Civista Bancshares, Inc.

Good day and welcome to the Sophisticated Bank Shares fourth quarter and year end 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 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, today's event is being recorded. I would now like to turn the conference over to Dennis Schaefer, President and CEO. Please go ahead, sir.

Good afternoon. This is Dennis Schaefer, President and CEO of Savista Bank Shares, and I would like to thank you for joining us for our fourth quarter and full year 2020 earnings call. I am joined today by Rich Dutton, Senior Vice President of the company and Chief Operating Officer of the bank, Chuck Parcher, Senior Vice President of the company and Chief Lending Officer of the bank, and other members of our executive team. Before we begin, I would like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of 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 qualitative 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 fourth quarter and full year 2020 earnings call. I would like to begin by discussing our results, which were issued this morning. At the conclusion of my remarks, we will take any questions you may have. This morning, we reported earnings for the fourth quarter 2020 of $10.2 million, or 64 cents per diluted share, which represents an increase of $2.5 million over the prior year's fourth quarter. Our full year results were net income of $32.2 million or $2 per diluted share for the year ending December 31st, 2020, which is a slight decrease of $1 million compared to 2019. Our pre-tax, pre-provision earnings for 2020 was $47.2 million compared to $40.6 million for 2019, and represented the highest pre-tax, pre-provision earnings our company has ever achieved. Our strong capital position and continued ability to generate core earnings allowed our board of directors to approve an increase in our quarterly dividend by one cent to 12 cents per share earlier this month, which represents a dividend payout ratio of 24%. As we noted during our last call, our strong capital position allowed us to resume share repurchases during the third quarter. During the fourth quarter, we repurchased nearly 47,500 shares at an average price of $14.72 per share. Shares repurchased during 2020 totaled 826,947 shares or approximately 5% of the outstanding shares at December 31st, 2019 for $13.4 million. The weighted average price for the year was $16.16 per share. We view share repurchases as an integral part of our capital management strategy. As of December 31st, we have $11.5 million available from our repurchase authorization which was approved last May. Our return on average assets was 1.44% for the quarter and 1.17% for the year, while our return on average equity was 11.79% for the quarter and 9.57% for the year. Despite the continued low rate environment, net interest income for the quarter increased to $23.5 million, which was $1.5 million greater than the linked quarter and $2.3 million greater than the prior year. While our margin did contract in 2020 to 3.7% compared to 4.31% for 2019, it did rebound to 3.69% compared to 3.44% for the linked quarter. Our PPP loans and the accretion of deferred fees associated with them provide positive net interest income in dollars, but they do have a negative impact on our margin. PPP loans made up 11.7% of our average loans earning 3.9% for the quarter and 8.8% of our average loans earning 3.7% for the year. Without the PPP loans, our margin would have improved by five basis points to 3.74% for the quarter and by 16 basis points to 3.86% for the year. Non-interest income totaled $7.7 million for the quarter. This is an increase of $880,000 compared to the linked quarter and a $2 million increase compared to the same quarter in the prior year. Year-to-date non-interest income increased $5.7 million or 25.6% as well. The low interest rate environment continues to drive the mortgage markets across our footprint. During 2020, mortgage banking was the largest driver of non-interest income. Fourth quarter gains on the sale of mortgage loans were $3.1 million or 26.9% greater than the length quarter and $2.1 million or over 200% greater than the fourth quarter of the previous year. Similarly, the year-to-date gain on sale of mortgage loans was $8.6 million or 216.3% higher than the previous year. During the quarter, we sold $91.8 million in residential mortgage loans and at an average premium of 334 basis points compared to 84.1 million in the late quarter and 45.2 million in the prior year. Year to date, we sold $304 million in mortgages compared to 125.8 million in the previous year. As we head into 2021, our mortgage pipeline remains very strong. Other significant drivers of non-interest income were service charges on deposit accounts, interchange fees, and wealth management fees. Service charges decreased $1.1 million compared to 2019 levels. Overdraft income, which is included in the service charge category, decreased $1.1 million during 2020. During the pandemic, customer behaviors changed and fewer customers overthrew their accounts. And we also waived service charges on personal checking accounts during the early stages of the pandemic to provide relief to our deposit customers. Our service charges returned to more normal levels in both the third and fourth quarters. Swap fee income was consistent with both the linked quarter and the fourth quarter of the previous year, but was $943,000 higher when compared to the prior year. While non-interest expense was flat during the quarter and increased 5.6% for the year compared to 2019, we did see a decrease of 4.3% for the linked quarter. The year-over-year increase was primarily related to compensation expenses, which centered on annual pay increases that go into effect each April, commissions attributable to increased mortgage loan activity, and overtime associated with commercial loan modifications, increased mortgage activity, and our participation in the SBA's PPP program. Our efficiency ratio was a very respectable 53.7% compared to 60.7% for the length quarter and 59.1% year-to-date. At our current size and excluding income associated with PPP, we think of ourselves as a low 60s efficiency ratio organization. During 2020, our focus on controlling non-interest expense was aided by some of the COVID-related changes we