Civista Bancshares, Inc.

Excuse me. This is a conference operator. Thank you for your patience. The call begins shortly. Thank you. you Thank you. 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 this call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute the most directly comparable gap 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. If you require operator assistance, please press star, then zero. At the conclusion of Mr. Schaefer's remarks, he and the Savista 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, and I would like to thank you for joining us for our third quarter 2023 earnings call. I'm 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. This morning, we reported net income for the third quarter of $10.4 million, or 66 cents per diluted share, which represents a 6.5% decrease from the third quarter in 2022, and net income of $33.3 million, or $2.12 per diluted share, for the nine months ended September 30th, which represents a 22.1% increase over our first nine months of 2022's performance. Our strong third quarter and year-to-date performance were set up by continued growth in our loan and lease portfolios, which grew at an annualized rate of 18% for the quarter and 10.9% year-to-date. This was organic growth and I believe is indicative of the strength of our markets and our organization. While we do not anticipate continuing to grow at this pace, we do anticipate continued growth at a single digit pace for the balance of the year and into 2024. This growth in the higher rate environment led to higher net interest income for the length quarter and year to date, which translated into record net earnings which were up 22% over the same period in the prior year. In the face of funding pressures, our margin compressed, albeit at a slower pace than the previous quarter, coming in at 3.69% for the quarter and 3.88% year to date. Our yield on earning assets increased by three basis points during the quarter, to 5.34% and was 5.29% year-to-date. However, the cost of funding our balance sheet increased by 21 basis points during the quarter to 1.72% and was 1.47% year-to-date. During the quarter, we continued our measured approach to increasing rates paid on some of our higher tier demand deposit accounts and select CDs. This led to an increase in our cost of deposits, excluding broker by 18 basis points, to 0.67% during the quarter. All in, our funding costs increased by 21 basis points from our late quarter to 1.72%. During the quarter, we experienced what has become our typical decline in total deposits, which were down 147 million for the late quarter. I say typical because the decline was due to the seasonality of the deposits related to our tax business, which were down $187 million for the length quarter. As we noted in our earnings release, we made the decision during the quarter to step away from our income tax refund business for 2024. Since the first quarter of 2021, when we mistakenly received $5.6 billion dollars in stimulus payments from the U.S. government, we began receiving an increased volume of complaints from taxpayers looking for their stimulus payments. Since then, the amount of information required by our regulators to close out each complaint has increased. While our business partner TPG handled the brunt of the research related to these requests, it has become apparent that our regulator's view of the program is changing, and we felt it better to step away before it became something that might inhibit future M&A activity. We will look to our new leasing division, other revenue opportunities, and tighter expense controls to help us replace this lost revenue next year and into the future. Yesterday, we announced a quarterly dividend of 16 cents per share, This is consistent with our prior quarter dividend and represents a 24.2% dividend payout ratio based on our year-to-date earnings. Our efficiency ratio for the quarter was 66.5% compared to 67.9% for the linked quarter and 65.5% year-to-date. However, if we were to back out the depreciation expense related to our operating leases from our new leasing company, our efficiency ratio would have been 62.6% for the quarter and 61.7% year-to-date. Our return on average assets for the quarter was consistent with our linked quarter at 1.12%, and our return on average equity was 11.83% for the quarter compared to 11.58% for the linked quarter. Year to date, our return on assets was 1.24%, and our return on equity was 12.88%. During the quarter, non-interest income declined $1 million, or 11.2%, in comparison to the linked quarter, and increased $2.4 million, or 41.7%, in comparison to the prior year third quarter. The primary drivers of the decrease from our linked quarter were declines in lease residuals, fees from our income tax refund processing program, and other non-interest income. Consistent with prior years, income from our tax program is earned during the first and second quarters. The primary driver for the increase over the prior year's quarter was $1.9 million in lease revenue and residuals generated by our leasing division. Our leasing division and that revenue stream were not a part of SEVISA until the beginning of the fourth quarter in 2022. Year-to-date, non-interest income increased $9.3 million, or 49.1%, in comparison to the prior year. The primary drivers of this increase were $6.2 million in lease revenue and residual fees from the addition of our leasing division 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 in other non-interest income was the $1.5 million bonus we received for entering into a new debit brand agreement during the first quarter and $707,000 in interim rent payments generated by our leasing division that we did not have in the prior 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 continue to 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 $26.8 million represents a 4.2% decline from our linked quarter as we experienced improvement in nearly every line item of non-interest expense. Year-to-date, non-interest expense increased $19.1 million or 30.2% over the prior year. Much of this increase is attributable to growth from our acquisitions of Communibank and VFG in the third and fourth quarters of 2022. Our compensation expense increased $7.5 million, or 20.4% over the prior year. The bulk of the increase is due to $6.1 million