Civista Bancshares, Inc. (CIVB) Earnings Call Transcript & Summary

Good day, and welcome to the Civista Bancshares, Inc. Overview and Transaction and Highlights Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Shaffer.

Thank you, operator, and good morning to everyone for joining our investor call to discuss Civista Bancorp's acquisition of Comunibanc Corp., the parent company of the Henry County Bank. With me this morning is Rich Dutton, Senior VP and Chief Operating Officer; and Chuck Parcher, Senior VP and Chief Lending Officer. Before I begin with my remarks, I would like Rich to read our safe harbor statement.

Our discussions today will include information about our management's view of future expectations, plans and prospects that constitute forward-looking statements. Actual results may differ materially from historical results or those indicated by these forward-looking statements due to risks and uncertainties. We do not assume any obligation to update any forward-looking statements as a result of the new information or otherwise, except as may be required by law. Please note that the presentations and safe harbor statement are available on our website, www.civista.bank. All comments made during today's call are subject to that safe harbor statement. The investor presentation and our press release regarding this combination, both issued yesterday after market close can be found on our Investor Relations section of our website. With that, I will turn the discussion back over to Dennis.

Thanks, Rich. Let me offer my appreciation to everyone for joining us on such short notice for today's call. We are very excited to announce our acquisition of the Henry County Bank. Prior to providing a few thoughts on the strategic rationale and financial impact of this opportunity, I wanted to share some of our perspective. M&A has always been a core part of our strategy, and we've made an effort to build relationship with Henry Bank in the Greater Ohio market. The two banks have worked together for over 30 years, and our current management teams have had personal relationship for much of that time. We have the utmost respect for they operate and serve the local communities. During that time, Civista has been Comunibanc's provider of item processing services, network infrastructure support and website hosting. Furthermore, we have similar philosophies and expect to retain most of the lending and front-loading personnel. This transaction allows Civista to continue to strengthen its core deposit franchise and utilizes the Henry County Bank franchise as a launchpad to grow in Northwest Ohio. During our November call, we announced the completion of a $75 million subordinated debt rate. As part of that process, we outlined to investors several strategic priorities, including any additional share in our markets, expanding into new markets, continuing our strong organic loan growth and opportunistic M&A. We think this is an excellent use of that newly raised capital and checks all the boxes with respect to the strategic objectives we've outlined and communicated. Since our last meeting transaction, which was the acquisition of United Community Bank in 2018, we focused on successfully integrating that acquisition and growing our combined markets. Our success has been evidenced by the organic loan and deposit generation we have achieved in the Cincinnati MSA and across our footprint. We've often stated that we would only consider a bank M&A opportunity that is both strategically and financially compelling, with Henry County Bank being is that opportunity for us. Before we go through a brief review of the model and transaction terms, I want to personally thank Bill Wendt and the Henry Bank County (sic) [ Henry County Bank ] team for working with us over the past 3 months. It is a pleasure and we look forward working together to realize the tremendous opportunity. As we've outlined on Page 4 of the investor presentation, this transaction has 7 branches in Northwest Ohio and $276 million in low-cost core deposits. Approximately 30% of the deposits are non-interest bearing. This provides us highly attractive core deposits in Henry County and Wood County. Henry County Bank's 60% loan-to-deposit ratio will provide ample liquidity to expand lending opportunities in Henry County and throughout the greater Toledo area. In addition, our higher lending limits will allow us to expand our lending relationships with both banks' best and most profitable clients. Our entry into this footprint will serve as an excellent platform to grow in the greater Toledo market. It's a market we know well. Our Chief Lending Officer and several commercial bankers focused on this market during their career, with Toledo MSA as the second fastest-growing market in Ohio. This deal will be structured with a 50% cash, 50% stock deal and is over 10% accretive to our earnings per share, which we believe is significant given size and robust nature of this transaction. We are aware of how important tangible book value is and how that correlates to long-term shareholder return. This transaction will be approximately 3.8% dilutive to our tangible book value at closing and inclusive of all deal-related charges. The earn back on the dilution is approximately 2.9 years, utilizing the crossover method. If we turn to Page 5 of the investor presentation, provide a