Civista Bancshares, Inc.

Good day, and welcome to the Savista Bank Shares third quarter 2022 earnings call. All participants will be in a listen-only mode today. Should you need any assistance, please signal a conference specialist by pressing the star key followed by a zero on your telephone keypad. 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 risks 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 gap-to-non-gap measures. This call will be recorded and made available on Savista Bank Share's website at www.civb.com. At the conclusion of Mr. Schaefer's remarks, he and the Savista management team will take any questions you may have. Now, I'd like to turn the call over to Mr. Schaefer.

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 2022 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. Let me start by noting several significant accomplishments or transactions that occurred during the third quarter. This morning, we reported net income of $11.1 million or 72 cents per diluted share for the third quarter of 2022 and net income of 27.3 million or $1.82 per diluted share for the nine months ending September 30th, 2022. 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. We closed our transaction with Communibank Corp on July 1st and completed the system's conversion over this past weekend. In addition to adding approximately $174 million of loans and $251 million of low-cost core deposits to our balance sheet, we are excited to introduce our new Northwest Ohio customers to the products and services that Savista has to offer. Loan growth across our footprint continues to be strong. Even after adjusting for the loans that came to us via Communibank, loans grew organically by $93 million, or 18%, on an annualized basis during the quarter. Due to our strong core funding and rising interest rates, our margin expanded by 60 basis points over the length quarter as new interest-earning assets were added at higher yields and existing loans repriced. Our deposit betas moved slower, and as a result, our funding costs only increased two basis points. Our return on average assets was 1.35 percent for the quarter, compared to 1 percent for the length quarter, and our return on average equity was 14.45 percent for the quarter, compared to 9.86 percent for the length quarter. Year to date, our return on assets was 1.14 percent, and our return on equity was 11.34 percent. We continue to be active in repurchasing common shares, During the quarter, we repurchased 286,611 shares. Year-to-date, we have repurchased 734,810 shares, or 4.9% of the outstanding shares, at December 31, 2021. Finally, we were excited to announce the acquisition of Vision Financial Group, a full-service business equipment leasing company and finance company based in Pittsburgh, Pennsylvania. The transaction closed on October 1st. We believe the addition of a small-ticket commercial leasing company to the Savista family further expands our revenue streams. Now let's turn our attention to our income statement and our balance sheet. Net interest income increased $6.2 million last or 25.4% over the length quarter, and $6 million, or 24.6% year over year. Net interest income for the first nine months of 2022 increased $5.5 million, or 7.7% compared to 2021. The increase was primarily the result of our excellent organic loan growth throughout the year, the rising interest rate environment, and the acquisition of Communibank Corp this past quarter. This increase was particularly impressive given that there were significant PPP fees amortized into interest income in the prior year. As I stated, we are extremely pleased with our loan growth for the quarter, excluding PPP loans and the loans acquired via our Communibank transaction We were able to grow loans organically by $93 million, or 4.5% for the quarter, which is 18% on an annualized basis. At the end of the quarter, of the approximately $400 million in PPP loans we originated during 2020 and 2021, only $819,000 remained outstanding. Without question, this program was a success for our business customers and communities throughout our footprint. Our net interest margin was 4.03% for the quarter and 3.62% for the first nine months of 2022, respectively. Both measures reflect expansion over the comparable 2021 periods. Similarly, our margin expanded by 60 basis points over the length quarter from 3.43% to 4.03%. The yield on our earning assets increased by 48 basis points compared to the prior year quarter and increased by 63 basis points over the linked quarter as new loans are being originated at higher rates and loans already on our books reprice at higher rates. Our yield on earning assets for the first nine months of 2022 grew by 17 basis points compared to the same period in 2021, even though our 2021 loan yields were augmented by the accretion of $9.8 million in PPP interest and fees. Funding costs for the quarter ticked up by eight basis points over the prior year quarter, and year-to-date compared to the prior year increased by two basis points. In comparison to the linked quarter, our third quarter funding costs also ticked up by two basis points. During the quarter, non-interest income was consistent with the linked quarter at $5.7 million and declined $692,000 in comparison to the same quarter in the prior year. The primary driver of the decrease from our prior year quarter was a decline in gain on the sale of mortgage loans of $975,000, which were partially offset by a $366,000 increase in service charges. Third quarter gains on the sale of mortgage loans were $637,000, an increase of 11.2% from our late quarter as we returned to our more typical mortgage banking activity of financing new home purchases. You will recall that we recognized a $1.8 million gain on the sale of our Visa B-shares as part of our balance sheet restructuring in the second quarter of 2021, which contributed to the year-to-date decline. However, the primary driver of the decrease in our non-interest income was a $4.4 million decline in gains on the sale of mortgage loans. For the nine-month period, non-interest income declined $5.6 million, or 22.8%, in comparison to the prior year. Wealth management revenues were consistent comparing our third quarter to the linked quarter, as was our wealth management year-to-date revenue at $3.7 million compared to $3.6 million in the prior year. We continued to add new accounts, and our existing clients continued to make additions to their existing accounts, which helped us keep pace with the 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 income. Non-interest expense for the quarter was $22.6 million compared to our linked quarter of $20.4 million. $788,000 of the $2.2 million increase was the result of one-time deal costs associated