------------------------------- Bryce Wells Rowe, Hovde Group, LLC, Research Division - Research Analyst [54] -------------------------------------------------------------------------------- Got it. Okay. I wanted to ask about PPP 2 here. You noted $55 million, give or take, of approvals so far. Just how are you thinking about maybe relative to PPP1 that was $260 million, give or take. Do you think that the PPP2 originations will approximate half of what you did PPP1? Or could it be less than that? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [55] -------------------------------------------------------------------------------- Well, I think we're probably going to be at half. If you look at even where we're at today, I think I looked at some numbers right before we came in, I think we were at about 1,035 loans. And PPP1, we did 23 -- a little over 2,300 so we're getting pretty close to that half level, and we're tracking them on a fee basis and everything. So we're right about at that mark. That surprises me, I thought when this rolled out. I think Paul will echo and Chuck echo the same thoughts, but that maybe we would do half of that volume, it looks like we're going to probably do maybe a little bit better than that. -------------------------------------------------------------------------------- Paul J. Stark, Civista Bancshares, Inc. - SVP [56] -------------------------------------------------------------------------------- Well, the volume number of loans but in terms of actual outstanding, the average size of the loans have dropped this round is part of it because the SBA put restrictions on the maximum amount. And we really are trying to emphasize smaller borrowers. So plus there's a lot more labor that go through this because they didn't do anything to simplify it for us. But by and large, I think those numbers are correct. I would -- it started to taper off a little bit in terms of demand, too. So we'll see how this all plays out because it's definitely more slow-moving than we thought it was going to be. -------------------------------------------------------------------------------- Bryce Wells Rowe, Hovde Group, LLC, Research Division - Research Analyst [57] -------------------------------------------------------------------------------- Okay. Last one for me, Dennis. You had some commentary around M&A and wanting to possibly deploy capital into some M&A that might make sense. Just -- I was wondering if you had maybe some conversations with potential partners, very informal conversations but just maybe talk about the type of chatter you might be hearing these days as we started to kind of come out of this COVID period and is bank valuations -- bank stock valuations have been happening in the last few months? -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [58] -------------------------------------------------------------------------------- Yes. And I think that's part of my daily chores is to proactively reach out. I mean, we're -- we've identified some potential in who we think, would be very good partners. I would tell you that I think the (inaudible) people realize the challenges that lie ahead, I think much more so today than they did even 12 months ago. Some of my conversations with some of my counterparts at other banks, they recognize that, hey, when PPP income goes away, when mortgage activity returns to a more normal level, particularly in this low rate environment, there's going to be substantial pressure on margin. And I think it will be very difficult for some of these banks to make money. So given that, I think they realize that. So we've had some -- I've had some pretty decent conversations with people in regards to what the future might look like. We kind of try to share our vision. We think we'd be a great fit for quite a few of these community banks, very -- in Ohio, there's 130 banks that are under $500 million in asset size. We think we would be great partners for those organizations as opposed to somebody that may be at $5 billion in assets or $6 billion or $7 billion in assets. Because I think we'll be a little bit more sensitive to their needs. And because I think it's got to work for both banks, and it's got to work for the shareholders, it's got to work for the communities, and it's got to work for the employees. It's got to be that cultural fit. And I think we'll be the ideal partner. There's not only opportunity just in Ohio. I think Eastern Indiana, we've had some conversations with banks in Indiana. And we've Southern Michigan, Northern Kentucky, those are all, I think, possibilities for us. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- And this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Shaffer for any final remarks. -------------------------------------------------------------------------------- Dennis G. Shaffer, Civista Bancshares, Inc. - President, CEO & Director [60] -------------------------------------------------------------------------------- Thank you. In closing, I just want to thank everyone for listening in, and thank those who participated in the call and asked questions. Again, we are extremely, extremely pleased with the results of our fourth quarter and for the entire year. 2021, I think, will undoubtedly be another year full of challenges for us, but we look forward to meeting those challenges and to talking to you again in a few months to share our first quarter results. So thank you for your time today. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- Thank you, sir. This concludes today's conference call. You may now disconnect your lines, and have a wonderful day.