Civista Bancshares, Inc.

Ladies and gentlemen, 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's shares bank 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 GAAP to non-GAAP measures. This call will be recorded and made available on Savista Bank Shares' website at www.cibb.com. At the conclusion of Mr. Schaffer's remarks, he and the Savista management team will take any questions you may have. Now, I will turn the call over to Mr. Schaffer. Please go ahead.

Good afternoon. This is Dennis Schaffer, President and CEO of Savista Bank Shares, and I would like to thank you for joining us for our first quarter 2024 earnings call. I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank, 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 first quarter of $6.4 million, or 41 cents per deleted share, which represents a $6.5 million decline from our first quarter in 2023 and a $3.3 million decline from our linked quarters. While we are disappointed in our results, we knew there would be headwinds as we stepped away from the third-party processor of income tax refunds, and we did not have the benefit of a $1.5 million one-time bonus that we received from the renegotiation of our debit brand agreement. In addition, in late 2023, we implemented changes in the way we process overdrafts, which reduced service charge income. As a result of these three items, non-interest income was approximately $3.8 million less in this quarter than in the previous year. While we continue to reduce rates on our CD specials and select money market accounts, the migration from our non-interest bearing and lower rate checking accounts into higher rate money market accounts and CDs continue to put pressure on our net interest margin. We also experienced an increase in our allowance for credit losses as our CECL model requires higher reserves based on our individually analyzed loan and lease portfolio and loan growth. During the third quarter of 2023, we announced that Savista would be stepping away from the third-party processor of tax refunds due to increased scrutiny from our regulators. Savista earned $1.9 million and $475,000 respectively during the first and second quarters of 2023 related to this program. Like many in the industry, we have been analyzing the way we process overdraft accounts and the fees associated with those services. Late in December, we discontinued assessing a charge on represented overdrafts and reduced our NSF charge from $37 to $32. We are also enhancing how we communicate with our customers on the use of their deposit accounts. Our overdraft fees, which are included in service charges, declined $375,000 compared to our first quarter of 2023. We anticipate these changes will reduce service charge revenue by $1.2 million over the course of 2024. In anticipation of this lost revenue, we implemented a number of initiatives to reduce our reliance on wholesale and borrowed funding to increase revenue and to reduce expenses. Although we have seen some immediate impact, most of the benefit from these initiatives will occur over the balance of the year. I am encouraged by the early results, and I'm optimistic that we are headed in the right direction. We anticipated pressure on our margin as we exited the tax program and the need to replace the significant interest-free funding balances it provided during the first and second quarters. However, it is difficult to model the impact of the depositors migrating from non-interest-bearing into interest-bearing accounts, which was evident during the quarter. During the quarter, our cost of funding increased by 35 basis points, to 2.54%, while our yield on earning assets increased by 12 basis points to 5.64%. This resulted in our margin contracting by 22 basis points, coming in at 3.22% for the quarter. During the quarter, we continued our measured approach to decreasing rates paid on some of our higher tier demand deposit accounts and CD specials. In spite of lowering these rates, our cost of deposits excluding brokered deposits increased by 21 basis points to 1.22% during the quarter. We have a number of initiatives in progress to reduce costs and our reliance on brokered and wholesale funding. The state of Ohio announced its Ohio Home Buyers Plus program to encourage Ohioans to save for the purchase of homes in Ohio by offering tax incentives to the depositors and subsidizing participating banks. As part of the program, the state will deposit up to $100 million in low-cost funds at the current rate of 86 basis points into participating banks. We also have historically maintained the cash balances of our wealth management clients and other financial institutions. However, we are currently taking steps that will allow us to hold the cash deposits of our wealth management clients at the bank. We anticipate the rates to approximate Fed funds less 20 to 25 basis points. Based on the current cash positions, we anticipate being able to move $75 million of these funds into the bank by the end of the third quarter. Our loan and lease portfolios grew at an annualized rate of 5% for the quarter. This was organic growth, and we believe it is indicative of the continued strength of our markets in our organization. While this is slower, we have focused on holding rates at higher levels. We anticipate continuing to grow at a mid-single-digit pace for the balance of 2024. While our overall credit remains solid, as I previously mentioned, we experienced an increase in our allowance for credit losses as our CECL model required higher reserves based on our individually analyzed loan and lease portfolios. This was primarily attributable to a hospitality credit and a cellular power credit that have both been classified for several quarters. Both borrowers continue to be cooperative. However, new information became available during the quarter, and it was necessary to adjust the collateral values and to increase our reserve. Earlier, we announced a quarterly dividend of 16 cents per share. Based on our March 29th share price, this represents a 4.16% yield and a dividend payout ratio of 42.11%. Our efficiency ratio for the quarter was 73.8% compared to 64.3% for the linked quarter. However, if we were to back out the depreciation expense related to our operating leases from our leasing group, our efficiency ratio would have been 70% for the quarter and 60% for the linked quarter. During the quarter, non-interest income declined $319,000 or 3.6% in comparison to the linked quarter and $2.6 million or 23.2% in comparison to the prior year first quarter. The primary drivers of the decrease from our linked quarter were declines in service charges due to the previously mentioned changes to how we were processing overdrafts and a $418,000 decline in swap fee income. These declines were offset by increases in other non-interest income, which included increases of $182,000 in fees related to leases and $289,000 in income from our captive insurance subsidiaries. The primary drivers for the decline for the prior year's first quarter were $1.9 million in tax refund processing fees earned in the prior year that I mentioned earlier and a non-recurring $1.5 million signing bonus that we recognized in the first quarter of 2023 related to a new debit brand agreement. These declines were partially offset by increases in the same other non-interest