with the Communibank transaction. Non-interest expense increased $2.5 million or 4.1% year-over-year as the prior year balance sheet restructuring costs were replaced by increases in compensation expense, professional fees, software maintenance expense, and non-recurring expenses related to our Communibank transaction. You may recall that during the second quarter of 2021, we incurred a $3.7 million prepayment penalty on our early termination of a FHLB long-term borrowing. Compensation expense increased $2.1 million, or 6%, over the prior year, primarily due to annual salary increases, which go into effect each year in April, and the addition of approximately 44 former Comunibank employees on July 1st. Professional fees increased $1.3 million, or 59.3%. primarily related to $839,000 in legal and investment banking fees related to our Communibank transaction. Total expenses related to the Communibank transaction were in line with our expectations in total $1.9 million through September 30th. Our efficiency ratio was 61.4% compared to 67% for the linked quarter and 64.4% year-to-date. If we had adjusted for one-time deal costs, our efficiency ratio for each of those periods would have been 59.7 percent, 66.1 percent, and 62.9 percent, respectively. Year-to-date, our total loans increased by $330.7 million, which includes the addition of $174.3 million of loans from Communibank and a $42.4 million reduction in PPP loans. Excluding the Communibank and PPP loans, our loan portfolio would have grown by $198.8 million or at an annualized basis of 13.6%. Making the adjustment for Communibank and PPP, our third quarter growth was $93 million or 18% on an annualized basis. Demand for commercial real estate in virtually every one of our markets continue to drive the majority of this increase. Along with our strong year-to-date loan production, our undrawn construction lines remain near an all-time high at $163.4 million at September 30th. While we believe the higher interest rate environment will inevitably slow the economy and loan growth, we are confident that even in the face of the anticipated headwinds, we will grow our loan portfolio at a high single-digit rate for the balance of 2022 and at a mid-single-digit growth rate into 2023. On the funding side, we experienced growth in every category except interest-bearing demand, with total deposits increasing $291.6 million, or 12.1%, since the beginning of the year. The addition of Communibank's low-cost core deposits accounted for $251 million of this increase. Non-interest-bearing demand accounts continue to be a focus and made up 37% of our total deposits at September 30th. As we continue to attract operating accounts of our business and municipal customers. Even in light of the uncertainties associated with the economy, we have not seen any real deterioration in our customers' financial positions across our footprint. While we did make a $300,000 provision during the quarter, it was attributable to growth in our loan portfolio rather than economic stress. In addition, we have realized $132,000 in net recoveries year-to-date. The ratio of our allowance for loan losses to loans at September 30th declined slightly from December 2021 from 1.33% to 1.19%, as did our allowance for loan losses to non-performing loans, which was 476.2% at September 30th compared to 496.1% at the end of 2021. I would note that if we include the credit mark of $2.8 million associated with the Communibank's loans, our ratio of allowance for loan losses to loans would have been 1.31% at the end of the quarter. We continue to be on track to adopt the new CECL allowance requirements beginning in 2023. The higher interest rate environment and the pressure it has had on the bond market resulted in a $78.8 million decline from December 31st, 2021 to September 30th in other comprehensive income related to our investment portfolio. As a result, we ended the quarter with a tangible common equity ratio of 6.05% compared to 9.25% at December 31st, 2021. Despite this decline, our Tier 1 capital ratio at September 30th was 9.32 percent, 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 286,661 shares of common stock for $6.1 million for an average price of $21.33 per share. Year to date, we have repurchased 734,810 shares or 4.9% of our shares that were outstanding at December 31st, 2021. We have an authorization of approximately $6.2 million remaining in our current repurchase program. Savista understands the opportunities growth brings to our customers, employees, and shareholders. Many of our employees were involved with the planning and execution of our recent conversion, and I could not be more pleased with the way they continued to manage their daily responsibilities. It has been a summer of much planning and even more work, and to see the way the conversion came together this past weekend reinforces my pride in our team. As I indicated earlier, we closed our transaction with Vision Financial Group Inc. on October 3rd. Vision is an equipment leasing and finance company with over 30 years of history based in Pittsburgh, Pennsylvania that brings a new revenue stream to Savista. While not exclusively, they do focus on six industry sectors, propane, recycling and waste management, environmental, additive manufacturing, construction, and non-destructive testing. I've said on previous calls that each transaction must be a cultural fit. I am confident, after our extensive due diligence process, that both organizations drive results by building strong customer relationships and by providing a superior customer experience. Deal highlights include the consideration mix was 84% or $28.6 million cash and 16% or $5.25 million stock. We expected the deal to be immediately accretive, ramping up from being 6.4% accretive in year one to being 15.1% accretive in year two as Vision leverages our low-cost funding to transition into a bank-funded model. The deal has a 3.8-year tangible book value earned back. Our employees will continue to work toward the successful integration over the fourth quarter, and we look forward to leveraging both of our client bases to grow our commercial loan and leasing businesses. In summary, we are pleased with another quarter of excellent earnings, continued loan growth, and solid credit quality. Despite the volatile interest rates, the 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 loan pipelines are solid. We successfully integrated Communibank into the Savista family and are well on our way to the same successful integration of Vision Financial Group. 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 1 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 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Terry McEvoy with Stevens. Please go ahead.