Civista Bancshares, Inc.

Good day, and welcome to the Savista Bank Shares Incorporated 2021 earnings 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. Please note, this event is being recorded. I would now like to turn the conference over to Dennis Schaefer, CEO and President. Please go ahead.

Good afternoon. This is Dennis Schaefer. CEO and President of Savista Bank Shares, and I would like to thank you for joining us for our fourth quarter and full year 2021 earnings call. I am joined remotely 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 fourth quarter and full year 2021 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. Let me start by noting several significant accomplishments and transactions that occurred during the fourth quarter. This morning, we reported earnings for the fourth quarter 2021 of nearly $11 million, or 73 cents per diluted share, which represents an 8 percent increase over the prior year's fourth quarter. Net income totaled $40.5 million, or $2.63 per diluted share, for the full year ending December 31st, 2021, which is an increase of $8.4 million, or 26%, compared to 2020. Our pre-tax, pre-provision earnings for 2021 were $48.4 million, compared to $47.2 million for 2020, and represented the highest pre-tax, pre-provision earnings our company has ever achieved. Our return on average assets was 1.47% for the quarter and 1.34% for the year, while our return on average equity was 12.49% for the quarter and 11.61% for the year. During the final quarter of 2021, our net loans exclusive of PPP grew by 33.1 million or at an annualized growth rate of 6.9 percent. This gave us $114.5 million in net loan growth exclusive of PPP for the year and an annual growth rate of 6.2 percent. In November, we announced the completion of a private placement of $75 million of 3.25% subordinated notes due in 2031 with the proceeds being used for general corporate purposes. We did push a portion of the proceeds down to the bank, and we anticipate using some of these proceeds to fund the cash portion of our recently announced transaction with Communibank Corp. We were pleased to announce the recent signing of the definitive agreement to purchase Communibank Corp and its subsidiary, the Henry County Bank. We view this as a low-risk transaction with a significant upside that will open the door to business in Northwest Ohio and the Toledo MSA. And we look forward to welcoming our new employees and customers into the Savista family. We continued to be active in repurchasing common shares. During the fourth quarter, we repurchased 73,541 shares at an average price of $23.83 per share. During the year, we repurchased 983,400 shares, or approximately 6.2% of the outstanding shares at December 31st 2020 at an average price of $22.59 per share. We view share repurchases as an integral part of our capital management strategy. As of December 31st, we have $9.3 million available from our repurchase authorization, which was approved by our board of directors last August. While we ceased repurchases since announcing the transaction with Comunibank Corp., we expect to resume our repurchase program now that we have announced earnings. 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 and the year. Excluding the impact of PPP loans, our loan portfolio grew by an annualized rate of 6.9% for the quarter and 6.2% for the year, despite having $93.8 million in loan payoffs during the quarter and $236.3 million in loan payoffs during the year. At year end, $43.2 million in PPP loans remained. All first round loans have been processed and all but seven of those loans totaling $622,900 were forgiven. Additionally, 67% of our second round loans have been forgiven. We have $1.8 million in PPP fees remaining at year end and we anticipate the forgiveness process to be essentially completed by the end of the second quarter. Net interest income for the quarter declined by 1.1 million or 4.5 percent compared to our linked quarter and was consistent with the prior year. Our margin for the quarter contracted 20 basis points from our linked quarter primarily on less PPP fee accretion. Net interest income for the year increased 5.7 million dollars or 6.4 percent compared to our prior year. The margin for the year contracted 23 basis points to 3.47 percent compared to the prior year. As we have shared on previous calls, the increased liquidity we experienced as a result of the federal government stimulus program and our tax processing program both continue to have a negative impact on our year-to-date margin. Our non-interest income remains strong, increasing $385,000 over the length quarter. While the quarter included $187,400 gain from life insurance proceeds related to a policy acquired through one of our acquisitions, increases in service charges and increases in wealth management fees more than compensated for a decline in our gains on the sale of mortgage loans. We continue to be pleased with the strength and diversity of our non-interest income streams. Similarly, if we back out the impact of the $1.8 million gain on the sale of our Visa B stock that occurred in the second quarter, our non-interest income still increased $1.5 million or 5.3% year-over-year as we experienced increases in all non-interest income categories except for anticipated declines in our gain on sale of mortgage loans and swap fees. Fourth quarter gains on the sale of mortgage loans totaled $1.5 million, or 9% less than the linked quarter, and $1.6 million, or 52.1% less than the fourth quarter of the previous year. Although production has slowed, mortgage banking was our largest driver of non-interest income during the year. The year-to-date gain on the sale of mortgage loans was $8 million compared to $8.6 million the previous year. During the quarter, we sold $54.8 million in residential mortgage loans and an average premium of 268 basis points compared to $56.9 million in the linked quarter and $91.8 million in the prior year. Year-to-date, we sold $260 $260.3 million in mortgages compared to $304 million in the previous year. As we head into 2022, our mortgage pipelines remain solid. Service charges continue to be a strong contributor to income, increasing $294,000 compared to the linked quarter in $617,000 over 2020. Interchange revenue remained consistent with our linked quarter and increased $866,000 or 21.8% compared to the prior year as consumers seem to be maintaining their cashless buying habits that began during the economic shutdown. Our wealth management group continues its strong contribution to non-interest income. While wealth management fees were consistent with the linked quarter, They increased $876,000, or 22%, when compared to the prior year. We continued to bring in new accounts and benefited from strong financial markets, ending the year with $683 million in assets under