Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures.
This call will be recorded and made available on the Civista Bancshares website at www.civb.com. If you require operator assistance, please press Star then zero. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now, I will turn the call over to Mr. Shaffer.
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our Q1 2022 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. This morning, we reported net income of $8.5 million or $0.57 per diluted share for the Q1 of 2022. These results include approximately $0.03 per share of expense related to our CommuniBanc acquisition.
While these deal costs contributed to the 16.2% decrease in our earnings per share when compared to the Q1 of 2021, the primary reason for the decline was lower mortgage production. During the Q1 of 2022, our net loans, exclusive of PPP, grew by $48 million or at an annualized growth rate of 10%. We continue to be on track with the CommuniBanc Corp. transaction that was announced earlier this quarter. We view this as a low-risk transaction with significant upside that will expand our footprint into Northwest Ohio and the Toledo MSA, and look forward to welcoming our new shareholders, employees, and customers into the Civista family. We expect this transaction to close at the end of the Q2 . We continue to be active in repurchasing common shares.
During the quarter, we repurchased 183,357 shares at an average price of $24.17 per share. We continue to view share repurchases as an integral part of our capital management strategy. At March 31, 2022, we had $4.9 million remaining in our current repurchase authorization plan. Our return on average assets was 1.07% for the quarter, compared to 1.47% for the linked quarter, and our return on average equity was 9.89% for the quarter, compared to 12.49% for the linked quarter. Now, let's turn our attention to our performance for the quarter and for the year. As I stated, we were extremely pleased with our loan growth for the quarter.
Including the impact of PPP loans, our loan portfolio grew by an annualized rate of 10%. This, despite having $42.5 million in loan payoffs during the quarter. At the end of the quarter, we had $15.5 million in PPP loans remaining. Our strategy of originating PPP loans to only our customers and those referred to us by known referral sources resulted in no fraud to date in the PPP loans that we originated. We have just $583,000 in PPP fees remaining at quarter end and anticipate the forgiveness process to be essentially complete by the end of the second quarter.
Despite solid loan growth, our net interest income declined $391,000 or 1.7% from the linked quarter, primarily due to the increased interest expense related to our subordinated debt issuance in November, and declined $896,000 or 3.8% year-over-year for the same reason. Our net interest margin for the quarter was 3.38% compared to 3.42% for the linked quarter. While accretion of PPP fees boosted our Q1 margin by 16 basis points. Excess cash generated by our income tax processing program negatively impacted our Q1 margin by 23 basis points. We expect our margin to expand as the PPP loan process concludes and the liquidity generated by our tax program subsides.
Assuming interest rates continue to increase, our asset-sensitive balance sheet should yield further expansion of our margins. During the quarter, non-interest income increased $832,000 or 12.2% in comparison to the Q4 of 2021, and declined $1.5 million or 16.8% year-over-year. The primary driver of the increase over our linked quarter was our income tax refund processing program, which continues to be an important contributor to our non-interest income during our Q1 and Q2 each year. Income from that program during the Q1 was consistent with the prior year at $1.9 million.
Service charge revenue declined by $234 thousand or 12.9% compared to our linked quarter and showed an increase of $323 thousand or 25.7% over our Q1 of last year. Decline in service charges for the linked quarter is due to the timing of when service charges were earned on tax program related accounts. These charges are related to services we provide to the tax software providers. The service charges associated with this business were around $270 thousand in the Q4 of 2021, and were $156 thousand during the first quarter of 2022. These fees are charged annually and are typically charged late in the year.
Interchange fees at $1.1 million were consistent with our linked quarter and that of the prior year. Mortgage banking continues to be a significant contributor to our non-interest income. However, like much of the industry, Civista experienced a decline in mortgage loan originations as interest rates increased and the inventory of homes available for purchase continues to be tight. Q1 gains on the sale of mortgage loans were $936,000, a decline of 36.2% from our linked quarter, which was $1.5 million, and a 66% decline from the prior year, which was $2.7 million. We sold $38.2 million in mortgage loans during the Q1 of 2022, compared to $54.8 million during the linked quarter.
