Good day, and welcome to Civista Bancshares third quarter 2021 earnings call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Mr. Dennis Shaffer, President and CEO. Please go ahead.
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our third quarter 2021 earnings call. I am joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank, Chuck Parcher, SVP of the company and Chief Lending Officer of the bank, and other members of our executive team. Before we begin, I would like to remind you that 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 the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP and non-GAAP measures. We will record this call and make it available on Civista Bancshares website at www.civb.com. Again, welcome to Civista Bancshares third quarter 2021 earnings call. At the conclusion of my remarks, we will take any questions you may have. Let me start off by noting several significant accomplishments or transactions that occurred during the third quarter.
This morning, we reported net income of $9.6 million or $0.64 per diluted share for the third quarter of 2021, and net income of $29.6 million or $1.90 per diluted share for the nine months ending September 30, 2021. Our earnings per share for the quarter increased 33.3% compared to the third quarter of 2020, as well as 39.7% compared to the first nine months of 2020. This is a direct result of our continued focus on growing and diversifying our revenue streams and the disciplined approach that we take in managing the company.
Earlier this month, we announced a $0.14 quarterly dividend, which represents an annualized yield of 2.41% based on our September 30 market close of $23.23, and a dividend payout ratio of 21.88%. We also continue to look for ways to make our balance sheet more efficient. Late in September, we began redeploying $50 million of excess liquidity from cash into investments, which we expect to result in $850,000 of additional interest income on an annualized basis. We continue to be active in our repurchasing common shares. During the quarter, we repurchased 404,620 shares.
Year to date, we have repurchased 909,859 shares, or 5.7% of the outstanding shares at December 31, 2020. Finally, last Friday, we filed a $100 million shelf offering, which was a renewal of our existing shelf that was set to expire at the end of November. Now let's turn our attention to our quarterly numbers. We were extremely pleased with our loan growth for the quarter. Excluding PPP loans, our loans grew by 3% or 12% on an annualized basis. The category that we saw the largest increase in was commercial real estate. We originated 3,700 loans for nearly $400 million through the SBA's Paycheck Protection Program. At September 30, we had 772 PPP loans remaining with balances of $83.3 million.
All of our first-round loans have been processed, with all but nine of the first-round loans totaling $2.7 million having been forgiven. In addition, 50.2% of our round two loans have initiated the forgiveness process. We anticipate having approximately $20 million of PPP loans remaining at the end of the year and hope to have them all forgiven or in payout by the end of the first quarter of 2022. We continue our focus on managing COVID-19 loan deferrals as well as asset quality as a whole. Our deferrals have continued to improve from 3.6% of total loans at December 31, 2020, to less than 1% at September 30.
Due to our efforts of working with customers and the strength of our borrowers, we have not experienced any defaults attributable to the pandemic, and delinquencies remain at historically low levels. Net interest income increased $592 thousand or 2.5% over the linked quarter and increased $2.4 million or 11% year-over-year. Net interest income for the first nine months of 2021 increased $5.9 million or 8.9% compared to 2020. Our net interest margin was 3.62% and 3.48% for the quarter and for the first nine months of 2021, respectively.
Both measures are lower than the comparable 2020 periods, but higher than the linked quarter as the impact of our second quarter balance sheet restructuring contributed a full quarter of impact. As we shared in our first quarter earnings release, the increased liquidity we experienced as a result of the federal government's stimulus program and the excess cash created by our tax processing program both continued to have a negative effect on our year-to-date margin. We continue to see decreases in our funding costs due to the lower interest rate environment.
Funding costs went down by $306,000 compared to the linked quarter and $1.2 million when comparing the third quarter of 2021 to the third quarter of 2020, and $3 million when comparing the first 9 months of 2021 to the same period of 2020. Our yield on earning assets is comparable to the prior year quarter and increased by 5 basis points over the linked quarter as new loan rates remained stable and the balance sheet restructuring transactions we executed in May took full effect.