income items, a $584,000 increase in fees related to leases and a $453,000 increase in income from our captive insurance subsidiary. Non-interest expense for the quarter of $27.7 million represents a $2.3 million or 9% increase from our linked quarter. This increase is primarily attributable to increases in compensation-related expenses, including salaries, which were up $139,000, payroll taxes, which increased $434,000 as the beginning of the year full payroll tax load resumed, and an increase in health insurance expense of $346,000. You will recall that Sylvista is self-insured for our employee health insurance. As has been our practice, we begin each year by accruing our health insurance expense at the rate computed by our actuaries. Thankfully, as has often been the case, we were able to reduce that accrual in the third and fourth quarters of the prior year. In addition, the combination of accruing up our marketing accrual in the previous quarter and the resumption of our monthly marketing accrual in the current quarter accounted for $669,000 of the increase. Compared to the prior year's first quarter, non-interest expense increased $257,000, or 1%. The increase is attributable to our normal annual merit increases, which take place each April in software expenses related to our digital banking platform that were mostly offset by declines in depreciation related to operating leases and professional fees that were paid to the consultant who assisted us with our debit card brand renewal in the prior year. Turning our focus to the balance sheet. For the quarter, total loans and leases grew by $36.4 million. This represents an annualized growth rate of 5%. While we experienced increases in nearly every loan category, Our most significant increases were in non-owner-occupied CRE loans, residential real estate loans, and real estate construction loans. The loans we are originating for our portfolio are virtually all adjustable rate loans, and our leases all have maturities of five years or less. New and renewed commercial loans were originated at an average rate of 7.92% during the quarter. Loans secured by office buildings make up about 5.1% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro 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 pipelines are fairly strong and our undrawn construction lines were $244 million at March 31st. Again, we anticipate loan growth to continue to be in the mid-single-digit range for the balance of 2024. On the funding side, total deposits were mostly flat, declining just $4.3 million, or negative 0.1%, since the beginning of the year. However, if we back out non-core tax program and broker deposits, our deposit balance has declined to $29 million, or 1% year-to-date. As I mentioned, we have a number of initiatives in progress aimed at gathering core funding. Our deposit base is 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 brokered deposits, non-interest-bearing deposits made up 29.5% of our total deposits at March 31st. With respect to FDIC insured deposits, excluding Savista's own deposit accounts and those related to the tax program, 13.1% or $392.3 million of our deposits were in excess of the FDIC limit at quarter end. Our cash and unpledged securities at March 31st were $452 million, which more than covered these uninsured deposits. Other than the $369.5 million of public funds with various municipalities across our footprint, we had no deposit concentration at March 31st. At quarter end, our loan to deposit ratio was 98.3%. Our commercial lenders, treasury management officers, and private bankers continue to have some success requesting additional deposits and compensating balances from our commercial customers and we will continue to be disciplined in how we price our deposits. We believe our low-cost deposit franchise is one of Sadista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. The interest rate environment continues to put pressure on bond portfolios. At March 31st, all of our securities were classified as available for sale. and had $62.5 million of unrealized losses associated with them. This represented an increase of unrealized losses of $7.9 million since December 31, 2023. Over the past few quarters, we have reduced our security portfolio by using its cash flow to fund our balance sheet. At March 31, our security portfolio was $608.3 million, which represented 15.7% of our balance sheet. We ended the quarter with our Tier 1 leverage ratio at 8.62%, which is deemed well capitalized for regulatory purposes. Our tangible common equity ratio was 6.26% at March 31st, down slightly from 6.36% at December 31st, 2023. So this is earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic loan growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is of value. While our capital levels remain strong, we recognize our tangible common equity ratios spring low. Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7% and 7.5%. To that end, we will continue to focus on earnings and will balance any repurchases in the payment of dividends with building capital to support growth. As we stated in an earlier 8K, the Board reauthorized a new stock repurchase program of $13.5 million during its April meeting. 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. As I previously mentioned, we did make a $2 million provision during the quarter, which was primarily attributable to higher reserves required by our model based on individually analyzed loans and leases, which was driven by two credits. A $3.3 million hospitality credit, which we expect to resolve via the sale of the properties and have a substantial guarantor backing, and a $4 million cellular tower credit, which we expect to resolve in the next six months. I would note that neither of these credit issues were related to underwriting weakness. The hotel had an issue with its fire suppression system during the pandemic that prevented it from operating for 17 months and continues to limit operations. The cellular tower business suffered an internal fraud where an employee caused significant damage to the company for personal gain. Our ratio of allowance for credit losses increased from 1.3% at December 31st, 2023 to 1.34% at March 31st. In addition, our allowance for credit losses to non-performing credits increased from 245.67% at December 31st, 2023 to 247.06% at March 31st. In summary, although our margin compression was more than we anticipated, our margin remains strong. We are taking steps to generate more lower-cost funding. Our loan growth during the quarter should remain at a mid-single-digit pace for the balance of 2024. While we experienced some isolated credit issues, we have seen no systemic deterioration in our credit quality. Overall, SOVISTA continues to generate solid earnings, and our focus continues to be on creating shareholder value. Thank you for your attention this afternoon and your investment, and now we will be happy to address any questions that you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press restore, followed by the one on your touchstone phone. You will hear a prompt that your hand has been raised. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. Once again, that is star one should you wish to ask a question. Your first question is from Brendan Nossel from Havde Group. Please ask your question.