little bit more color on how we analyze the deal. Three major points, first, the valuation of 1.52x tangible book value and 7.8% core deposit premium is in line or lower than recent deals for bank of this size. . Second, in addition to looking at what the EPS accretion would be, we also looked at the level of accretion relative to the amount of risk we've been taking. We show here with the risk adjusted EPS accretion is nearly double that of the comparable group. Third, we're also compared -- we also compared how the EPS accretion looks relative to our stock buyback. And Civista do not do this acquisition and instead repurchased a comparable amount of its own stock to 10.5% EPS accretion in this deal is nearly double what the buyback accretion would have been. If you turn to Page 6, this provides a nice overview of the Henry County Bank franchise. The franchise is focused around rapidly growing Route 24 and I-75 corridor; notably Henry County Bank operates a low-risk balance sheet and -- with excess liquidity they are the #1 ranked bank by deposit market share in Henry County. Page 7 really speaks to the strength of the Northwest Ohio market. This region is experiencing a lot of commercial activity. On the top left of the page, out of all the major MSAs, the Toledo MSA has the second fastest growing growth rate. Two thoughts here on Page 8. During the last rising rate environment, we, like other banks, ran loan-to-deposit ratios much closer to the 90% or 100% levels. Henry County has operated at the 55% to 60% level. I believe there is this strong probability we are heading into the environment similar to 2016 to 2018 time frame and this acquisition provides ample liquidity for us to deploy not only in the greater Toledo market, but also deploy in our other metro markets. We feel very confident on our ability to deploy this excess liquidity as we have proven in our better than pure organic loan growth the last 3 years. We have a demonstrated track record of entering growth markets that are dominated by larger banks, mostly lending seller and regional banks. The Toledo market is no exception. And you can see here the top 5 players in the market command 71% of the market share. We are confident in our sophisticated suite of products and Comunibanc customer service will play well in these markets within the small and midsized commercial businesses. Page 9 -- to look a little bit more from the acquisition side today. This is our third -- since 2015. Notably, this is a smaller and lower risk than last year we did with United Community Bank. The lower left shows how these acquisitions have fit into our overall franchise footprint. The bottom-right chart shows how we have successfully grown in a new market via our last acquisition. We entered the Cincinnati market with United Community Bank acquisition and in 3 years, we've almost doubled the deposit and loan balances. Page 10 and 11 provide a summary of their loan and deposit mixes as well as ours. I would note that on Page 10 that 73.5% of the accounts are transaction-based. They have done a great job with the deposit base as we look forward to enhancing it with additional products and services via treasury management for their commercial customers. Please note on Page 11, with this acquisition and the $50 million downstream in the capital from the sub-debt issuance, the [ CRAE ], the risk-based capital ratio reduces to 272%. Page 12 covers some of the key transaction modeling assumptions, and financial impact. The total deal value is $50.2 million. As previously mentioned, is structured as a 50-50 cash and stock deal. The common stock portion of the deal was structured as a fixed exchange ratio. As we have stated before, this deal was 10.5% accretive to EPS, 3.8% dilutive to tangible book value per share and inclusive of all deal charges, and results in an earn-back of 2.9 years. Notably, the internal rate of return of 20.7% is very strong and well above our cost of capital. From a due diligence perspective, this was a very involved process that definitely helped having an earlier relationship with our [indiscernible]. We feel very confident around the [ 40% cost-aids ]. We see little risk with their credit portfolio. We were pleased to see that there were limited COVID-19 referrals and an overall limited number of problem loans. The credit mark is equal to our current reserves, approximately 1.3%, which is over 30% higher than normal reserves stood at 2018 year-end prior to COVID. I will note that their reserves provided over 4x coverage of our nonaccrual loan balances. To conclude our remarks on Page 13, we think this opportunity checks the boxes on our long-term strategic priorities we've outlined for the past several years. The deal has meaningful scale in core deposits in a highly attractive Northwest Ohio market. It also provides a platform to expand our commercial lending opportunities in the highly attractive greater Toledo market. It has double-digit EPS accretion and manageable tangible book value dilution and earn-back period. The pro forma metrics compared favorably to recent M&A transactions and an alternative uses of excess capital. And is a low-risk transaction where they give a long history between both management teams and higher retention of business development for investors. We will now ask the operator to open up the call for any questions.