The average premium recognized on the sale of loans declined 23 basis points from 2.68% to 2.45% compared to the linked quarter. Wealth management revenue of $1.3 million was consistent with that of the linked quarter, and an increase of $131,000 or 11.4% over the prior year as gains in new accounts were offset by declines in the overall market. We continue to view the expansion of these services across our entire footprint as an opportunity to diversify and grow non-interest income. Non-interest expense increased $1.1 million or 5.6% year-over-year, which was primarily attributable to annual compensation increases that go into effect each April.
Non-interest expense increased $3.1 million or 18% compared to the linked quarter as a result of increases in compensation expense, data processing, marketing, and professional fees related to our Comunibanc transaction. Compensation expense, which increased $2.1 million, accounted for the largest portion of the linked quarter increase in non-interest expense. Payroll taxes are typically higher in the Q1 and increased $411,000 from the linked quarter. Similarly, contributions to our employees' 401(k)s are higher in the Q1 and increased $104,000.
Health insurance and incentive expense also increased over the linked quarter by $604 thousand and $647 thousand, respectively, as we trued up accruals at year-end and then resumed our normal accrual levels in the Q1 of this year. Data processing expense increased $257 thousand over the linked quarter due to $215 thousand in conversion fees associated with the pending Comunibanc acquisition. Professional fees increased $589 thousand over the linked quarter due to $268 thousand in legal and investment banking fees associated with our pending Comunibanc acquisition.
In addition to acquisition related professional fees, $91,000 of the linked quarter increase in professional fees was the result of reversing accruals at the end of the prior year to bring them in line with our actual expense. The legal close of our Comunibanc transaction planned for the end of the Q2 and the system conversion scheduled for October. We anticipate recording most of the additional deal costs during the Q2 and Q3 . Marketing expense increased $214,000 over the linked quarter, which was directly attributable to reversing our accrual by $214,000 in the Q4 to bring our budgeted marketing expense in line with our actual marketing expense. Our efficiency ratio was 65.2% compared to 56.2% for the linked quarter and 57.4% year-over-year.
If we had adjusted for one-time deal costs, our Q1 efficiency ratio would have been 63.7%. Turning our focus to the balance sheet. During the Q1 , our total loans grew by $20.3 million. Backing out $27.7 million of PPP loans forgiven during the Q1 , our loan portfolio grew organically by $48 million or at an annualized rate of 10%. While non-owner-occupied CRE loans led the way, we had good demand in owner-occupied CRE, residential real estate, and residential construction loans in every market across our footprint. Along with strong Q1 loan production, our undrawn construction lines ended the quarter at $120.2 million, giving us confidence that we will grow our loan portfolio at a mid-single-digit rate for 2022.
As I stated earlier, mortgage loan production is down. However, we are optimistic that our pipeline is solid with very few refinances. We are seeing a lot of pre-approvals, but unfortunately not enough inventory to keep up with the demand. On the funding side, total deposits increased $198.4 million or 8.2% since the beginning of the year. Increases in balances related to our income tax processing program of $199 million made up virtually all of this increase, although we did see some movement from time deposits into money market and interest-bearing demand accounts. Non-interest-bearing demand accounts continue to be a focus, making up 37.6% of our total deposits at March thirty-first, as we continue to attract the operating accounts of our business customers. Turning to asset quality.
The segment with the largest number of criticized loans remains hotels and lodging. At the end of the quarter, total criticized hotel and lodging loans were $48.6 million. Most of these operators have experienced increased occupancy from leisure travel during the last four quarters. Despite the lingering effects of COVID-19 on business travel, we anticipate continued leisure demand going forward, resulting in further reduction in our criticized portfolio. While there continue to be uncertainties associated with the economy, we continue to see improvement throughout our footprint in our customers' financial positions. As a result, we did make a $300,000 provision during the quarter, primarily attributable to growth in our loan portfolio rather than economic stress. In addition, we realized $92,000 in net recoveries during the quarter.
