Civista Bancshares, Inc.

Good day and welcome to the Savista Bank Shares year-end 2022 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 your touch-tone phone. To withdraw your question, please press star then two. 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 for 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 a reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Savista Bank Shares' website at www.civb.com. At the conclusion of Mr. Schaefer's remarks today, he and the Savista management team will take any questions you may have. Now I will turn the call over to Mr. Schaefer. 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 2022 earnings call. I am joined today by Rich Dutton, SVP of the company and chief operating officer of the bank, Chuck Furcher, 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 fourth quarter. This morning, we reported earnings for the fourth quarter 2022 of $12.1 million or 77 cents per diluted share, which represents a 5% increase over the prior year's fourth quarter. Our full year results were net income of $39.4 million or $2.60 per diluted share for the year ended December 31st, 2022 which is consistent with our prior year net income of $40.5 million. During the year, we completed two acquisitions, expanded in central Ohio, had record organic loan growth, and achieved near-record profits. I want to take this opportunity to thank all of our employees for their commitment to the organization and for their good work in helping us achieve these accomplishments. Our return on average assets was 1.41% for the quarter and 1.21% for the year, while our return on average equity was 16.09% for the quarter and 12.47% for the year. If we adjust for the $2.9 million in non-recurring expenses associated with the acquisition of Communibank Corp., which closed on July 1st, and the $814,000 in non-recurring expenses associated with the acquisition of Vision Financial Group Bank, which closed on October 1st, our earnings per share would have been $0.88 for the fourth quarter and $2.80 for the year. During the quarter, loans and leases grew by $218.3 million or an annualized growth rate of 37.5%. Excluding loans and leases from our BFG acquisition, which occurred during the quarter, net loans grew by $150.9 million, or an annualized rate of 25.7%. While we are pleased with BFG's contribution, it was our strong loan growth that drove our quarterly earnings. Excluding the addition of loans and leases that came to us through Communibank, and Vision Financial, and adding back the repayment of $46 million in PPP loans, we experienced $356.8 million in organic loan growth for the year, which is an annual growth rate of 18.3%. Our net interest margin expanded by 11 basis points compared to the linked quarter, and by 72 basis points when compared to the prior year quarter. For the year, our net interest margin expanded 28 basis points when compared to the previous year to 3.75%. This is a reflection of our strong core deposit franchise and the disciplined approach we take in managing our deposit rates. In early October, we announced and closed on the acquisition of Vision Financial Group, a small equipment leasing and finance company based in Pittsburgh, Pennsylvania that originates leases and loans nationally. Small equipment leasing represents a new line of business for us. We were looking for other revenue sources to help diversify our income and leasing, which is a natural extension of our lending products, will help us do that. Also in October, we successfully completed the system conversions of Communibank and now have them operating on our legacy systems which will allow us to offer our standard suite of products to customers in Northwest Ohio and the Toledo MSA. Now let's turn our attention to our performance for the quarter and for the year. Net interest income increased $2.1 million, or 7%, over the length quarter, and $9.2 million, or 39.6%, over the same quarter in the prior year. Our net interest income for the year increased $14.8 million, or 15.5% compared to 2021. The increase was primarily the result of strong organic loan growth across our footprint, a rising interest rate environment, our disciplined approach to managing deposit rates, and the addition of CommuniBank Corp. and Vision Financial in the latter half of the year. Our net interest margin was 4.14% for the quarter and 3.75% for the year. Both measures reflect expansion over the comparable 2021 period. Similarly, our margin expanded by 11 basis points over the length quarter from 4.03% to 4.14%. Our yield on earning assets increased by 118 basis points compared to the prior year quarter and by 51 basis points over the length quarter as our team originated new loans and existing loans on our books continued to reprice at higher rates. Our yield on earning assets for 2022 grew by 43 basis points compared to the same period in 2021, even though our 2021 loan yields were augmented by the accretion of $11.5 million in PPP interest and fees. Funding costs for the length quarter increased by 41 basis points while our year-over-year funding costs increased by 15 basis points. We have always and continue to negotiate rates with our large depositors. We are starting to feel some deposit rate pressure and in mid-December To remain competitive, we increased our offering rates on higher tiered money market accounts and select time deposits in conjunction with the Fed's most recent move. Our non-interest income remained solid, increasing $4.3 million over the linked quarter. While the quarter included $3.9 million in revenue from our leasing company, we also experienced increases in virtually every non-interest income category over our linked quarter as we continue to focus on diversifying and strengthening our non-interest income streams. 