Our yield on earning assets for the first nine months of 2021 declined 42 basis points compared to the same period in 2020 as interest rates began to tumble late in the first quarter of 2020. Backing out the effect of the $1.8 million gain on the sale of our Visa B stock that occurred in the second quarter, non-interest income declined $814,000 or 11.2% in comparison to the linked quarter and increased $2.3 million or 11.4% year-over-year. The decline in tax program fees from the second to third quarter is typical, and the decline in gain on sale of mortgages is reflective of a slowdown in refinancing across our footprint. These declines were partially offset by an increase in service charges.
The adjusted year-over-year increase was the result of increases in virtually every category of non-interest income, particularly gains on the sale of mortgage loans, service charges, interchange fees, and wealth management fees as we continue to focus on growing our non-interest income streams. Mortgage banking continues to be the largest driver of our non-interest income, although refinance activity slowed considerably. Third quarter gains on the sale of mortgage loans were $1.6 million, down from our linked quarter of $2.2 million as refinances began to decline and home inventories continued to be tight across our markets. For the first nine months of 2021, we recorded gains of $6.6 million compared to $5.5 million in 2020.
We sold $56.9 million of mortgage loans during the third quarter of 2021 and $204.7 million during the first nine months of 2021. Third quarter volume was down $12.3 million from the linked quarter as demand for refinancing continued to soften. The average premium recognized on the sale of loans decreased from 3.20% for the linked quarter to 2.83% for the current quarter. Service charge revenue was a bright spot, increasing $202 thousand for the linked quarter and $280 thousand for the first nine months of 2021 compared to 2020.
Interchange revenue was consistent with our linked quarter and increased $150,000 for the quarter and $663,000 for the first nine months of 2021, as consumers seem to be maintaining the online and cashless retail buying habits that began during the economic shutdown. Wealth management revenue continues its strong contribution to our non-interest income, increasing $230,000 for the quarter and $654,000 for the first nine months of 2021. We continue to bring in new accounts as well as benefiting from strong financial markets. The reduction in swap fees is a result of our decision to book select 5- and 7-year fixed-rate loans on our balance sheet.
Given the current rate environment, we have elected to book the higher fixed-rate loan that we might otherwise have swapped to a lower variable rate loan. Adjusting for the $3.8 million Federal Home Loan Bank prepayment penalty we incurred in the second quarter, non-interest expense for the linked quarter would have increased $704,000 or 3.7%, and $3.9 million or 7.3% year-over-year. The year-over-year increase is primarily attributable to a $2.5 million increase in compensation expense, the largest components of which were an $832,000 increase due to normal pay raises, a $984,000 increase in commissions paid to mortgage originators, and a $300,000 increase in health insurance claims.
Our efficiency ratio for the quarter was 62.2% compared to our adjusted ratios of 59.5% for the linked quarter and 59.9% year-over-year. Turning our focus to the balance sheet. Year to date, our total loans declined by $52.7 million, which includes a $134 million reduction in PPP loans. Excluding PPP loans, our loan portfolio would have grown by $81.3 million or 5.9% annually. Third quarter growth was consistent with that of our second quarter at $55.3 million or 12% annualized. Demand for commercial real estate loans across our footprint continued. Real estate construction loan demand continued the trend that started during the second quarter.
We are encouraged by the loans booked during the second and third quarters, as well as the strong demand across our footprint in undrawn construction lines totaling $128 million, which are near an all-time high. While we continue to battle loan payoffs on completed projects, reduced outstandings on operating lines of credit and increased liquidity of our customers, we continue to expect that we will grow our loan portfolio at a mid-single-digit rate for 2021. On the funding side, we experienced growth in every category except time deposits, with total deposits increasing $245.4 million or 11.2% since the beginning of the year.
Non-interest-bearing demand accounts, which made up 34.2% of our total deposits at September 30, grew by $111.7 million compared to December 31, 2020. While balances related to our income tax processing program made up $31.5 million of the increase, $48.9 million of the growth came from non-interest-bearing business accounts and $28.5 million from public entities. We also experienced a $92.7 million increase in our interest-bearing demand accounts, driven by a $52.1 million increase in public fund accounts. During the pandemic, we automatically downgraded commercial loans that requested concessions beyond the initial 90-day modification period.