The ratio of our allowance for loan losses to loans was 1.34% at quarter-end, compared to 1.33% at year-end 2021. Our allowance for loan losses to non-performing loans also improved to 501.5% at the end of the quarter, up from 496.1% at the end of 2021. As a reminder, Civista met the guidelines for the delayed implementation of CECL and are on track to adopt the new allowance methodology beginning in 2023.
The anticipation of a higher interest rate environment and the pressure it has had on the bond market resulted in a $29.5 million decline from December 31, 2021 to the end of the quarter in other comprehensive income related to our investment portfolio. As a result, we ended the quarter with tangible common equity of 7.85% compared to 9.25% at December 31, 2021. We continue to be comfortable with the credit quality and duration of our security portfolio at the end of the quarter. We continue to create capital through earnings. Our overall goal is to have adequate capital to support our organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be the payment of dividends and share repurchases.
We continue to believe our stock is a value and as previously discussed, have taken advantage of the recent market conditions to remain active in repurchasing shares. As I indicated earlier, we continue to be on track to close our transaction with Comunibanc and their subsidiary, the Henry County Bank. Members of both companies have been meeting in anticipation of legally closing the transaction at the end of June and successfully integrating our systems in October. We look forward to welcoming their shareholders and customers to our Civista family as we grow into northwestern Ohio and the Greater Toledo MSA. In summary, despite some of the noise in our numbers, we are pleased with another quarter of solid earnings, continued loan growth, and solid credit quality.
Despite the economic and geopolitical uncertainties we are all facing and their impact on our local and larger economies, we remain optimistic. Businesses across our footprint continue to have strong balance sheets. Our loan pipelines are solid, and we are well on our way to the successful integration of the Henry County Bank into the Civista family. Thank you for your attention this afternoon, and now we'll be happy to address any questions that you may have.
We will now begin the question-and-answer session. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, you may press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Terry McEvoy with Stephens. Please go ahead.
Thanks. Good afternoon, everybody.
Good afternoon. Hi, Terry.
Hi, Terry.
Maybe first question, if we kind of exclude PPP and then the tax refund deposits, could you just talk about the core net interest margin trend as short-term interest rates go higher, and what percentage of the portfolio is variable rate? Help us kind of understand the impact on a core basis of rising rates.
This is Rich. I'll go through kind of the analysis that we had the last couple of quarters. We reported 3.38% margin. About 16 basis points of that was attributable to PPP. If you back that out, that would have reduced the margin, right? And then we had another 23 basis points that was attributable to the liquidity generated from the tax program. When you run all that through, I would say a normalized margin for Civista for Q1 was 3.45%. That's not too different from, I think, the number that we shared at the end of the last quarter. Maybe a fair amount of expansion, actually. Sorry, I'm not very clear. Is that better, Terry?
Yeah, that's better.
Okay. I didn't say anything important earlier anyway.
No, I can hear you. You were just quiet.
Okay. Our model indicates that for every quarter basis point increase in short-term rates, our margin will expand by about 5.5 basis points. I'm not sure what the rest of your question was. About a third of the portfolio, 33% of the portfolio, Terry, will adjust every 30 days or less.
Perfect.
It's 39%. If you add another 6%, adjusts in a year or less.
Okay. Thank you for that. Maybe as my follow-up, are there parts of the portfolio you're just watching a bit closer given inflation and supply chain issues? Maybe how have you thought about the impact of higher rates on your non-owner occupied CRE customers?
I mean, we're watching it, Terry. You know, the first question, are we watching any certain part of the portfolio? We're still watching the hotel portfolio relatively closely. We feel good about the numbers we're seeing from that as we're mostly leisure travel and not business travel. We're watching that probably closer than any other piece. I guess the right way to say it is we're looking at our portfolio closely as far as from an interest rate increase, but we don't really see any specific area that I would say is at risk. You know, I've been watching our lines of credit pretty closely to see if they are beginning to be drawn on.
