Civista Bancshares, Inc.

Good afternoon. 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 direct reconciliation of the GAAP to non-GAAP measures. The call will be recorded and made available on Savista BankShare'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'll turn the call over to Mr. Schaefer.

Good afternoon. This is Dennis Schaefer, President and CEO of Savista BankShares, Inc. I would like to thank you for joining us for our second quarter 2023 earnings call. I'm joined today by Rich Dutton, SDP of the Company and Chief Operating Officer of the Bank, Chuck Parcher, SDP of the Company and Chief Lending Officer of the Bank, and other members of our executive team. This morning, we reported net income for the second quarter of $10 million, or $0.64 per diluted share, which represents a 20.8% increase over our second quarter in 2022, and that income of $22.9 million, or $1.45 per diluted share, for the six months ended June 30, 2023, which represents a 41.8% increase over the first half of 2022's performance. Our margin, which was 3.99% year to date and 3.86% for the quarter, continues to drive our earnings. However, Like the rest of the industry, our margin is under some pressure. Our yield on earning assets decreased by nine basis points during the quarter to 5.31% and was 5.27% year-to-date. The cost of funding our balance sheet increased by 36 basis points during the quarter to 1.51% and was 1.33% year-to-date. Let me provide some additional color around our deposit strategy. Late in the first quarter, with the uncertainty surrounding the bank failures, we went out and locked up funding to fortify our balance sheet. We filled an order for $141.5 million of nine-month brokered CDs paying 5.2% and $151 million of 12-month brokered CDs paying 5%. This replaced $92 million of maturing brokerage CDs and provided additional liquidity to preserve our overnight borrowing capacity at the federal home loan bank. We felt this was extremely important given the bank failures in March. Beginning in the first quarter, we also began raising interest rates primarily to our larger balanced money market and time deposit customers to maintain balances. Excluding the increase in broker deposits and increases in deposits related to our tax refund processing program, our deposit balances have declined just 2.3% from December. As a result, while our cost of deposits during the quarter increased from 49 basis points to 107 basis points, our cost of deposits, excluding broker deposits, only increased 10 basis points during the quarter from 39 basis points to 49 basis points. Our cost of deposits, excluding broker deposits year-to-date, was 46 basis points. Our deposit data, excluding brokered CDs, was 7 basis points over the last 12 months, and our cost of overall funding data was 22 basis points over the last 12 months. Our loan data has been consistent over the 12-month cycle at 30 basis points. We will continue to monitor deposit flows and react accordingly, but we do not anticipate a similar increase in our funding costs going forward. Our earnings were also impacted by lower gains on sales of leases. This was primarily the result of internal changes made to our lease sales process in May, which were not fully implemented until the quarter end. we anticipate resuming the sale of our originations in the third quarter. For the quarter, we originated $36.6 million of loans and leases through VFG and sold $10.8 million for a gain of $256,800. We typically target the sale of 50% of our lease production. Yesterday, we also announced a penny per share increase in our quarterly dividend to 16 cents per share. This is a 6.7% increase in our dividend and represents a 25% dividend payout ratio based on our second quarter earnings. This is our second consecutive quarterly increase and reflects our confidence in our earnings. Our year to date earnings per share have increased 32.3% when compared to the same period a year ago. Our return on average assets was 1.12% for the quarter compared to 1.47% for the length quarter and our return on average equity was 11.58% for the quarter compared to 15.32% for the length quarter. Year to date, our return on assets was 1.29% and our return on equity was 13.42%. During the quarter non-interest income declined $1.9 million or 17.3% in comparison to the linked quarter and increased $3.5 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. We also received a $1.5 million bonus as part of the newly negotiated debit grant agreement we entered into during the first quarter, which was also included in other non-interest income. Year-to-date, non-interest income increased $6.9 million, or 52.3% in comparison to the prior year. The primary driver was $4.2 million in lease revenue and residual fees from the addition of VFG late in 2022. These fees are primarily made up of operating lease payments and gains on the sale of equipment at the end of the lease term. Also included was the previously mentioned $1.5 million bonus we received as part of the debit brand agreement. Second quarter gains on the sale of mortgage loans or $615,000, which was consistent with our linked quarter. The year-to-date gain on the sale of mortgage loans was $1.2 million and represented a 17.4% decline from the previous year. Wealth management revenues for the quarter were consistent with the linked quarter and declined slightly year-to-date compared to the prior year. While we anticipate that market uncertainty will continue for some time, We view the expansion of these services across our footprint as an opportunity to