Our total criticized loan portfolio, which includes all classified and substandard loans, declined from $148.1 million at December 31, 2020 to $106.1 million at September 30, 2021. The segment with the largest number of criticized loans is hotels and lodging, totaling $61.4 million. Many of these operators have experienced increased occupancy from leisure travel during Q3 2021. We anticipate further reduction in our criticized portfolio as hotel revenues stabilize. While there are still uncertainties associated with the economy, we continue to see improvement in both the economy and our customers' financial positions. In addition, year to date, we have realized $710,000 in net recoveries.
As a result, it was not necessary to record a provision expense during the quarter. The ratio of our allowance for loan losses to loans increased from 1.22% at year-end 2020 to 1.33%. Exclusive of the PPP loans, this ratio would have been 1.38%. Our allowance for loan losses to non-performing loans also increased to 503.5% at the end of the quarter from 343.05% at the end of 2020. We ended the quarter with a tangible common equity ratio of 9.28% compared to 9.98% at December 31, 2020.
The extra $67.5 million of liquidity related to our income tax refund processing business at quarter end. Combined with the $83.3 million in PPP loans had the effect of reducing our tangible common equity ratio by approximately 52 basis points. We continue to create capital through earnings. Our overall goal is to have adequate capital to support our growth, both organically and through acquisitions. Two important parts of our capital management strategy are the payment of dividends and share repurchases. As previously stated, we recently announced our fourth quarter dividend of $0.14 per share. We also remain active in repurchasing our shares. Even with the recent increase in our stock price, we continue to believe our stock is a value.
During the quarter, we purchased 404,620 shares of our stock for $9.2 million at an average price of $22.74 per share. Year to date, we have repurchased 909,859 shares, or 5.7% of our shares that were outstanding at December 31, 2020. We have approximately $11 million authorized to be repurchased under the current repurchase program. In summary, we are pleased with another quarter of solid earnings, continued loan growth, net interest margin expansion, and improved credit quality. While the economy has opened up during the first 9 months of 2021, labor shortages and supply chain issues are affecting many of our customers. In spite of these challenges, we remain optimistic. Our loan pipelines are solid.
We expect that most of the remaining PPP Phase II loans will be forgiven during the balance of 2021. We will continue leveraging our new digital banking platform and plan to roll out online account opening during the fourth quarter, all of which will allow us to provide a better customer experience. Thank you for your attention this afternoon, and now we'll be happy to address any questions you may have.
We'll now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble the roster. First question comes from Terry McEvoy, Stephens. Please go ahead.
Hey, guys. Good afternoon. You there?
There now, you can hear. Hey, Terry. Terry?
First question is on the expenses, the software maintenance expenses were up about $300,000 year-over-year, and I know you mentioned the new digital banking platform. I guess my question is that a good run rate to use going forward? I know you mentioned you're gonna roll out the online account opening next quarter, and maybe spend some time, if you could, just talking about how the new digital banking platform is, how your customers are using it and some early feedback.
Okay. Terry, this is Rich. We did have about $200,000 worth of kind of one-time non-recurring expenses related to that that we did expense in the quarter. So the run rate, I think I told you last quarter, would be about $200,000 a quarter, and that's just about where we expect it to be going forward. I think if you're looking at a run rate for expenses for Q4 and Q1 of next year, $19.2 million is probably a good number. On the online account opening and stuff, Terry, we'll initially roll that out. It should roll out here in the fourth quarter. We'll market it to existing customers within kind of our footprint in the neighboring, you know, bordering states.
We'll further expand upon that once we see some patterns and analyze some of the, you know, the usage and stuff like that. The initial rollout will be marketed and targeted towards existing customers to begin with, so that we can analyze that data. Yeah. The only thing I'd add, Terry, is that we don't anticipate any additional expenses attributable to that, the online account opening.
Great. Then maybe as a follow-up, maybe just talk about new loan yields and just market competition for commercial and commercial real estate loans.
Yeah. Terry, it's Chuck. I'd love to say that it's softening, but that's not the case. As you know, we've seen a little tick-up in the Treasury, but we have not seen the ability to pass that movement upward to our customers as far as the loan rates yet. We're hoping that we'll see that here going forward, but that has not been the case. It's been very competitive. You know, we've had some really nice growth across both of our metro, all of our metro markets, actually. And Columbus and Cleveland are ultra-competitive right now.