[Operator Instructions] Our first question will come from Tim Switzer from KBW.

I'm on for Mike Perito. This is like a great way to breaking the Toledo market for you guys. Could you tell us a little bit about the lending team you're getting, how familiar you are with them? It sounds like you know them pretty well, obviously, with your guys' long relationship. And then what will the calling and sales effort look like in Toledo? Does this change your growth outlook at all? Will it be like an immediate accelerator to growth? Or will it take a little bit more time for the growth to be realized here? Just trying to get a sense on you guys' strategy and what it'll look like?

Chuck Parcher to comment on that, he's had -- certainly, through the processes, he's had a chance to meet senior lender. And so Chuck?

I would think that it's going to take a little bit of time. I think the one advantage we do have is looking at their 4 or 5 larger customers that they have on the balance sheet right now, we've got a really good opportunity to expand those relatively quickly, I think, bringing our much larger lending limits to that -- to those people. So we feel like we'll get a relatively immediate pop and I think it'll be a normal growth period and we look forward from that perspective. But I do feel good about going out and seeing those larger customers sooner rather than later.

Nice. And then if you're moving on beyond just the current customers and you're trying to expand into Toledo. What will be your strategy to approach and when you kind of win market share there?

To be honest with you, we already had one new lender in our budget for Toledo looking into next year. So it was our plan to try to start that expansion. We've been kind of slow to put any structure over that direction and getting the brand in -- a out of the complete it will be helpful until we kind of move a little bit more into that Northern Wood County, Lupus County area. But the key is going to be pulling out, seeing the COIs, I've had a couple of accounts that Toledo already called this morning and talked about seeing -- excited about us coming to that marketplace. So I think it's going to be -- we'll put a pretty big push on the calling efforts moving up to the COI level for sure.

So Chuck, Tim -- has really -- grew up in that market and lived in that market, worked that market for over 25 years. So he knows quite a few of the businesses and who we'll probably be calling on. They have several lenders who have worked that market. And we think combining our folks with the Henry County Bank folks, I think we'll be able to make some inroads. It will take us -- and hit up the speed there. We think we'll be able to accelerate that just given the higher lending [ loads ] based on our experience on our last couple of deals, just the higher lending limits alone will help us expand relationships there. And will also help us attract lenders and because sometimes lenders shy away knowing that they will be able to do a deal or something and then be at their limit. So this is where, I think, will help us recruit lenders as well.

Got you. That sounds great. And you guys are pretty asset-sensitive today. Does this impact your sensitivity at all one way or the other? And will there be any opportunities for you guys to remix their deposits to either more noninterest-bearing or maybe waver their CDs a little bit?

Tim, this is Rich. And remember, this is only 10% of our total assets. So it's not going to move the needle a ton. I think certainly, when Chuck and his treasury management team get over there and start kind of pushing treasury management services to commercial clients, the mix will change, not that it will push any of the existing customers or depositors out. But I think will just grow into a balance sheet that looks more like us. But again, this is a pretty low risk, I mean, we love it. But it's just not a big contributor one way or the other balance sheet-wise in terms of asset mix.

Yes. We did like the fact that 30% of those deposits were noninterest-bearing accounts. And those -- that speaks volumes to me because those are core customers. And core customers really who you can sell and expand relationships for and 73.5% transactional customers -- those are core customers. And that's where we think we can expand relationships. We'll also -- we'll be bringing wealth management to the table, we'll be bringing private banking in the table. So those are our new products and services that they haven't had in addition to all the treasury management stuff. That's where we think that opportunity is. But really, any time we have a chance to acquire the core customers, we get excited about those opportunities.

Got it. Okay. So it sounds like you guys might have room for some revenue synergies as well. That's all for me.

Our next question comes from Nick Cucharale from Piper Sandler.