in additional salary, commissions, and benefits attributable to new employees from last year's acquisitions. The balance of this increase is attributable to normal benefit and merit increases. While we do have seven additional branch offices as a result of our Communibank acquisition, the $7.2 million increase in occupancy and equipment expense was primarily due to an increase in depreciation expense on equipment related to our new leasing division. Equipment under an operating lease is owed and depreciated by Savista until the end of the lease term. Depreciation related to operating leases was $6.1 million year-to-date. The increase in other non-interest expense was primarily due to a $595,000 provision for credit losses on unfunded loan commitments That was a new expense category resulting from our adoption of CECL in January. Like many in the industry, we experienced an increase of $353,000 in bad check losses year to date. We also experienced $608,000 of increases in a number of other expense categories related to our new leasing division. Turning to the balance sheet. Year to date, our total loans have grown by $208.2 million, which includes $32.9 million of loans and leases originated by our leasing division. This represents an annualized growth rate of 10.9%. A number of banks in our markets have curtailed their lending efforts, which we view as an opportunity. Opportunity for new and expanded lending, opportunity to increase our spreads on those loans, and opportunity to require new and increased compensating deposit balances. While we experienced increases in nearly every loan category, our most significant increases were in non-owner occupied CRE, residential real estate loans, and lease financing receivables. The loans we are originating are virtually all adjustable rate loans, and our leases all have maturities of five years or less. Loans secured by office buildings make up 5.5% of our total loan portfolio. These loans are not secured by high-rise office buildings. Rather, they are predominantly secured by single or two-story offices located outside of central business districts. Along with year-to-date loan production, our undrawn construction lines were $239.5 million at September 30th. We anticipate loan growth to moderate to a low single-digit rate for the balance of 2023 and into 2024. On the funding side, total deposits increased to $175.8 million or 6.7% since the beginning of the year. However, if we were to back out non-core tax program and broker deposits Our deposit balance has declined 1% year-to-date. When compared to what we are seeing across the industry, we believe this illustrates the strong relationships we have with our commercial and retail customers. Our deposit base is what we would term as fairly granular, with an average deposit account excluding CDs approximately $26,000. Non-interest-bearing demand accounts continue to be a focus, excluding tax-related and brokered deposits. Non-interest-bearing deposits made up 30.2% of the remaining total deposits at September 30th. With respect to FDIC insured deposits, excluding Savista's own deposit accounts and those related to the tax program, 14.5%, or $404.5 million of our deposits were in excess of the FDIC limits at September 30th. Our cash and unpledge securities at September 30th were $430 million, which more than covered these uninsured deposits. Other than $361.1 million of public funds with various municipalities across our footprint, we had no concentration in deposits at September 30th. At September 30th, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program, was 101%. As I mentioned, we are having success requesting additional deposits and compensating balances from our commercial customers, and we will continue to be disciplined in how we price our deposits and we will take advantage of broker funding when we think it makes sense. We believe our low-cost deposit franchise is one of Savista's most valuable characteristics, contributing significantly to our strong net interest margin and overall profitability. On September 30th, all of our $595.5 million in securities were classified as available for sale, and had $93.1 million of unrealized losses associated with them, which puts pressure on our tangible common equity. At quarter end, our tangible common equity ratio had declined to 5.5% as compared to 5.83% at December 31st, 2022. Despite this decline, our Tier 1 capital ratio at September 30th was 8.79%, which is well above what is deemed well-capitalized for regulatory purposes. So VISTA's strong earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic growth and potential acquisition. We continue to believe our stock is of value, and as such, we resumed our repurchase program during the third quarter. During the quarter, we repurchased 84,230 shares of common stock for $1.5 million for an average price of $17.77 per share. This represents all of our repurchase activity year-to-date. We have an authorization of approximately $12 million remaining in our current repurchase program. While our capital levels remain strong, We recognize our tangible common equity ratio screens low and we'll balance our repurchases and the payment of dividends with building capital to support growth. Despite uncertainties associated with the economy and the expense pressures our borrowers face, our credit quality remains strong and our credit metrics remain stable. We did make a $630,000 provision during the quarter, which was primarily attributable to loan and lease growth. A ratio of allowance for loan losses to loans improved from 1.12% at December 31st, 2022 to 1.28% at September 30th, reflecting growth and 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 308.52% at September 30th. In summary, although we experienced margin compression, we continued to generate strong earnings and our margin remains strong. While we experienced exceptional organic loan growth during the quarter, we anticipate a slowdown in loan growth as we finish out the year. While we continue to examine and stress our portfolios, we have seen no material deterioration in our credit 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 hopefully will eventually be rewarded. 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 are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Nick Couturel with Hubby. Please go ahead.