Civista Bancshares, Inc.

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 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 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 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 Savista Bank Share's website at www.civb.com. Again, welcome to Savista Bank Share's 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 64 cents 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 30th, 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 30th 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 31st, 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 30th, 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 31st, 2020 to less than 1% at September 30th. 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 $592,000 or 2.5% over the length 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 stimulus program and the excess cash created by our tax processing program both continue 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 nine months of 2021 to the same period of 2020. Our yield on earning assets is comparable to the prior year quarter, and increased by five basis points over the length 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 late 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 $202,000 for the linked quarter and $280,000 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 five- and seven-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 a $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 length 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 and 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 30th, grew by $111.7 million compared to December 31st, 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 the third quarter of 2021. We anticipate further reduction in our criticized portfolio as hotel revenues stabilize. While there's still 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 31st, 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 14 cents 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 31st, 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 nine 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 two 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.

Well, now I'll begin the question and answer session. To ask a question, you may press star then one on your touch-tone 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. This time will pause momentarily to assemble the roster. First question comes from Terry McEvoy. Stevens, please go ahead.