To be honest with you, we have not seen any significant draws on our operating lines of credit year to date. In fact, they've actually diminished a little bit. We're running about give or take 33% utilization on those lines of credit.
Part of our underwriting, Terry, does include. We kind of stress the interest rate, so we'll underwrite it at the actual rate, and then we do have a stressed analysis in there as well.
That's great. Thank you, guys.
Thanks, Terry.
The next question comes from Ben Gerlinger with Hovde Group. Please go ahead.
Hey, good afternoon, everyone.
Hi, Ben.
I was wondering if we could just kind of think just 10,000-foot view, just from a macro perspective here relative to your clients and who you're working with. It seems like global economics are slowing a little bit, inflation is increasing. But when you think from boots on the ground perspective, what are the kind of things that they're worried about, or what are they trying to tackle in front of them? How could that kind of juxtapose against loan demand?
Ben, this is Chuck. I mean, I think everybody is worried about, I guess, number one, supply chain, number two, labor, as far as getting, you know, getting and retaining labor. It's a tough labor market right now. Then, you know, obviously the inflation effects that are taking place right now. You know, the interesting part is we've got some people that are distributors, and the retailers are dying for product. So, you know, from that perspective, as long as they can get the product here, they can sell it at almost whatever, at whatever price they want to do it. There's a lot of.
I guess there's concern, but at the same time, I think, you know, most of our clients are doing really well right now and feel like that they'll weather this, you know, relatively well.
Gotcha. That's helpful. When you think about the expense, I know the closing you said 2Q. When you think about a core, do you have anything in mind for the latter half of the year? Are there any investments that might increase it over time that we're not necessarily seeing in today's numbers?
I'll let Rich answer that. You remember in that expense number that increased was a lot of it was related to accruals and some of the acquisition stuff. Rich, you wanna give maybe a better number there?
Yeah. Ben, I think a good run rate for you guys to use going forward is probably $20.5 million on the non-interest expense. Remember, we've got annual increases that go into effect April first for our folks. That's probably the big thing that you haven't seen yet. But other than that, I don't know that we've got any significant investments other than the lumpiness that we've generated from the Henry County acquisition. But I think what we've got in terms of a run rate, what you see is what you get, I guess, is what I'm saying.
Gotcha. Okay. That's helpful. I appreciate it. That's all.
The next question comes from Michael Perito with KBW. Please go ahead.
Hey, good afternoon, guys.
Hi.
Hi.
Thanks for taking the questions. I wanted to start, I apologize if I missed it, but just on the non-interest income side, there were a couple moving parts. I heard you guys address some of them in your remarks, but just, are we fair to kind of be in the mid six-ish range and then layering in the deal on top of that once it's closed, or would you frame it differently, Rich?
I think that's probably a good place to be. I mean, if you back out, right, the tax program fees, that's the stuff that we had $1.9 million of that this quarter. We'll have another half a million or what in the Q2 . I think all in will be at $2.9 million. We're back at maybe another $1 million in the Q2 . But yeah, other than that, I think the crystal ball is ours as good as anybody else's on what goes on with mortgage fees, but the rest of the stuff is probably where you said. I mean, 6% or 6.5% is probably a pretty good place to model.
How do you guys... you kind of talked about the state of mind of the customer. I mean, it sounds like the near term loan outlook, you guys have decent line of sight on. As we move into, like, the back half of the year, like, how do you guys think about the degree of confidence around the loan growth budgeting and, you know, particularly as rates, you know, per, you know, right now the forward curve's doing like 100 basis points by the middle point of the year. Just curious how you guys are thinking about the back half of the year from a growth perspective as it stands today and given what we, you know just from the consensus outlook.
Mike, this is Chuck. You know, we kind of shot for or I guess told you guys that we'd be, you know, mid-single digits for the year. I still think that outlook is pretty good. Obviously, we exceeded that in the Q1 and our pipeline is really strong right now. To be honest with you, the pipeline of deals that we're actually looking at is probably at all-time highs. You know, the rates are affecting it a little bit as far as maybe the amount of money that some people can extract out of some projects, going forward, just from a cash flow perspective, but we haven't seen demand diminish a lot. In talking to our customers, I think it's really just kind of what, you know, Columbus right now is really hot.