Thanks, Chuck. Appreciate it, guys.
Yep. Thank you. Thanks, Terry.
Thank you. Next question from Nick Cucharale of Piper Sandler. Please go ahead.
Good afternoon, guys. How are you?
Hey, Nick. Good.
Just on the mortgage side, what was the breakdown in purchase versus refinance in the quarter?
I've got September in front of me. Let me see if I can figure the quarter out. September was 64% purchase, 36% refi. We've seen that, you know, continue to rotate. If I look across the numbers here, Terry, it's pretty much, it's pretty close to that, I mean, for the quarter as well. I can get you an exact number after the fact, but I know last month it was 64/36 because I've been watching it pretty close.
Okay. I appreciate the commentary with respect to the buyback and the increased dividend recently. Can you talk about another prong of your capital allocation strategy, just your appetite for M&A and the deal landscape within your footprint?
Sure, Nick. You know, we continue to have a number of ongoing talks with many of the smaller banks really across our footprint. I think discussions are probably a little bit more active than normal. There probably are a few more of those discussions going on. Our view really hasn't changed much. We would like to do a deal. We believe that getting a little larger makes us a little bit more efficient. We continue to be, I think, opportunistic. But for us, it's got to be the right deal both in terms of creating some long-term shareholder value and it needs to culturally align for both the buyer and the seller, because those are the deals that are most successful.
I would say that the discussions are probably a little bit more active than they have been in the past.
Thank you for taking my questions.
Hey, quick, but while you're still there, or I mean, Nick, it was 69% purchase for the quarter.
Thanks, Chuck.
Thank you. Next question is from Michael Perito of KBW. Please go ahead.
Hey, good afternoon, guys.
Hi, Mike.
Two questions. One, just on the size of the balance sheet a little bit. The security portfolio, I apologize if you said this in the prepared remarks, but is it likely to kind of stay pretty flat here at $500 million? Hopefully, the excess cash works really well with the mid-single digit loan growth expectation over the next handful of quarters. Is that generally how you guys are looking at the total asset base?
I would say yes.
Yeah.
That's where we want it to go is into loan growth, for sure. Again, we did that transaction that kind of bled over the end of the quarter. I think we had $50 million earmarked to be invested, and I think $43 million of it got invested by September 30. I think the rest of it has been since. Yeah, I think things have kind of stabilized and certainly whatever excess liquidity or any liquidity, we'd love to have to borrow money to make loans. That's where the balance will go.
Helpful. Thanks. Then, just on the expenses, I think you said $19.2 million was a better kind of starting point to grow off of for the next couple quarters. Just curious though, I mean, as we look at, you know, overall core expenses of, I think like $77 million, you know, on pace to do about maybe $77-$77.5 million. I mean, how should we think about kind of year-on-year growth? I mean, maybe a little too early in the budgeting process to ask, but there's, you know, a lot of labor pressures, kind of an interesting market out there right now.
I mean, do you think, you know, putting you up in the kind of $79.5 million-$80 million full year range for next year is too heavy or do you think that there's enough kind of headwinds out there where, you know, it pays to add, you know, a few percent growth in there off of that run rate?
You're right. We're early in the budgeting process, but I think if you grew expenses in the 2%-4% range just across the board, that's kind of the way we're looking at it, again, very preliminarily. You alluded to interesting on the wages. I don't know if that's the adjective we would use, but yeah, it's out there for sure.
Yeah. Yeah. I mean, I think the wage inflation is real. I mean, for in September, we did pass on a $1 an hour increase to all of our hourly non-exempt employees. You know, in the end, it just means that you know, the cost eventually either gets passed on to the consumers or the banks have to figure out a way to operate more efficiently. You know, we know that consumer and business behaviors are changing and you know, more customers are banking digitally. That's why we invested the dollars we did in upgrading our mobile app for consumers and our treasury management platform for our business customers. It's also why we migrated to this online account opening feature. And that's a big step forward for us.
To combat that inflation, I think, you know, banks are just going to have to figure out how to, you know, kind of operate more efficiently in some of these areas. That's what we'll be looking to address and tackle.
