Civista Bancshares, Inc.

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 involves 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's bank shares 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 will turn the call over to Mr. Schaefer.

Good afternoon. This is Dennis Schaefer, President and CEO of of Savista Bank Shares, Inc., and I would like to thank you for joining us for our fourth quarter 2023 earnings call. I am joined today by Rich Dutton, SVP of the company and chief operating officer of the bank, and Chuck Percher, 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 fourth quarter of $9.7 million, or 62 cents per diluted share, which represents a 20.5% decrease from our fourth quarter in 2022. Our full-year net income represented record earnings of $43 million, or $2.73 per diluted share, which represents a 9% increase over our 2022 performance. Our fourth quarter and year-to-date performance was set up by continued strong growth in our loan and lease portfolio, excluding the participation adjustment, which grew at an annualized rate of 15.5% for the quarter and 12.4% year-to-date. We added new and renewed commercial loans at a yield of 7.94% during the quarter and new equipment finance loans and leases increased at a yield of 9.80% during the quarter. Demand came from all areas of our footprint as we continue to strengthen market share in most of our markets and add new customers in our urban markets. While we do not anticipate continuing to grow at this pace, we do anticipate continued growth at a single-digit pace in 2024. Net interest income declined compared to our linked quarter, but increased 13.9% for the year in comparison to 2022. Competition for deposits is becoming a little bit more rational, but is still very intense. This led to a five basis point increase in our cost of deposits, excluding broker, to 72 basis points for the quarter. During the quarter, we began a measured approach to decreasing rates paid on some of our higher-tier demand deposit accounts and select CDs. Excluding broker and tax-related deposit accounts, our deposit balances were consistent compared to the linked quarter. All in, our funding cost increased by 47 basis points from our linked quarter to 2.19% as we funded much of our growth with wholesale funding. In the face of funding pressures, our margin compressed at the same pace as it did during the previous quarter, coming in at 3.44% for the quarter and 3.7% year-to-date. Our yield on earning assets increased by 18 basis points during the quarter to 5.52% and was 5.35% year-to-date. However, the cost of funding our balance sheet increased by 47 basis points during the quarter to 2.19% and was 1.72% year-to-date. Noninterest income was up 8.6% for the length quarter, primarily on higher swap fee income, and it was up 27.8% year-to-date, primarily on lease revenues. While we continue to complete our integration of our leasing division, We view them as a significant contributor to our non-interest income as we move into 2024 and beyond. Our tangible book value grew to $15.10 compared to $12.60 at September 30th and $12.61 at December 31st, 2022. and our TCE ratio increased to 6.36% from 5.49% at September 30th and 5.66% at December 31st, 2022. This growth came from continued solid core earnings and a marked reduction in unrealized losses related to our securities portfolio. We will continue to focus on growing our TCE ratio during 2024. Last week, we announced a quarterly dividend of $0.16 per share. This is consistent with our prior quarter dividend and represents a 23% dividend payout ratio based on our 2023 earnings. Our efficiency ratio for the quarter was 64.1% compared to 66.5% for the linked quarter and 65.2% year to date. If we were to back out the depreciation expense related to our operating leases, our efficiency ratio would have been 59.8% for the quarter and 61.3% year-to-date. Our return on average assets was 1.02% for the quarter compared to 1.12% for our length quarter, and our return on average equity was 11.34% for the quarter compared to 11.83% for the linked quarter. Year to date, our return on assets was 1.16% and our return on equity was 12.5%. During the quarter not interest income increased $698,000 or 8.6% in comparison to the linked quarter and decreased $1.2 million or 12.3% in comparison to the prior year fourth quarter. The primary drivers of the increase from our linked quarter were $454,000 in swap fees as borrowers took advantage of the inverted interest rate curve to lock in what they viewed as favorable rates. We also earned an annual $225,000 bonus from our debit brand partner that contributed to the increase. The primary driver for the decrease from the prior year's quarter was an $874,000 decline in lease revenue and residuals as the higher interest rate environment put pressure on our leasing division's production. In addition, we recorded $345,000 less in gains on the sale of loans and leases originated by our leasing division as our buyers paid lower premiums as their balance sheets became less liquid. Year-to-date, non-interest income increased $8.1 million, or 27.8% in comparison to the prior year. The primary drivers of this increase were $5.3 million in lease revenue and residual fees. This was the result of a full year's income from our leasing division, which we acquired in October 2022. These fees are primarily made up of operating lease payments and gains on sale of equipment at the end of the lease term. Also included in other non-interest income was a $1.5 million bonus we received for entering into a new debit brand agreement during the first quarter and $1.2 million in interim rent payments generated by our leasing division that we did not have in the prior year. Wealth management revenues for the quarter We're 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 incomes. Non-interest expense for the quarter of $25.3 million represents a 5.4% 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 $17.1 million or 18.9% 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 $7.2 million, or 14.2%, over the prior year. The bulk of the increase is due to $5.2 million in additional salaries, 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 an additional seven branch offices as a result of our Communibank