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 or requests 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.civb.com. At the conclusion of Mr. Schaefer's remarks, he and the Savista management 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, Inc., and I would like to thank you for joining us. for our second 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, Ian Wim, SVP of the company and chief financial officer of the bank, and other members of our executive team. This morning, we reported net income for the second quarter of $7.1 million or 45 cents per diluted share, which represents a $700,000 or 10% increase over the first quarter of 2024 and a $3 million decline from our second quarter in 2023. Overall, I was pleased with our quarterly results. As I mentioned during our first quarter call, this is a year of transition for Savista as we look to replace the revenue and non-interest-bearing funding from the exited relationship with our income tax refund processor. As a result of exiting this relationship and continued strong loan demand, our overnight borrowings and brokered deposits are higher than we would like. This higher cost of funding continues to put pressure on our net interest margin. To mitigate some of this pressure, we are undertaking a number of deposit initiatives focused on deepening relationships and attracting newer low-cost deposits. This all takes time, but these initiatives will help reduce our dependency on higher interest funding sources and overall funding costs. I was also encouraged by the disciplined approach we took in pricing our deposits. This approach, in a still extremely competitive environment, helped us reduce our cost of deposits by four basis points to 210 basis points during the quarter. Our ability to stay disciplined is even more impressive as we continue to see a shift from non-interest bearing deposit products into interest bearing money market and time deposit. We continue to have strong loan demand across our footprint. Our loan and lease portfolio grew at an annualized rate of 16% during the quarter. This was organic growth, and we believe it is indicative of the continued strength of our markets and our organization. We continued our focus on holding loan rates at higher levels to ensure an appropriate return for the use of our liquidity and capital. During the quarter, our overall cost of funding increased by six basis points to 2.61%, while our yield on earning assets decreased by seven basis points to 5.58%, as we retained more residential mortgages and relied more on wholesale funding. This resulted in our margin contracting by 13 basis points compared to the first quarter of 2024, coming in at 3.09% for the quarter. For the quarter, we also experienced an increase in our allowance for credit losses, which was primarily attributable to the strong loan growth. There was a $500,000 charge-off associated with a discreet fraud-related event that one of our clients experienced. Earlier, we also announced a quarterly dividend of $0.16 per share, no change from the prior quarter. Based on our July 26 share price of $18.98, this represents a 3.37% yield and a dividend payout ratio of 35.6% for the second quarter. During the quarter, non-interest income increased $2 million, or 24%, from the first quarter, and $1.3 million, or 15%, from the second quarter of 2023. The primary drivers of the increase from our linked quarter were $1.7 million in fees related to leasing operations at Savista Leasing and Finance, partially offset by declines in service charges due to changes made last year in how we process overdrafts. The primary drivers for the increase from the prior year's second quarter were $1.3 million in fees related to leasing operations, along with increased wealth management fees. Our increases overcame the $475,000 in lost income related to the tax refund processing fees. Non-interest expense for the quarter was $28.6 million and represents an $866,000 or 3.1% increase over the first quarter. This increase is primarily attributable to increases in compensation related to annual merit increases, which take effect in April each year. The decrease in equipment expense is primarily due to the reduction of depreciation related to operating leases as they mature. Compared to the prior year's first quarter, non-interest expense increased $906,000, or 3.3%. The increase is attributable to our normal annual merit increases, which take place each April, and software expenses related to our digital banking platform. Our efficiency ratio for the quarter was 73.4%, which remains elevated due to the compression of our net interest income and expenses associated with leasing depreciation and our investments in digital banking. Our effective tax rate was 12.6%. Turning our focus to the balance sheet, for the quarter, total loans and leases grew by $116.9 million. This represents an annualized growth rate of 16%. While we experience 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 continue to be virtually all adjustable rate, and our leases all have maturities of five years or less. During the quarter, new and renewed commercial loans were originated at an average rate of 8.20%. Residential real estate loans were originated at 6.64%, and loans and leases originated by a leasing division were at an average rate of 9.75%. Loans secured by office buildings make up 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 $273 million at June 30th. Again, we anticipate loan growth to be in the low single-digit range for the balance of 2024. On the funding side, total deposits were mostly flat, declining just $3 million for the quarter. As I mentioned, we do have a number of initiatives in progress aimed at gathering core funding. One of those initiatives is leveraging a new program for the state of Ohio, which announced its Ohio Home Buyers Plus program to encourage Ohioans to save for the purchase of a home 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 a current rate of 86 basis points into participating banks. At the end of the quarter, we had opened 411 of these accounts on our way to the maximum of 1,000 accounts, and we have made additional progress since then. Another example of an initiative is that we 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 our bank. We expect the rates paid on these deposits will approximately fed funds less 20 or 25 basis points. Based on the current cash positions, we anticipate being able to move $75 million of those funds into the bank by the end of the third quarter. We continue our measured approach to decreasing rates paid on some of our higher tier demand deposit accounts and CD specials. The result of lowering these rates are cost of interest-bearing deposits decreased by five basis points to 2.75% during the quarter. Our deposit base continues to be fairly granular with our average deposit accounts excluding CDs approximately $18,000. Non-interest-bearing deposit and business operating accounts continue to be a focus. Non-interest-bearing deposits and interest-bearing demand made up 37% of total deposits at June 30th. With respect to FDIC insured deposits, excluding CIVISTA's own deposit accounts and those related to the tax program, 11.8% or $352 million of our deposits were in excess of the FDIC limits at quarter end. Our cash and unpledged securities at June 30th were $456.8 million, which more than covered these uninsured deposits. Other than $404.6 million of public funds with various municipalities across our footprint, we had no deposit concentrations at June 30th. At the end of the quarter, our loan to deposit ratio remained elevated. Our commercial lenders, our treasury management officers, and private bankers continue to secure additional deposits and compensating balances from both business and personal customers. This success is attributed to ongoing initiatives, and we are exploring new tools to provide to our sales teams to further support these efforts. We believe our low-cost deposit franchise is one of Savista's most valuable characteristics, contributing significantly to our solid net interest margin and our overall profitability. The interest rate environment continues to put pressure on bond portfolios. At June 30th, all of our securities were classified as available for sale and had $63.2 million of unrealized losses associated with them. This represented an increase in unrealized losses of $8.6 million since December 31st, 2023, and is consistent with our linked quarter. At June 30th, our security portfolio was $612 million, which represented 15% of our balance sheet, and when combined with cash balances, is 22.5% of our deposits. We ended the quarter with our Tier 1 leverage ratio at 8.59%, which is deemed well capitalized for regulatory purposes. Our tangible common equity ratio was 6.18% at June 30th, down slightly from 6.28% at March 31st, 2024. So this is 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. While our capital levels remain strong, we recognize our tangible common equity ratio screens 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 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. As I previously mentioned, We did make a $1.7 million provision during the quarter, which was primarily attributable to funding loan growth and a charge off associated with a discreet fraud event related to a commercial borrower that suffered internal fraud. A ratio of our allowance for credit losses to total loans is 1.32% at June 30th, up two basis points for 1.30% at December 31st, 2023. This change is due to the loan mix of new production and the quarterly updating of factors within our model. In addition, our allowance for credit losses to non-performing loans is 225% at June 30, 2024, compared to 247% at March 31, 2024, and 246% at December 31, 2023. $1.5 million of the increase in non-performing loans was attributable to the previously mentioned fraud-related event or one of our clients' experience during the quarter. In summary, we are pleased that our margin compression slowed during the quarter and our margin remains strong as the steps we are taking to generate more lower-cost funding are beginning to generate results. We anticipate that our loan growth should remain at a low single-digit pace for the balance of 2024 as we temper our growth with lower-cost funding. While we have experienced some isolated credit issues, we have seen no systemic deterioration in our credit quality. Overall, Savista continues to generate solid earnings, and our focus continues to be on creating shareholder value and serving our customers and communities. 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 star followed by the one on your touchtone phone. You will hear a three-tone 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 Justin Crowley with Piper Sandler. Your line is now open.