I wanted to start on the repurchase, especially since you've been quite active on that front. Just given the deployment of capital and the deal and the rules regarding buybacks in conjunction with the pending transaction, can you update us on your appetite for repurchase over the foreseeable future?

We've halted our repurchase activity as of yesterday's announcement. And that activity will most likely remain halted until after we release our earnings.

Yes. I mean, not most likely, it will remain halted until after we release earnings. But Nick, if you're asking about will we still be at their mind, if we think it's appropriate, we still have plenty of capital. And I think our intention would be that after we release earnings in February, February 4, I think, is the date, that we would be back in if it made sense to be back in.

Right.

So are you limited to any extent by the deal in terms of just the regulations of the pending transaction?

No, nothing other than the SEC and the, I guess, NASDAQ rules.

Our next question comes from Terry McEvoy from Stephens.

So let's start with the earnings accretion. That 10.5% accretion. Is all that coming from the fully phased-in cost savings? Or are you assuming any type of incremental commercial loan growth or loan growth coming out of the Northeast Ohio or Toledo market in 2023?

Yes. We are assuming some commercial loan activity, so it includes both of those. So we are including some increased commercial loan activity from that market.

So Terry, the biggest lift is loan growth for sure. I mean, I think what we modeled was $50 million in loan growth, I think, in 2022 and then another $89 million. I mean, which seems like maybe big numbers, but they're small in terms of our total balance sheet for sure. And in terms of revenue synergies, we haven't really modeled in any of the stuff that Dennis was talking about with respect to wealth management or private banking or the treasury services. That's all on top of whatever.

Yes. And that $50 million or $50 million to $80 million number, that kind of relates back to what Chuck was saying earlier about several customers, or their top customers that Chuck knows really well from his time in that market. And we do believe that we'll be able to expand those relationships where we just couldn't be more loan capacity. So we think we'll able to expand those relationships.

Okay. And just as a follow-up question, given today's news or last night's news, excuse me, are you in a position to evaluate additional M&A opportunities in 2022? And then this bank, the Henry County Bank is 11% of your asset size, maybe just remind us what size deals are you looking at or would you call your sweet spot?

Yes. I think we were in a position to maybe do another deal. It takes a while to put these things together. We've had a number of good discussions as I've previously stated on other calls. And a couple of those discussions are still ongoing. But it takes a while to put these things together. So we'll continue to work those. But think the ideal sweet spot for us is the $300 million to about $1 billion. That would be kind of our ideal sweet spot -- we'll look at banks. Remember this, we feel it's a very low-risk transaction for us just because we have a long history with them. We haven't seen core providers, so that should help a little bit where we will operate on 2020 and we're [indiscernible] so there's a little bit of difference, but that should help. But just knowing the team should make that -- this transition a little bit easier for everybody -- for the customers and employees. We're going to remain disciplined as we move forward though, it's got to be the right -- as we talk about, it's got to be the right fit. We don't want to overpay for something. So we need to stay disciplined. And we think we checked a lot of the boxes in this deal. We paid a fair price, we think, but as we stated in the investor presentation, there's a lot of deals that were priced a lot higher than that. Some of our competitors have done deals in the past that were higher priced. So we're going to remain disciplined as we move forward.

And maybe one last question is, if I could. The Slide 9, the comparison or the reference to Cincinnati and the success you've had over there since you acquired that company and closed it in late 2018. Could you just maybe talk about what types of resources and hires you had to make, if any, to show that type of growth? And when you think about Toledo in Northwest Ohio today, is that platform or franchise large enough to show that type of growth? Or will you have to make some investments in order to take advantage of the opportunities there?

Yes. We'll have to make some investments. We did -- they had a team in place on the last deal. And we've added that team. We've added some experienced commercial lenders. We added a wealth management officer, we added a private banker. So there will be investments that we make over time. What's nice about this deal, as Chuck alluded to, we already had a commercial lender, built into our budget for the Toledo market -- for the '22 budget. So we'll immediately start looking to fill that, to bring another body to the team and stuff. And then as we roll out wealth and private banking and stuff, we'll need to add layer as well. So it's a combination of both using their existing people and then hiring a few people.

