Civista Bancshares, Inc.

Good day and welcome to the Savista Bank Shares, Inc. Third Quarter 2020 Earnings Call Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would like now to turn the conference over to Dennis Schaffer. Please go ahead.

Good afternoon. This is Dennis Schaffer, President and CEO of Savista Bank Shares, and I would like to thank you for joining us for our third quarter 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 Savista Bank Shares, Inc. that involves risk 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 Savista Bankshare's website at civb.com. Again, welcome to Savista Bankshare's third quarter 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 that you may have. This morning, we reported earnings for the third quarter 2020 of $7.7 million or 48 cents per diluted share and $22 million or $1.36 per diluted share for the nine months ending September 30th, 2020. This represents an increase in net income from 2019 of $136,000 for the quarter and a decrease of $3.5 million for the nine-month period. The COVID-19 pandemic has had several effects on our balance sheet and income statement during 2020. Our balance sheet has grown as a result of the Paycheck Protection Program, or PPP, The makeup of our income statement has shifted as well. The largest change on our income statement is an increase in provision for loan losses due to the economic uncertainty created by COVID-19, stay at home orders, and increased unemployment. Without the increase in provision, our net income would have exceeded 2019 levels for both periods. Our strong capital position and continued ability to generate core earnings allowed our board of directors to once again approve our quarterly dividend of 11 cents per share earlier this month, which represents a dividend payout ratio of 23%. In addition, after meeting with customers and working through the second round of pandemic-related loan modifications during the quarter, we began to gain some clarity of our customers' financial positions and their ability to perform moving forward. This clarity along with our strong capital position allowed us to resume share repurchases. During the quarter, we repurchased 107,500 shares at an average price of $12.15 per share. We view share repurchases as an integral part of our capital management strategy. Our return on average assets was 1.08% for both the quarter and year to date, while our return on average equity was 9.01% for the quarter and 8.8% year to date. Despite the lower interest rate environment, net interest income for the quarter was $22 million, which was consistent with the linked quarter and $1.6 million greater than the prior year. Our net interest margin did contract to 3.44% compared to 3.61% for the linked quarter and 3.70% year to date. While the $259 million of PPP loans provided positive net interest income in dollars, they made up 12.7% of our average loans for the quarter and 7.8% year to date at an average yield that approximates 3%, they do have a negative impact on our margin. Without the PPP loans, our margin would improve by 40 basis points to 3.84% for the quarter and by 23 basis points to 3.93% year-to-date. During the quarter, non-interest income was fairly consistent with that of our second quarter at $6.8 million and increased $1.4 million or 25% over the same quarter in the prior year. During the first nine months, non-interest income increased $3.7 million or 22% over the prior year. The low interest rate environment continues to drive the mortgage markets across our footprint and mortgage banking continued to be the largest driver of non-interest income. Third quarter gains on the sale of mortgage loans were $2.4 million or 6.7% greater than the linked quarter and $1.6 million or 196.1% greater than the third quarter of the previous year. Similarly, The year-to-date gain on sale of mortgage loans was $5.5 million or 223.4% higher than the previous year. During the quarter, we sold $84.1 million in residential mortgage loans at an average premium of 286 basis points compared to $91.5 million in the linked quarter and $36 million in the prior year. Year to date, we have sold $211.1 million in mortgages compared to $80.5 million in the previous year to date. Our mortgage pipeline remains very strong. Other significant drivers of non-interest income were interchange fees and wealth management fees. Swap fee income was down for the third quarter but is 339% higher year to date. Service charges have decreased compared to 2019 levels. We did see some rebound in service charges compared to the linked quarter with an increase of $484,000 or 52%. $183,000 of the increase was due to reinstating several customer service charges that we suspended during the second quarter to provide relief to our deposit customers. Overdraft Bs also increased $270,000 compared to the linked quarter. While non-interest expense increased both during the quarter and the nine-month period compared to 2019, we did see a decrease of 2.1% for the linked quarter. The year-over-year increase was primarily related to compensation expense, which centered on annual pay increases that go into effect each April, commissions