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Civista Bancshares, Inc.
7/28/2022
Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Savista Bank Shares, Inc. that involve 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, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Savista Bankshire's website. at www.civb.com. At the conclusion of Mr. Schaefer's remarks, he and the system management team will take any questions you may have. Now, I will turn the call over to Mr. Schaefer.
Good afternoon.
This is Dennis Schaefer, President and CEO of Savista Bank Shares, Inc. And I would like to thank you for joining us for our second quarter 2022 earnings call. I am joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank, and Chuck Parcher, SVP of the company and Chief Lending Officer of the bank, and other members of our executive team. This morning, we reported net income of $7.7 million or 53 cents per diluted share for the second quarter of 2022, which includes approximately two cents per share of expense related to our community bank transaction and that income of $16.2 million or $1.10 per share for the six months ended June 30, 2022, which includes approximately $0.04 per share of expense related to our CommuniBank transaction. While these deal costs contributed to the decline in earnings for the quarter and year to date, the primary reasons for the decline were the normal timing of when we earn our tax program fee income from our first to second quarters, lower mortgage production, and restructuring charges taken in the second quarter of 2021. We were able to sustain the strong loan demand we experienced during the first quarter. Net loans exclusive of PPP grew by $57.9 million during the second quarter or at an annualized growth rate of 11.6%. While demand remains strong in most categories, commercial and industrial, non-owner occupied commercial real estate, and residential construction loans experience the strongest growth. On June 27th, we opened a new branch office in Gahanna, Ohio, located in the northeast portion of Franklin County, which is part of the Columbus MSA. Earlier this year, Intel announced they would be locating two new semiconductor fabrication plants in the nearby area. We continue to be on track with our Communibank transaction, with the legal close taking place on July 1st and the system conversion scheduled for the weekend of October 22nd. We are excited to expand our footprint into Northwest Ohio and the Toledo MSA. The process of welcoming our new shareholders, employees, and customers into the Savista family is well underway. We continue to be active in repurchasing common shares. During the quarter, we repurchased 264,860 shares at an average price of $22.86 per share. Our return on average assets was 1% for the quarter compared to 1.07% for the length quarter, and our return on average equity was 9.86% for the quarter compared to 9.89% for the length quarter. Year-to-date, our return on assets was 1.04%, and our return on equity was 9.87%. As I stated, we are extremely pleased with our loan growth for the quarter. Excluding the impact of PPP loans, our loan portfolio grew at an annualized rate of 11.6%. At the end of the quarter, we only had $3.7 million of the approximate $400 million in PPP loans we originated remaining. Our strategy of originating PPP loans to our customers and those referred to us by no referral sources has resulted in no fraud to date in the PPP loans that we made. Our net interest income increased $1.3 million, or 5.8%, from the linked quarter, fueled by low growth and rising interest rates. Our net interest income for the quarter and year-to-date were comparable to the prior years as increases in volume and rate were primarily offset by lower PPP accretion. Our reported net interest margin was 3.43% for the quarter compared to 3.38% for the linked quarter.
Like many banks, the accretion of PPP fees
have had an impact on margins and we have the added complexity of the excess cash generated by our tax program during the first and second quarters also having a negative effect on our margin. Our reported year-to-date net interest margin was 3.40% compared to 3.41% for the prior year. Similarly, the net impact of PPP fee accretion and excess cash from our tax program reduced our 2022 year-to-date margin by seven basis points, while it increased our 2021 year-to-date margin by nine basis points. Assuming interest rates continue to rise with our PPP loan process all but concluded and the liquidity generated by our tax program continuing to subside, we expect our asset-sensitive balance sheet to yield strong margin expansion as we move into the third and fourth quarters. During the quarter, non-interest income declined $2 million or 26.3% in comparison to the linked quarter and declined $4.9 million year-over-year. The primary driver of the decrease from our linked quarter was the timing of fees from our income tax refund processing program. Consistent with prior years, income from our tax program during the first quarter was $1.9 million compared to $475,000 in the second quarter. Gains on the sale of loans declined $363,000 from the first to the second quarter, also contributing to the decline. Interchange fees increased $124,000 over our late quarter due to increased volume. Year to date, non-interest income declined $4.9 million or 27.1% in comparison to the prior year. A $1.8 million gain we recognized on the sale of our Visa B shares as part of our balance sheet restructuring in the second quarter of 2021 contributed to the year-to-date decline, but the primary driver was a $3.5 million decline in gains on the sale of mortgage loans. Second quarter gains on the sale of mortgage loans were $573,000, a decline of 38.8% from our late quarter, and a 74.2% decline from the prior year gain, which was $2.2 million. We sold $35.5 million of mortgage loans during the second quarter of 2022 compared to $38.2 million during the length quarter. The average premium recognized from the sale of loans declined 84 basis points from 2.45% to 1.61% compared to the length quarter. Wealth management revenues were consistent, comparing our second quarter to the late quarter, and wealth management revenue year-to-date 2022 increased to $2.5 million from $2.3 million in the prior year as gains in new accounts and additions to existing accounts kept pace with declines in the overall market. While we anticipate that market pressures will continue to be a headwind for some time, we view the expansion of these services across our entire footprint as an opportunity to diversify and grow non-interest incomes. Non-interest expense for the quarter of $20.4 million was comparable to our linked quarter as increases in professional fees and other expenses were offset by declines in compensation and data processing. Non-interest expense declined $814,000 or 2% year-over-year as the prior year balance sheet restructuring costs were somewhat offset by increases in compensation expense, software maintenance expense, and non-recurring expenses related to our Communibank transaction. You will recall that during the second quarter of 2021, we incurred a $3.7 million prepayment penalty on our early termination of a FHLV long-term borrowing. Our compensation expense increased $982,000, or 4.2% over the prior year, primarily due to annual
Salary increases would go into effect each year in April.