Okay. Helpful. Then just lastly, on the NIM, I think you, Rich or Dennis, might have said there was like $850,000 of interest income to come in from some of the liquidity deployment. I think if you back out the PPP and the accretion, the core NIM was about 3.26 up four basis points quarter-over-quarter. I just, you know, I mean, it seems like with the loan growth and the actions you took, you know, over the course of the quarter, that should continue to move higher.
I guess my broader question is, you know, with the long end where it is and no help on short-term rates, do you guys have any thoughts about where that core NIM could trend to near term with the loan yield pressures you're seeing? Just any insights there would be a helpful starting point.
I think you're right. I mean, if it goes up or down, it's gonna be basis points. I mean, I think we've done and continue to monitor the excess liquidity to see if there's opportunities there. But really, the things that we put in place, where we would expect to push the margin up, you know, again, basis points. I think we said last quarter, 12 basis points or 17 basis points.
Yeah
over a 12-month period.
Seventeen.
That's kinda played out the way we wanted it to. I think Chuck and his team are doing the best they can to hold the line. I think we're putting on assets at a rate pretty comparable to what we had did in the prior quarter, so there's less pressure there. Absent of any movement in interest rates, larger scale, I think where we are is where we'll be. You know, possibly we could trend up, but it would be, again, basis points.
When you make all the adjustments, Mike, I think, you know, for the year it's been basis points contraction for us as opposed to, you know, some of the, our competitors that I've looked at, that they've had that or more in a quarter. I think our adjustments have been, you know. I mean, our, we've been doing a pretty good job of holding the line, reducing our interest expense and holding the line on our loan pricing.
Helpful. All right, guys. I appreciate all the insights as always. Thank you.
Again, if you have a question, please press star then one. Next question is from Russell Gunther of D.A. Davidson. Please go ahead.
Hey, good afternoon, guys.
Hey, Russell.
I wanted to talk about the growth outlook. Really strong result over the last couple of quarters. Understand the guide for the year, mid-single digits and implies kind of a like amount in the fourth quarter. As you look out into 2022, I mean, is a high single digit pace achievable for you guys? What would cause you or the growth results to take a step back sustainably going forward from where you've been running the past couple quarters?
Yeah, I mean, I think. You know, we've kinda always been that mid to high level single digit growth shop, Russell. I think, you know, I think that's probably a pretty good forecast for us. I mean, a lot of it depends on how fast some of our projects get completed and how fast they go to the perm market. We've seen a little bit more aggression out of the perm market lately, taking those projects off our balance sheet a little quicker than they have in the past. That might, you know, limit us a little bit from the growth cycle, keeping them on the books as long. I think you're probably in the right thought process, you know, mid to high single digits.
Probably, you know, probably somewhere in the center of that, to be honest with you.
Okay. Is that, you know, likely to remain commercial weighted or is there any increased appetite to portfolio single-family resi? I know you mentioned the securities book not really expected to build, but just portfolio and single family at all incrementally more attractive here?
Well, you know, it's interesting. I. The one thing that might help us a little bit is maybe we may not run off as much single family. I think this year, last I looked, I think we're down $18 million from the beginning of the year in single family as we've taken some of our on balance sheet single family product and moved it into sale and sold in the market. You know, maybe it will get a little bit of more thick of growth just by not doing as much of that as the refinance boom stuff.
Yeah, that's kind of, you know, somewhat reflective with our swap strategy as well. I mean, we just have not taken, you know, we'd rather get the yield right now, as opposed to really book those low, low interest yield deals, you know, the single family deals. It is gonna almost, you know, entirely be that growth's gonna come from that commercial book.
Great. Well, thank you, guys. The rest of my questions are asked and answered. Appreciate your help.
You bet. Thank you.
Thanks, Russell.
This concludes the question and answer session. Now I'd like to turn the conference back over to Mr. Dennis Shaffer for closing remarks. Please go ahead.
Well, in closing, I just wanna thank everyone for listening and thank those that participated on the call. Again, we are pleased with our third quarter, and we look forward to talking to you guys again in a few months to share our year-end results. Thank you for your time today.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.