diversify and grow non-interest income. Non-interest expense for the quarter of $27.9 million was comparable to our linked quarter as increases in FDIC assessments and software maintenance were mitigated by declines in compensation and professional fees. Year-to-date non-interest expense increased $14.9 million or 36.7% over the prior year. Much of the increase is attributable to our acquisitions of Comunibank and VFG in the third and fourth quarters of 2022. Our compensation expense increased $5.9 million or 24.5% over the prior year. The bulk of the increase is due to $4.4 million in additional salaries, commissions, and benefits attributable to our new community bank and VFG employees. The increase in depreciation is primarily due to our new leasing company. Equipment that is under an operating lease is owned and depreciated by Savista until the end of the lease term. Included in this year's professional fees is a $400,000 payment to a consultant, that assisted in the negotiation of our new debit card agreement. The increase in amortization of our deposit-based intangible and marketing were also due to our 2022 acquisitions. The increase in other non-interest expense was primarily due to growth in unfunded loan commitments and the related $264,000 provision required by our adoption of CECL during the first quarter. Our efficiency ratio is 67.9% compared to 62.4% for the length quarter and 65.1% year-to-date. Turning to the balance sheet, year-to-date, our total loans have grown by $89.6 million, which includes $24.8 million of loans and leases originated by VFG. This represents an annualized rate of 7%. While non-owner-occupied CRE loans led the way, lease financing receivables were up due to lighter than anticipated sales. Residential real estate loans increased as we originated more of our on-balance sheet mortgage products, including our CRA, ARM, and construction products. Commercial revolving lines of credit, currently at a 35% utilization rate, have not re-advanced and are well below pre-pandemic balances. Along with our year-to-date loan production, our undrawn construction lines were $211.3 million at June 30th, adding to our confidence that we will grow our loan portfolio at a mid-single-digit rate over the balance of 2023. At June 30th, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program, was 98%. On the funding side, total deposits increased $322.8 million, or 12.3% since the beginning of the year. If we adjust for increases in brokered deposits and tax program funding, our deposits declined just 2.3% year-to-date. We believe this illustrates the strong relationships we have with our commercial and retail customers. Non-interest-bearing demand accounts continue to be a focus. making up 34.1% of our total deposits at June 30th. If we exclude CIVISTA's own deposit accounts and those related to our tax program, 13.2% or $390.7 million of our deposits were uninsured by the FDIC at June 30th. Our cash and unpledged securities were $415.5 million at quarter end, which more than covered our uninsured deposits at June 30th. Other than the $378.2 billion of public funds with various municipalities across our footprint, we had no concentration in deposits at June 30th. We continue to believe our low-cost deposit franchise is one of Sylvester's most valuable characteristics and contributes significantly to our peer-leading net interest margin and profitability. We ended the quarter with our Tier 1 leverage ratio at 8.86%, which has been well capitalized for regulatory purposes. At June 30th, all of our $619.2 million in securities were classified as available for sale and had $63.1 million of unrealized losses associated with them. Our tangible common equity ratio improved to 6.16%, at June 30th, 2023, compared to 5.83% at December 31st, 2022. Given the turmoil in the banking industry as we entered the quarter and our good fortune of being the Federal Reserve Bank of Cleveland's first safety and soundness exam after the failure of Silicon Valley and Signature Banks, we thought it prudent to hold off on the resumption of our stock repurchase program during the quarter. I am happy to report that we received our exam report earlier this month and we were very pleased with the results. We continue to believe our stock is of value and anticipate resuming our repurchase program now that we have released earnings. Despite the uncertainties associated with the economy and the expense pressures our borrowers face, our credit quality is strong and our credit metrics remain stable. We did make an $861,000 provision during the quarter which was primarily attributable to loan and lease growth. Our ratio of our allowance for loan losses to loans improved from 1.12% at December 31st, 2022 to 1.33% at June 30th, reflecting growth in our adoption of CECL during the first quarter. In addition, our allowance for loan losses to non-performing loans increased from 261.45% at December 31st, 2022 to 327.05% at June 30th. In summary, although our margin compressed more than anticipated, we continue to generate strong earnings and our margin remains healthy. We continue to see quality loan growth, solid opportunities across our footprint, and no material deterioration in our crack quality. Our focus continues to be on creating shareholder value, which is evidenced by the year-over-year increase in our earnings per share and the two increases in our quarterly dividend. Thank you for your attention this afternoon, and now we'll be happy to address any questions that you may have.

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