We're getting great growth out of Cleveland, and we're getting great growth out of the Cincinnati area, and we really don't see any one of those three cities slowing down, you know, that much. We're hoping to, you know, start to get a little bit more demand out of Toledo with our acquisition. So I feel good about demand right now. I mean, you know, I'll let you know in 90 days, I guess, whether as rates go up, that does diminish. As we're looking at it right now, it's pretty strong.
We're hoping to add another lender or two, just we had budgeted just ourselves in Columbus because we are expanding, with another office, in Gahanna, Ohio, New Albany area, which is really close to where Intel's gonna, you know, starting to make their investment. Also in the Toledo market, you know, we already had that budget. We're still moving forward with that because, you know, we think The Henry County Bank acquisition will be a platform for us to do some lending there. With Chuck's background, having spent almost his entire banking career in Toledo, we just think, there's opportunity there as well.
We still feel pretty bullish on, you know, hitting that mid-single digit number and continuing to do that over the next couple of quarters, you know, just with that and the things that Chuck mentioned.
Super helpful. Thank you, guys.
Michael, before I let you go, our producer.
Oh, yeah.
Was talking about here. The tax income in the Q2 will be $ half a million, so it's exactly the same as what it was last year.
The better number is.
Thank you, guys.
$600? $6 million?
Yeah.
The next question comes from Nick Cucharale with Piper Sandler. Please go ahead.
Good afternoon, everyone. How are you?
Good afternoon. How are you?
Hey, Nick.
Good, Nick.
Hi, Nick.
Just to follow up on your commentary with respect to the buyback, you know, in light of the reduction to tangible book value given the AOCI mark this quarter, do you see any change to your anticipated level of repurchase or capital deployment more broadly?
No, I think we'll continue to be active with the buyback, as the market's down. Obviously, we're buying it cheaper and so we have a certain level that we kind of set that target at, and I think we continue. You know, that'll pretty much stay the same. We think it's a great way to deploy our capital, and I think we'll continue to be active there.
Can you share with us where new loan yields are coming on relative to the portfolio rate?
That's a great question from that perspective, Nick. I think that's the hardest thing in banking right now is trying to price these loans as the rates are bouncing around. I would tell you they're coming on a little bit higher, probably averaging in that 4.75% range on new stuff, give or take on a five-year. You know, we're starting to obviously quote some rates over 5% now, and we've got some still to close that are in the pipeline that are probably in the mid- to lower 4s.
I would tell you probably a good number is 4.75% right now, and then we'll continue to push that up as the back end of the five and 10-year yields get pressed up.
Then lastly, I just wanted to dig into the loan growth guidance a little bit. You guys are guiding to mid-single digits. You know, typically the Q1 is a little bit softer for you guys, but a 10% annualized pace, as you mentioned. Is the mid-single digit guidance just kind of exhibiting a little bit of caution in the back half of the year, just without knowledge of where the end is going to be at some point?
Well, yeah, sure. You know, I mean, the nice part is, Nick, you know, as I look at the numbers, we grew $48 million this year in the Q1 . Last year, we went backwards $26.5 million. You know-
Right.
You're right. Usually the Q1 is relatively soft, so we're really excited about, you know, that growth out of the box. I, you know, would tell you, we may press it up a little bit. I'd like to get through another quarter to make sure demand stays where it's at. Where we're at right now, you know, the trajectory on is pretty good.
Yeah, we just, you know, I think we are being a little bit cautious just because we hear, you know, people talking seven, eight, nine rate hikes. You know, I think that'll eventually does slow things down a little bit. I think we are a little bit cautious, but we're off to just a fantastic start in our loan portfolio and our loan growth that we had in that Q1 . Because typically, we, Chuck mentioned we went backwards last year. Well, historically, we always go backwards of that Q1 . We were really pleased with our loan growth for the quarter.