Professional fees increased $779,000 or 52.7%, primarily related to $428,000 in legal and investment banking fees related to our community bank transaction. We also had a $100,000 increase in fees related to our third-party call center that assists with overflow and after-hour call activity, largely the result of calls from income tax refund customers. Total expenses related to the Communibank transaction, including professional fees, were $776,000 through June 30th. With the system conversion scheduled for October, we anticipate recognizing the remaining deal costs during the balance of 2022. Our efficiency ratio was 67% compared to 65.2% for the linked quarter and 66.1% year-to-date. If we had adjusted for one-time deal costs, our efficiency ratio for each of those periods would have been 66.1%, 63.7%, and 64.9% respectively. Turning to the balance sheet. Year to date, our total loans have grown by $66.3 million. Backing out the $39.5 million of PPP loans forgiven during the first six months of 2022, our loan portfolio grew organically by $105.8 million, or at an annualized rate of 10.8%. While not owner-occupied CRE loans led the way, we had good demand in owner-occupied CRE, commercial and industrial, and residential construction loans in every market across our footprint. Along with our strong year-to-date loan production, our undrawn construction lines were at an all-time high of $164.5 million at June 30th, giving us confidence that even in the face of anticipated headwinds, we will grow our loan portfolio at a mid-single-digit rate for 2022. On the funding side, total deposits increased $38.8 million, or 1.6%, since the beginning of the year. As is typical, balances related to our income tax processing program peak toward the end of the first quarter and return to more normal levels throughout the remainder of the year. Non-interest-bearing demand accounts continue to be a focus, making up 34% of our total deposits at June 30th as we continue to attract the operating accounts of our business customers. While asset quality continues to be good, we continue to monitor our hotels and lodging loans closely. At June 30th, hotel and lodging loans made up our largest segment of criticized loans, totaling $48.6 million. Most of these operators have experienced increased occupancy from leisure travel during the last four quarters. Despite the lingering effects of COVID on business travel, we anticipate continued leisure demand going forward will result in a further reduction in our criticized portfolio. There continue to be uncertainties associated with the economy. However, we continue to see improvement in our customers' financial positions across our footprint. While we did make a $400,000 provision during the quarter, it was attributable to growth in our loan portfolio rather than economic stress. In addition, we have realized $94,000 in net recoveries year-to-date. The ratio of our allowance for loan losses to loans at June 30th was consistent with year-end 2021 at 1.33%, and our allowance for loan losses to non-performing loans improved to 572.8% at June 30th, up from 496.1% at the end of 2021. We continue to be on track to adopt the new CECL allowance methodology beginning in 2023. The higher interest rate environment and the pressure in his hand on our bond market resulted in a $55.1 million decline from December 31st, 2021 to June 30th in other comprehensive income related to our investment portfolio. As a result, we ended the quarter with a tangible common equity ratio of 7.38% compared to 9.25% at December 31st, 2021. Despite this decline, our Tier 1 capital ratio grew to 9.87% at June 30th, which is well above what is deemed well capitalized for regulatory purposes. So Vista continues to create capital through earnings and our overall goal remains to have adequate capital to support organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be the payment of dividends and share repurchases. We continue to believe our stock is a value. During the quarter, we repurchased 264,860 shares of common stock for $6.1 million. For an average price of $22.86 per share. Year to date, we have repurchased 448,199 shares, or 3% of our shares that were outstanding at December 31st, 2021. We have an authorization of approximately $12.3 million remaining in our current repurchase program. As I indicated earlier, we closed our transaction with Communic Bank and their subsidiary, the Henry County Bank, on July 1st. Our employees continue to meet and work towards successfully integrating our systems later this year. And we look forward to welcoming their shareholders and customers to our Savista family as we grow into northwestern Ohio and the greater Toledo MSA. In summary, we are extremely pleased with another quarter of solid earnings, continued loan growth, and solid credit quality. Despite the volatile interest rates, economic uncertainties, and inflationary pressures we are all facing, we remain optimistic. Businesses and consumers across our footprint continue to have strong balance sheets. Our load pipelines are solid, and we are well on our way to a successful integration of the Henry County Bank into the 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 the start button on your telephone keypad. 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 sign off our roster. Our first question will come from Terry McEvoy with Stevens.