And Terry, I wouldn't underemphasize the fact that similar as this is to the United Bank deal, what we have in this one that we didn't have in that one is Chuck's history in the community. I mean, he -- like Dennis said, he grew up professionally there. We let him keep this membership in Inverness because we knew someday we'd do a deal like this. So he's connected over there. And in fact, he's been involved in the hospital, involved in the chamber. I mean, he's -- again, we've got a big head start, and that's something we didn't have in Cincinnati.

Right. Right. So Terry, just to give you a little idea. We have one guy running around over the last year. He did about a little over $18 million -- last year and grew about $30.7 million in that marketplace. So and that's with no infrastructure, just working out of home, kind of cherry picking deals. So as we put the infrastructure together and build a team for over there, we feel really good about what we can extract in that market.

Our next question comes from Bryce Rowe from Hovde Group.

A few questions here. Just curious how competitive the transaction was from a bidding perspective. And then I've got a couple more if you just want to hit that one real quick.

Yes, there was about 5 or 6 banks involved in the bid process.

Okay. That's helpful, Dennis. Appreciate it. And then maybe you guys could speak to how you thought about the tangible book dilution versus the earnings accretion and how you weighed those two against each other, especially considering the consideration of it being 50-50, cash-stock?

Well, and I think again, I bring you back to the Page 5 in the slide deck because I think that did a really nice job of kind of outlining the thought process. And we looked at it, like you said, several different ways. We looked at it. Again, the price that we paid and the core premium, how that compares with recent deals. I think that was kind of #1. And then, I think #2, again, we're sensitive to dilution and accretion. And we may stretch from time to time over the 3-year earn-back, but kind of that's kind of the bright line are you above it or below it, and we were able to get this at a price that we believe gets us under that and to earn back the dilution. And then I think the more interesting was even the last line of it, if -- as low risk as this deal is to get the kind of return that we think we're going to get and compare that with a risk-free, if you will, stock repurchase, again, I think it compares pretty favorably to that, too. So I mean, I think we looked at lots -- looked at it in a lot of different ways. But every deal is unique for sure. I don't know -- again, given our 30-year history and the fact that we know this bank and have worked with them for as long as Dennis and Chuck and I have been here, we're pretty involved with their IT department and how they have set up a lot of their systems. I mean, we've been pretty supportive of that organization for a long time. We'll never have another deal that we know as well as we know this one. So there are a lot of other kind of factors that figured into it. But again, I think it checked all the boxes financially in terms of earn back and how quickly we can -- we've always, I suppose, underpromised and overdelivered. I don't know that we'll do that again this time, but our record has been pretty good in terms of beating what we said we were going to do.

Yes. And we think that dilution, it was very reasonable, given the fact that double-digit accretion. So we thought that was really reasonable, given the offset there.

Got it. And that accretion that you're showing, I guess, on '23, is that based on consensus of $2.42, at least that's what I'm seeing right now in terms of what consensus is for 2023 earnings?

I would say yes.

Okay. We didn't -- we have the -- does not have the factor of the capital [ raising ] [indiscernible].

Most of that, that's true.

That consensus doesn't have it separate.

Right, right, the consensus [indiscernible].

Okay. Okay. That's helpful. And then in terms of -- you're targeting a second quarter close. Curious when you're planning the operational conversion?

Well, right now, we were in Jack Henry's queue and that is sometime early fourth quarter, sometime early October. Now our history has been that they've been able to move us up, and we certainly -- we welcome that. But right now, it's set with earliest date we got from them is early October.

And I would add to that, that we've entered into an agreement with their key people to make sure that they stayed on through whenever we're able to do the conversion. So we feel pretty comfortable. If it lasts that long then we'll -- we won't have any operational issues.

Our next question comes from Russell Gunther from D.A. Davidson.

Just a couple of follow-up. So on the expense saves, could you guys provide some color as to what you think the drivers are most likely to be, whether back office, personnel, any branch closures planned?