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 of 2021, our non-interest income for the year of $29.1 million was comparable to that of the previous year. as the increases in service charges and leasing revenue offset declines in our gain on sale of mortgage loans. Service charges continue to be a strong contributor, increasing $185,000 compared to the late quarter and $1.2 million over 2021. Non-interest expenses increased $4.2 million or 18.4% in comparison to the late quarter. The increase was primarily the result of $637,000 in non-recurring expenses associated with the acquisition of Vision Financial Group and $1.5 million in non-recurring expenses associated with the conversion of Communibank systems and severance payments to former Communibank employees during the quarter. Excluding these one-time expenses, non-interest expenses would have increased by 8.8% primarily on additional compensation expense related to our new employees. Non-interest expense increased $12.8 million or 16.5% year-over-year as the $3.7 million prior year balance sheet restructuring costs were replaced by increases in compensation expense, occupancy expense, software maintenance expense, professional fees, and other non-recurring expenses related to our Communibank and Vision Financial Group transactions. Excluding non-recurring expenses, non-interest expenses for the year would have increased by 11.7%, primarily on additional compensation and occupancy expenses related to our new employees and additional facilities. Total expenses related to Communibank and Vision Financial transactions were in line with expectations and totaled $3.8 million for the year. Our efficiency ratio was 63.2% and 64% year-to-date. If we had adjusted for one-time deal costs, our efficiency ratio for each of those periods would have been 58.2% and 61.4% respectively. Turning to the balance sheet. Year-to-date, our total loans increased by $548.8 million, which includes the addition of $167.5 million of loans from Communibank, $67.5 million in loans and leases from Vision Financial Group, and a $42.6 million repayment in PPP loans, excluding the Communibank, Vision Financial Group, and PPP loans, our loan portfolio grew by $356.8 million or on an annualized basis of 18.3%. Making the same adjustments for our fourth quarter organic loan growth was $158.6 million or 29.2% on an annualized basis. This growth was attributable to strong commercial loan demand in virtually every one of our markets. Along with our strong year-to-date loan production, we continue to have commercial construction projects at various stages of completion. Our undrawn construction lines remain near record highs, and we were $162 million at December 31, 2022. While we believe the higher interest rate environment will inevitably slow the economy and loan growth, we believe our loan portfolio will grow at a mid-single-digit rate for at least the first half of 2023. On the funding side, we reported $203.3 million increase in total deposits from year-end 2021 to 2022, with increases in every deposit category except interest-bearing demand accounts as customers migrated into higher-yielding deposit accounts. If we were to exclude the deposits accounts acquired from Communibank, total deposits would have been unchanged from year end 2021 to 2022, although we would have seen a similar migration from interest-bearing demand and savings accounts into higher-yielding time deposits. We continue to focus on attracting non-interest-bearing demand accounts, which made up 34.2% of our total deposits at year end. These accounts are primarily made up of operating accounts of our business and municipal customers. We continue to believe our deposit franchise is one of Savista's most valuable characteristics and contributes significantly to our peer-leading net interest margin and profitability. Despite the uncertainties associated with the economy, we have not seen any deterioration in our customers' financial positions across our footprint, In fact, year-end classified loan levels have improved and are below pre-COVID levels. While we did make a $752,000 provision during the quarter, it was solely attributable to growth in our loan and lease portfolio rather than economic stress. In addition, we realized $118,000 in net recoveries during the year. The ratio of our allowance for loan losses to loans at year-end declined slightly from December 2021 from 1.33% to 1.12%, as did our allowance for loan losses to non-performing loans, which was 261.45% at December 31, 2022, compared to 496.10% at the end of 2021. I would note that if we include the credit mark of $5.4 million associated with CommuniBank's loans and Vision Financial Group's leases, our ratio of allowance for loan losses to loans would have been 1.33% at the end of the year. As we look forward to the adoption of CECL in the first quarter of 2023, we anticipate increasing our allowance for credit losses by $3.3 million and recording a liability for unfunded commitments of $3.4 million. These initial entries will not impact earnings as they will be recorded through equity. While longer-term interest rates have moderated, the higher interest rate environment continues to put pressure on bond portfolios. Although unrealized losses in our securities portfolio began to moderate in the fourth quarter, we did experience a $67.4 million decline in other comprehensive income from December 31st, 2021 to December 31st, 2022 related to unrealized losses in our investment portfolio. As a result, we ended the quarter with tangible common equity ratio of 5.91% compared to 9.25% at December 31st, 2021. Despite this decline, our Tier 1 leverage ratio at December 31st was 8.92% and remains well above what is deemed well-capitalized for regulatory purposes. Sylvester 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. While we did slow the pace of repurchases during the fourth quarter, we did repurchase 7,205 shares of common stock for $152,400 at an average price of $21.15 per share. For the year, we repurchased 742,000 and 15 shares at an average price of $22.58 per share. This represents 5% of our shares that were outstanding at December 31st, 2021. We have an authorization of approximately $6.1 million remaining in our current repurchase program. As you know, we added Vision Financial Group, a small equipment leasing and finance company to Savista in October. We have retained their management team and are well on our way to integrating them into our organization. Vision originated $40.6 million in leases and loans during the fourth quarter at a weighted average yield of 9.2%, and we have budgeted them to originate $164.5 million in leases and loans during 2023. In summary, we are pleased with another quarter and year of excellent earnings. exceptional loan growth, and solid credit quality. I would like to say again that none of this would be possible without the efforts of our team. So this is fortunate to have people who care about our shareholders, our customers, our communities, and each other. Despite the uncertainty surrounding interest rates in the greater economy, as well as the inflationary pressures we are all facing, we remain optimistic. Businesses and consumers have crossed our footprint continue to have strong balance sheets, our loan pipelines remain solid, and we have successfully integrated Communibank and Vision Financial Group into the Savista family. Thank you for your attention this afternoon, and now we'd be happy to address any questions that you may have.

Thank you, sir. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, we ask that you please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Terry McEvoy with Stevens. Please go ahead. Hi. Good afternoon, everyone.