You may now go ahead.
Hi, good morning, guys. Maybe to start, could you just talk about deposit pricing competition within your markets and what are your thoughts on your deposit rates and average deposit yields in the second half of the year? Where do you think those can go?
Well, I think, you know, we've started to see a few specials being offered, but in our market, as far as the project pricing, but, you know, obviously, having kept up with the loan increases, we've not seen much movement in our rates. As we stated on our last call, I think the first 100 basis point of rate increases, there's probably little movement at all, which there was really no movement in ours through those first 100 basis points. We'll have to give a little bit back to the clients, but again, when rates were higher back in 16 and 17, our margin was much stronger than our peers during that time. I think as rates fell, we had less room to improve our margin. So we were maybe 15 basis points or so better than our peers. But when rates were at today's level and above, we were very disciplined in raising our deposit prices. And our margin expansion back during that time was probably 50 basis points better than our peer banks. So, you know, I would anticipate that to continue. I'll ask Rich Dutton here if he has any other further color he'd like to give around that.
Yeah, Terry, I think like Dennis said, we'll attack our significant depositors with specials. And again, because most of our accounts are operating accounts with our businesses, they're maybe a little less deposit-sensitive, rate-sensitive. Like Dennis said, too, I mean, we're pretty disciplined. We've not seen a ton of... pressure to move rates up in our markets. And I would anticipate that while, yeah, it will go up, I don't think we're not going to be a leader in raising rates in the back end of the year. I don't know if that helps or not, but that's kind of what we're thinking.
And our loan-to-deposit ratio still is hovering somewhere in that 83%, 84% range. we still have a lot of liquidity on our balance sheet. We're comfortable operating the bank somewhere in the high 90s.
So we still feel we got a lot of liquidity from deposits on our balance sheet.
Thank you both for that. And then maybe sticking with the topic of higher rates, I'm just wondering, have you stress test your commercial real estate portfolio in a rising rate environment? And What are your thoughts there as rates rise, particularly the non-owner-occupied CRE?
Terry, this is Paul Stark. We do that frequently. We do it every time we underwrite credits as well. So I think right now, given the relationship aspects of our borrowers, we've also got strong sponsors. So I'm not really too concerned based on what we've seen so far.
I appreciate it. Thank you.
Thanks, Terry.
Our next question will come from Tim Switzer with KBW. You may now go ahead.
Hey, good morning. I'm on for Mike Perito. Thanks for taking my question. Yeah, hi, Tim. You guys just mentioned you have a lot of excess liquidity still on the balance sheet. And, you know, working on balancing that with, you know, deposit pricing and I guess maybe possibly some deposit runoff, depending on how trends go. But just given all that and rates moving up, what's your guys' strategy with that excess cash? Do you have any plans to possibly deploy it into the securities portfolio anymore? Or I guess like what kind of movement should we expect?
I don't think we will, probably at least not over the next quarter, do anything big like that and make a deployment of liquidity into our securities portfolio. Our loan demand is pretty strong. I'm sure Chuck's competent a bit to talk about what we've got in the pipeline, and that's where we want to deploy it. And I think the other thing, while we've not talked about it, and I'm not going to talk much about it, but we've got the Henry County, the community bank deal, they've got some liquidity on their balance sheet too. And we did maybe, we might do some things with that going forward, but it won't be significant. Okay, I got you. And those are where we want to deploy it.
Yeah, we'd rather deploy it in loans. And we really want to get, you know, see what happens over the next couple of months with the rising rates. And, you know, we read the same articles that you do that, you know, some of the consumers are starting to, you know, spend down their savings and things like that. We've really not seen it too much on our balance sheet. We know there's been a little bit, but not much yet. So, I don't think we want to make that move. We just want to give it a little bit more time before we do that. But we are picking up some excess liquidity from the Henry County Bank deal, too.