attributable to the increased mortgage loan activity, and overtime associated with commercial loan modifications, increased mortgage activity, and our participation in the SBA PPP program. Our efficiency ratio was 60.7% compared to 61.7% for the length quarter and 61.1% year-to-date. Excluding PPP loans, our loan portfolio increased $16.4 million during the third quarter and $72.9 million year to date. That equates to an annualized growth rate of 3.6% for the quarter and 5.7% year to date. That growth came in every commercial category. Our loan pipelines remain strong and we have $124.4 million in approved undrawn construction loans at September 30th. In a normal year, we would probably be disappointed with our loan growth. However, considering the effects of the pandemic, we are pleased with the loan production across our footprint. 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. With respect to PPP, we originated just over 2,300 loans for $259.1 million, resulting in deferred fees of $9.9 million. The SBA recently provided guidelines for abbreviated forgiveness of PPP loans with balances less than $50,000. At September 30th, we had 1,368 loans totaling $26.3 million that should qualify for the SBA's abbreviated forgiveness application. To date, we have submitted 23 applications totaling $8.1 million for forgiveness and have received proceeds from the SBA paying off four of those loans. While this remains a more labor-intensive effort than we had hoped, we are confident in our approach and are proud of Savista's role in assisting our customers and communities as we continue to navigate this pandemic. In regards to COVID-19 loan modifications, as the CARES Act was rolled out, We took a very proactive approach to modifications, offering 90-day modifications on over 800 mostly commercial loans, totaling $431.3 million, which represented 26.5% of our commercial loan portfolio at June 30th. Since that time, we and our customers have gained a better understanding of the impact of the pandemic on their business. As a result, most have resumed making their contractual payments. At September 30th, we had 47 loans totaling $52.2 million, or 2.9% of total loans remaining in deferred status. The largest concentration of these loans are $21.9 million in hotel, $11 million in healthcare, and $3.3 million in restaurant loans. We continue to experience low charge-off rates, and delinquencies remain very, very low. While we and our customers have a much better understanding of the impact of the pandemic that we'll have on our businesses than we did coming into the quarter, as part of our credit process, we automatically downgraded each of the loans that requested concessions beyond the initial 90-day modifications. This resulted in an increase in substandard loans of $4.7 million in special mention loans of $107.9 million during the quarter. 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 our loan loss model. As a result, we recorded $2.25 million provision expense for the quarter and $7.9 million provision expense for the year. The ratio of our allowance for loan losses to loans increased to 1.11% from year end, which was 0.86%. Exclusive of the PPP loans, this ratio would have been 1.27%. Our allowance for loan losses to non-performing loans also increased to 292.88% at the end of the first quarter 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 will not be required to adopt it until 2023. On the funding side, our deposits increased $390 million, or 23.2%, since the beginning of the year. While we have seen increases in every deposit category, the most significant increases came in our business checking accounts where the proceeds from the PPP loans were deposited. In addition, over $108.9 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 FHLB advances by $101.5 million or 44.8% since December 31st. In addition, we borrowed $183.7 million from the PPP liquidity facility to assist with funding the PPP loans originated during the second quarter. These borrowings carry a low rate of 35 basis points and also provide for advantageous regulatory regulatory capital treatment of the PPP loans. In spite of the challenges of the current environment, we are pleased with another quarter fueled by solid core earnings. Throughout today's comments, I hope I have conveyed how proud I am of the great team we have here at Savista and the quality customers that have chosen to work with us. We couldn't have one without the other. Our people have accomplished much through the first three quarters of 2020. Despite the pandemic, we reported earnings per share for the third quarter of 2020 that exceeded earnings in the same period of 2019. While the next several months will continue to test the banking industry and the larger business world, I am confident that Savista is well positioned with a solid balance sheet strong capital levels, and a diverse revenue stream to meet the challenges that lie ahead. 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 your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And if any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Terry McEvoy from Stevens. Please go ahead.