adopted. Excluding PPP loans, our loan portfolio increased $58.4 million during the fourth quarter and $131.2 million for the year. That equates to an annualized growth rate of 13.1% and 7.7% respectively. We are pleased with our loan production, which occurred in every market across our footprint and was spread across every commercial category. As the pandemic continues, it is difficult to project how the larger economy and more specifically, our loan portfolio will grow in future quarters. However, we remain optimistic. Our loan pipelines remain consistent with $126.8 million in approved undrawn construction loans at December 31st. With respect to PPP-1, we originated over 2,300 loans for $259.1 million resulting in SBA fees of $9.9 million. As of December 31st, 2020, 322 loans with a principal balance of $37.5 million had been approved for forgiveness by the SBA and were forgiven. Of the $9.9 million in fees related to PPP-1, we recognized $4.7 million in 2020 with the remaining expecting to be recognized in 2021. With respect to P2, we began accepting applications on January 15th. Through the end of January, we had received 945 applications with 427 of those applications approved and funded for a total of $54.7 million. In regards to COVID-19 loan modifications, As the CARES Act was rolled out, you will recall SOVISTA took a very proactive approach, offering 90-day modifications on over 800 mostly commercial loans, totaling $431.3 million, which represented 24.4% of our commercial loan portfolio at June 30th. Since that time, we and our customers continue to gain a better understanding of the impact of the pandemic on their business. As a result, most have resumed making their contractual payments. At December 31st, we had 55 loans totaling $73.8 million or 4% of total loans net of PPP loans in payment deferral programs. The largest concentrations of these loans are $43.6 million in hotel, $11 million in mixed retail office, $5.1 million in mixed retail residential, and $5.1 million in restaurant loans. All of these programs, the PPP-1 and the PPP-2, as well as the CARES modifications, are part of our commitment to working with our customers and helping them as they cope with the pandemic. I couldn't be more proud of the efforts that all of our employees have put into these programs, as well as just running the bank on a day-to-day basis. to provide banking services that our customers need in these trying times. During the third quarter, we automatically downgraded each of the commercial loans that requested concessions beyond the initial 90-day modifications. This resulted in nearly $108 million increase in our criticized loans from second quarter to the third quarter. We continue meeting with our customers to better understand how they have been impacted by the ongoing pandemic, and their plans for operating as we move forward. That said, our total criticized loan portfolio, which includes all classified and substandard loans, increased by $10.9 million to $148.1 million at December 31, 2020. The largest segment of criticized loans are hotels, totaling $74.2 million. While we have downgraded risk ratings on many loans, We have yet to see any specific defaults or increased loan losses. Given the uncertainties associated with the COVID-19 and its impact on the economy, we continue to review and refine the qualitative factors in our allowance for loan loss model. As a result, we recorded a $2.25 million provision expense for the quarter and a $10.1 million provision expense for the year. The ratio of our allowance for loan losses to loans increased from 0.86% at year end 2019 to 1.22%. Exclusive of the PPP loans, this ratio would have been 1.36%. Our allowance for loan losses to non-performing loans also increased to 343.05% at the end of the year from 161.95% at the end of 2019. While these reflect very strong credit metrics by historical standards, given the uncertain nature of our current economy, we will continue to monitor our portfolio and the economy, making further adjustments as our model dictates. As a reminder, we did meet the guidelines for the delayed implementation of CECL and will not be required to adopt it until 2023. On the funding side, our deposits increased 510 or 30.4% since the beginning of the year. While we have seen increases in every deposit category, $173.4 million of the increase came in our business checking accounts where the proceeds from the PPP loans were deposited, and $85 million of our year-to-date deposit growth came in personal checking and savings accounts. The increase in deposits allowed us to reduce our reliance on our FHLB advances by $101.5 million, or 44.8% since December 31st. In addition, during the second quarter, we borrowed $183.7 million from the PPP liquidity facility to assist with the funding of the PPP loans originated. These borrowings were repaid in November. In spite of the challenges that 2020 brought to all of us, we are pleased with another year of solid core earnings. I continue to be proud of the great team we have assembled and the quality customers that we have chosen to work with. Among our accomplishments during 2020 are helping our customers navigate through the first and now second rounds of the PPP process, our continued focus on improving our customer experience through a number of digital initiatives aimed at improving customer communications, adding better tools which will enable a digital transformation for how we deliver treasury management services to our commercial clients, as well as how we deliver our retail services to our consumers. We expect to roll out many of these new digital tools in the second quarter of 2021. All of these accomplishments happened while learning to work under conditions we had planned for but never really thought we would endure, especially over the last nine months. 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 diverse revenue streams to meet the challenges that lie ahead. Thank you for your attention this afternoon, and now I will be happy to discuss any questions that you may have. Thank you.

We will now begin the question and answer session. To ask a question, you may press star and one on your touch-tone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star and two. Today's first question comes from Michael Schiavone with KBW. Please go ahead.