Right. And speaking of the strong loan growth, very strong trends in the first half of the year, but still expecting mid-single-digit growth for the full year. What's driving that? Are you guys just being cautious? Are you seeing a slowdown, or is it maybe an expectation of a slowdown just given economic trends and the Fed tightening?
I think we've got relatively decent clarity into the third quarter here. Fourth quarter, I don't have much clarity at all of what's going on from that side of it. That was our guidance from the beginning of the year, mid-single-digit growth. I'm hopeful that the To eclipse that, obviously, we're running a little over 10% now. I think 10% might be a stretch to get through the whole year, but I think we're hoping to eclipse that mid-single-digit.
Yeah, I mean, we have a record undrawn construction loans already booked. So those will draw up. There's $164 million. As Chuck said, near-term, the pipelines look good. But the rising rate environment, I think, will definitely slow loan demand. And as loan demand slows and there's less deals out there, I think those deals also get very competitively bidded. So, your fallout ratio and your pipelines are a little greater as well. So, but we are being, I think, cautious as we move forward because we had really great demand for, you know, that first half of the year. So, we try to be realistic in our views. But, you know, we're off to a great start for the first six months, and the pipelines are good.
And, you know, a nice part, too, is Tim and Chuck, again, Our large payoffs in the first half of the year were nearly $30 million more this year than they were last year at the commensurate same time. The one thing that I guess would temper a little bit of growth would be we're seeing some crazy pricing being offered to some of our real estate clients for properties that are stabilized. A few of them have decided just to sell up, you know, based on the price that they're getting right now. If that continues to happen into the future, you know, it might temper our growth a touch. But we're still very optimistic. The biggest issue we have right now is just trying to look out into the fourth quarter with all the economic things that are taking place and, you know, what will demand be like in the fourth quarter.
And we're seeing some credit structure that is not typical out there. We've seen more 30-year amortizations on real estate. And historically, Savista and a lot of commercial banks have not gone that far.
on their amortization so you are seeing a little bit of that and you know we've been fairly you know we're pretty disciplined in our in our uh credit structure so we will we want to stay disciplined as we move forward and as you can tell in our marketing piece we know we've been very disciplined on the margin side as well we're saying you know we're seeing some of the banks that have tons of excess liquidity put some rates out there that you know we just will not match
Awesome. Thanks for all the color there. That's all for me.
Thanks, Tim.
Again, if you have a question, please press star then 1. Our next question will come from Nick Tucciarelli with Piper Sandler. You may now go ahead.
Good afternoon, everyone. How are you?
Hi, Nick.
I appreciate the mid-single-digit loan growth guide and the commentary from the previous question. But I was hoping you could discuss your approach to adding credits given the macro uncertainty. Are you being more selective at this point in the cycle? Are there segments where you're showing more caution or on the flip side areas of particular opportunity?
I think it's more looking at it on a case-by-case basis. Obviously, we're not going to go run out and do a lot of hotel loans or restaurant loans, et cetera, the stuff that struggled through the COVID time period and is just bouncing back. But really, we kind of take it on a case-by-case basis and probably, most importantly, a sponsor-by-sponsor basis. You know, we're looking at the people that are backing the deals and the strength that they have. So, you know, we don't have any stop signs. Let's tell our guys, hey, don't go look at that industry. But, you know, I would tell you we're underwriting it as hard as we ever have.
Well, in this part, it's being selective also with locations. So certain parts of Cleveland are much better than other parts of Cleveland. So that just reiterates what he's saying on a case-by-case basis. Well, I'm just talking about where demand is. Yeah.
And obviously, we're seeing a tremendous amount of growth in the Columbus area as far as a lot of, you know, we do a lot of development lending down there. And that's continuing to be strong, especially with Intel moving in here in the next couple of years.
Right, and then the overall expense base is going to be impacted by the deal closing, but can you help us think about the core expense run rate in future periods?
I think last time we were together, we kind of guided you to $20,500,000 a quarter. We came in a little under that this time, but I still think looking forward, that's what we're guiding to. X deal costs.
Thank you very much for taking my questions. This concludes our question and answer session.
I would now like to turn it over to Mr. Schaefer for any closing remarks.
Well, I just want to close and I just want to thank everyone for joining and those that participated in today's call.
Again, we're very pleased with our second quarter results. We're pleased with the loan growth that we had and the pipelines that we have in place moving forward. So we look forward to talking to you all again in a few months to share our third quarter results.
So thank you very much. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.