Right. Very helpful. Thank you for taking my questions.
Again, if you have a question, please press star then one. The next question comes from Russell Gunther with D.A. Davidson. Please go ahead.
Hey, good afternoon, guys.
Hi, Russell.
Hey, Russell.
Hey, circling back to the margin discussion, you know, appreciate your thoughts on what every 25 basis point move means. Could you let us know what you're expecting from a deposit beta assumption in that 5.5 basis points and maybe what you're thinking about first 100 versus next 100?
I think it's pretty ratable, whether it's the first. Well, that's probably not true. Let me back up. I mean, we're laggards for sure. I mean, our non-maturing deposit betas are just shy of 13 basis points. I mean, that's what our model, that's what we've modeled. But I mean, you've seen over the years, Russell, you've been covering us for a while. I mean, we're pretty aggressive when rates are coming down, and at least over the last cycle, we were among the last going up, and we never did get back up. I mean, that's something that I think over time, again, don't forget, we've got a big portion,
30%-37% in non-interest DDAs, so that definitely helps.
Those are primarily operating accounts of our commercial customers, and they're not really rate sensitive at all.
Yeah.
They're not going anywhere. We've got them tied up with treasury services and whatnot. I don't know if I'm answering your question, but I mean, I think that's a good deposit beta for us. Again, I think it just depends on how quickly and how big the rate increases are. We'll be in the back of the bus as rates are going back up on the deposit side.
Right. You know, we and Rich said we're less rate sensitive because we don't have a lot of CDs and, you know, we're picking up some additional deposits with the Henry County Bank acquisition, and they're not very rate sensitive as well. I think that first 100 basis points, we'll definitely be a lagger.
I appreciate it, guys. Thank you both. Another question I had was just on the tax processing program and related revenue. Appreciate the look into next quarter. Just remind us what type of line of sight you have into future revenue there, as we look out a year, maybe even two.
Our deal, if you will, hasn't changed. I mean, it's a three-year rolling contract, and at the end of each tax season, usually in the latter half of the year, once our partners have all kind of done their marketing, we kind of set what the revenues will be for next year and add a year. We've been. I think at least the last two years, the revenue has been identical. I don't know what it'll be next year. I'll be able to tell you, I guess, later in the year, but we'll be in the business for at least two more years and probably three, if that.
Yeah, no, helpful. Helpful reminder. Thank you. Last one for me, guys. You know, you've described the pending transaction as a low-risk deal. Just curious as to continued appetite for M&A here and just any general color on pace of conversations and what you'd be interested in.
Yeah, I mean, so much of it depends on our stock price, and as we know, we're a little bit undervalued there, but we remain really active in our calling efforts. We think we've developed some pretty good relationships. You know, that target for us is $300 million-$1 billion probably in asset size or something. That's probably the ideal range for us. We think maybe there's a little bit you know less competition for that half a million-dollar bank because it could becomes less significant for some of those larger players that are 7, 8, 9 billion dollars in asset size. We would like to continue to grow.
I think that helps, you know, level out our, you know, our expenses a little bit. Like, makes us more efficient as a company. We've proven that, we can integrate these deals really nicely from a cultural standpoint, and that they work really well. I just, you know, I like keep pointing back to the last acquisition prior to this deal we just announced. The deal we did late in 2018, we have 45% of the market share, deposit market share in Ripley and Dearborn Counties in southeastern Indiana, which is three and a half hours from our headquarters here. We've expanded that market presence. We haven't gone backwards, we've increased that deposit market share.
I think we can integrate these deals really well, and we can decentralize a few functions and stuff. We remain, we would like to continue to grow, and we remain diligent in our calling efforts and in developing relationships.
I appreciate it, guys. Thank you for taking my questions.
This concludes our question and answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.
Well, in closing, I just wanna thank everyone for joining us today, and for those that also participated on today's call. Again, I look forward to updating you again in a few months, to share our Q2 results. Thank you for your time today.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.