acquisition, the $6.7 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 owned and depreciated by Savista until the end of the lease term. Depreciation related to operating leases was $6.5 million year to date. The increase in other non-interest expense was primarily due to a $515,000 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 $400,000 in bad check losses year-to-date. Turning to the balance sheet, year-to-date, our total loans, excluding the participation adjustment, grew by $315.1 million, which includes $42.1 million of loans and leases originated by the leasing divisions. This represents an annualized growth rate of 12.4%. During our last call, I noted that a number of banks in our markets had curtailed their lending efforts, which created some opportunities for us to expand existing relationships and enter into some new relationships. As we move into 2024, we have noticed that the larger regional banks in our markets are becoming more active. So we do not expect the rate of loan growth we experienced during the quarter to continue into 2024. While we experienced increases in nearly every loan category, our most significant increases were in CNI, non-owner occupied CRE loans, residential real estate loans, and leased financing receivables. The loans we are originating are virtually all adjustable rate loans and leases and all have maturities of five years or less. Loans secured by office buildings make up about 5.2% of our total 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. Our CRE portfolio remains well diversified with no concentration risk by property type or by geography. Along with year-to-date loan production, our undrawn construction lines were $237.3 million at December 31st. We anticipate loan growth to moderate to a low single-digit rate in 2024. On the funding side, total deposits, increased $365 million, or 13.9%, since the beginning of the year. However, if we were back out, non-core tax program and brokered deposits, our deposit balances declined 5.8% year-to-date. Our core deposit balances remain consistent from the late quarter. Our deposit base is what we would term as fairly granular with our average deposit account. excluding CDs, approximately $25,000. Non-interest-bearing demand accounts continue to be a focus, excluding tax-related and broker deposits. Non-interest-bearing deposits made up 33.2% of the remaining total deposits at December 31st. With respect to FDIC insured deposits, excluding services owned deposit accounts, and those related to the tax program, 14.1% or $421.4 million of our deposits were in excess of the FDIC limits at December 31st. Our cash and unpledged securities at December 31st were $462.5 million, which more than covered these uninsured deposits. Other than the $336.5 million of public funds, with various municipalities across our footprint. We had no concentrations in deposits at December 31st. At December 31st, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program, was 97.6%. Our commercial lenders, our treasury management officers, and private bankers are having success requesting additional deposits and compensating balances from our commercial customers. We will continue to be disciplined in how we price our deposits, and we will take advantage of brokered and wholesale funding sources 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 December 31st, all of our $620.4 million in securities were classified as available for sale. At year end, the unrealized losses associated with our security portfolio improved from $93.1 million at September 30th to $54.5 million. At year end, our tangible common equity ratio had improved 6.36%, which was an 87 basis point improvement over September 30th. And our Tier 1 leverage ratio at year end was 8.75%, which is well above what is deemed well capitalized for regulatory purposes. So this is strong earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is of value. During the year, we repurchased 84,230 shares of common stock for $1.5 million for an average price of $17.77 per share. All of our 2023 repurchase activities occurred during the third quarter. We have an authorization of approximately $12 million remaining on our current repurchase program. While our capital levels remain strong, we recognize our tangible common equity ratios screen low. We have stated publicly that we would like to rebuild our PCE ratio back to between 7% and 7.5%. To that end, we will continue to focus on earnings and will balance any repurchases and the payment of dividends with building capital to support growth. Despite the 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 $2.3 million provision during the quarter, which was primarily attributable to our strong loan and lease growth. Our ratio of allowance for loan losses to loans improved from 1.08% at December 31st, 2022 to 1.30% at December 31st, reflecting growth in our adoption of CECL during the first quarter. In addition, our allowance for loan losses to non-performing loans declined slightly from 261.45% at December 31st, 2022 to 245.66%. at December 31st, 2023. As I conclude my remarks, I would like to thank our entire Savista team. 2023 was another challenging year, and once again, they showed me what it means to be a part of a team that cares about our customers, our communities, our shareholders, and most importantly, each other. I could not be more proud. Although our margin continues to be under pressure, We continue to generate strong earnings, and our margin remains relatively strong. 2023 was a year of exceptional organic loan growth, and while we do not anticipate growth at a similar pace in 2024, our markets do remain vibrant, and we expect to grow at a mid-single-digit pace. We will continue to examine and stress our portfolios, but so far we have seen no material deterioration in our credit quality. In 2024, our focus will continue to be on creating shareholder value. For 2023, in a tough interest rate environment, our earnings per share increased 5%, which we believe is indicative of our disciplined approach to managing the company. Thank you for your attention this afternoon, and now we'll be happy to address any questions you may have.

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Nick Kacharaly with Hovde. Please go ahead.