The biggest drivers are technology and really the top three executives are all retiring. So when you take the top three executives with their compensation, their bonuses and the technology and that's 2/3 of those -- the cost saves that we've outlined. So those are the biggest drivers of the cost saves. We don't initially anticipate any closures of the branches. They're a pretty tight-knit community. We'll certainly evaluate that as we move forward. But we don't anticipate any branch closures at this time. We want to go in and we make a very favorable impression in the market and those communities that they serve. So there was no branch overlap. So no branch closures or estimated...

And Russell, the only thing I'd add is, again, they were running at like a 72% efficiency ratio. So I mean -- again, we'll be gentle in the cost saves, but we'll get the cost saves that we predicted for sure.

Yes. That's very helpful, guys. And then just the last one for me. You guys mentioned in the prepared remarks and the deck how well you know these guys and the history you have providing -- processing services and infrastructure support, et cetera. Is that a relationship you have with other banks in-state and curious as to...

That with probably two other banks, but not to the level that we were providing services probably because of geography. They're just -- I mean, an 1.5 hours away, closer. And in fact, we announced back in November, with a number -- with all those banks that we were going to cease that support by June of this year, just so we can focus on our own.

We have 1 process for a number of banks, Russell. But as we grew, we kind of focus on our own stuff and kind of and got out of that business per se. As sort of Rich said, there's just 2 or 3 other banks now left, but not to the level of Henry County Bank is at.

[Operator Instructions] Our next question comes from Daniel Cardenas from Boenning and Scattergood.

Just a quick follow-up question. I missed it. In terms of the loan growth assumption you have baked into that EPS accretion, was that $50 million for the second half of '22?

Correct.

Yes. Correct.

And then $80 million.

$89 million, I think we said $90 million, but yes in the...

In '23?

Correct.

Is that going to be primarily a commercial type of loans that you're going to be going after? And then maybe a little bit of color on the competitive nature of Toledo, the Toledo marketplace versus some of the other Ohio marketplaces that you're in? And what kind of yields do you expect to get from some of this new production?

As I -- I can't remember which slide it was discussed it, I guess it's Slide 8. The four major players in that marketplace are all reginal/national banks. Huntington where I was at for 20 years, we've got the #1 market share, it has the #1 market share for quite a while there rolling in the old [indiscernible] balance this from that -- from historically, I guess the [ rate with Fed ]. The marketplace is relatively competitive. I wouldn't say it's a whole lot more or less competitive than the other Ohio marketplaces. The two primary, I would say, community banks that play in that marketplace was Signature and Waterford and then you've got State Bank kind of around the fringes as well from that perspective. And I know Toledo has got -- it's trying to build in that marketplace as well. So I wouldn't say that it's -- from a competitive perspective, is any different than any of our other major markets around Ohio. It's very competitive and we expect to see basically the same yields coming out, that we were seeing coming out of Cleveland, Columbus and Cincinnati.

Okay. And maybe if you can just remind me the typical loan size that you're going to be going after in this marketplace?

I would say our sweet spot is probably that $2 million to $5 million deal. $1 million to $5 million is pushed down a little bit. And then we do some a little bit bigger, some a little smaller. The nice part is we'll probably -- our internal lending limit right now is, I think, $22.5 million to any 1 customer, to yield more growth there we might push that up, which will give us some opportunity to grow with some of our other customers across the rest of our footprint. But it also, as we discussed earlier, will give us the opportunity to expand some of those $2 million and $3 million borrowers that are there up to $5 million, $10 million, $15 million if we need to, depending on the strength of those customers. Three of the top five customers were large customers or ours back in the day at Sky Bank. And I feel like that I think they will buy into our model much like they've bought in the [ Sky on that ] back in the day.

Okay. And so the lending staff that you're acquiring, you feel comfortable with them being able to maybe step up and do these types or these sizes of loans?

Yes, I believe so. Yes.

Congrats on the deal.

This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Yes, I'd just like to thank everyone for joining again the call. Again, we think it's a pretty low-risk transaction, it checks a lot of boxes for us. So we're excited to close this deal and get this integrated into our system. So thank you again for your time today.

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