management on our trust and brokerage platforms combined. As we discussed during our call last quarter, The year-over-year reduction in swap fees is the result of our decision earlier this year to book select five- and seven-year fixed-rate commercial loans on our balance sheet. Non-interest expense declined $2.3 million, or 11.7 percent, in comparison to the linked quarter. Our compensation expense was down $1.3 million on lower commissions as mortgage production declined. After adjusting for the $3.8 million federal home loan bank prepayment penalty we incurred during the second quarter, non-interest expense would have increased $4.1 million or 5.8% year-over-year. The increase is primarily attributable to a $2.2 million or 5.2% increase in compensation expense and a $922,000 increase in software maintenance, which was primarily the result of the digital banking platform we implemented earlier this year. Our efficiency ratio for the year was very respectable, 59 percent, after adjusting for the prepayment penalty compared to 59.1 percent for the prior year. Turning our focus to the balance sheet, Year-to-date, our total loans declined by $59.6 million. However, excluding the impact of PPP loans, our loan portfolio increased $33.1 million during the fourth quarter and $114.5 million for the year. That equates to an annualized growth rate of 6.9 percent and 6.2 percent, respectively. We are pleased with our loan production, which occurred in every market across our footprint. Our loan pipelines remain solid, and we have 108.7 million in approved, undrawn construction loans at December 31st. While we continue to battle loan payoffs on completed projects, reduced outstandings on operating lines of credit, and increase liquidity of our customers, we continue to expect that we will grow our loan portfolio at a similar pace in 2022. On the funding side, we experienced growth in every category except time deposits. Total deposits increased $227.3 million or 10.4% since the beginning of the year. Non-interest bearing demand accounts which made up 32.6 percent of our total deposits at December 31st, grew by $68.1 million compared to December 31st, 2020. $36.3 million of this growth came from the non-interest bearing business accounts and $23.6 million from public entities. We also experienced a $127.4 million increase in our interest bearing demand accounts driven by a $60.1 million increase in consumer savings and $28.2 million in consumer MMDAs. While we are talking about deposits, I would like to note that we successfully implemented online account opening through our digital banking service in December. This was the next in a series of initiatives we set out to accomplish when we introduced our new digital banking platform earlier this year. These initiatives are focused on improving efficiency and ultimately to provide a better customer experience for our retail and business customers. 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 $78 million at December 31, 2021. The segment with the largest number of criticized loans remains hotels and lodging, totaling $49.2 million at the end of the year. Many of these operators have experienced increased occupancy from leisure travel during 2021. Despite the lingering effects of COVID on travel, we anticipate increased demand going forward, resulting in further reduction in our criticized portfolio. While uncertainties continue to be associated with the economy, there is improvement throughout our footprint in our customers' financial positions. In addition, we realized $782,000 in net recoveries during 2021. As a result, it was not necessary to record a provision during the quarter. The ratio of our allowance for loan losses to loans increased to 1.33% at year end 2021 from 1.22% at year end 2020. Exclusive of the PPP loans, the 2021 ratio would have been 1.36%. Our allowance for loan losses to non-performing loans also increased to 496.1% at the end of the year from 343.05% at the end of 2020. As a reminder, we did meet the guidelines for the delayed implementation of CECL and will not be required to adopt it until 2023. We ended the quarter with tangible common equity ratio of 9.33% compared to 9.98% at December 31st, 2020. We successfully completed the private placement of $75 million in 3.25% subordinated notes that will be due in November, 2031. We pushed $50 million of the proceeds down to the bank, which lowered our CRE to risk-based capital ratio to 291.5% at December 31st, 2021. In addition to raising sub debt, 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 dividend payments and share repurchases. We continue to believe our stock is a value and remained active in repurchasing our shares until just prior to announcing the transaction with Communibank Corp. Now that we have announced earnings, we will be free to resume our repurchase program. During the quarter, we repurchased 73,541 shares of our stock at an average price of $23.83 per share. Year to date, we repurchased 983,400 shares at an average price of $22.59 per share. This represented the repurchase of 6.2% of the shares that were outstanding at December 31, 2020. We have approximately $9.3 million remaining to be repurchased under the current repurchase program. We have shared our desire to grow through acquisition on past calls, and we were pleased to announce the definitive agreement with Communibank Corp., the parent company of Henry County Bank, headquartered in Napoleon, Ohio. At September 30th, Communibank had total assets of $329 million, with total loans of $165 million and $276 million in low-cost deposits. The transaction will add seven branches in Henry and Wood Counties in Northwest Ohio. The acquisition significantly accelerates our presence in Northwest Ohio and will put us well on our way to have a significant presence in each of Ohio's top five MSAs. Their strong core customer base fits well with our relationship banking philosophy and their nearly 60% loan to deposit ratio will provide liquidity to accelerate our loan growth throughout Northwest Ohio and the greater Toledo area. We anticipate closing the transaction during the second quarter and converting their core banking systems during the fourth quarter. In summary, we are pleased with another quarter and year end of solid earnings, continued loan growth, and solid credit quality. While the economy improved during 2021, labor shortages, supply chain issues, and inflationary pressures are affecting many of our customers. Despite these challenges, we remain optimistic. Our loan pipelines are solid, and we are looking forward to the successful integration of the Henry County Bank into the Savista 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 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. Our first question comes from Terry McEvoy from Stevens. Please go ahead.