Civista Bancshares, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Savista Bank Shares, Inc. Third Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode. 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 the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute to 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 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 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 2024 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, Ian Wynnum, 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 third quarter of $8.4 million or 53 cents per diluted share, which represents a $1.3 million or 18% increase over the length quarter and a $2 million decline from our third quarter in 2023. We are pleased with our results. As I mentioned during previous calls, this is a year of transition for Savista as we look to replace the revenue from the exited relationship with our income tax refund processor, as well as changes in the way we process and charge for overdraft items. In addition, we had to replace the non-interest bearing funding that was a byproduct of our relationship with our former tax refund processing customer. Exiting this relationship, coupled with strong loan growth and flat deposit growth over the last several years, has resulted in a greater reliance on wholesale funding. This reliance has put pressure on our net interest margin, which we are taking steps to address. While loan demand continues to be strong in each of our markets, we are taking a disciplined approach in our loan and lease pricing, which has had the intended impact of slowing our loan and lease growth. Our loan and lease portfolio growth slowed to an annualized rate of 4% during the quarter, which, when combined with our efforts to gather core funding, lowered our loan-to-deposit ratio to 95% at September 30th compared to 102% at June 30th. We discussed a number of our deposit initiatives during our last call, and I would like to provide an update on two successful outcomes during the quarter. Through the State of Ohio's Home Buyer Plus program, we were successful in opening 1,000 new deposit accounts aimed at helping Ohio residents save for the purchase of a new home. In addition to $10.5 million in customer deposits as a result of this program, of which 35% were new to the bank, we received $100 million in deposits from the State of Ohio at a cost of 89 basis points. We were also successful in moving approximately $87 million in cash balances of our wealth management clients that were formerly held outside the bank into a money market account with Savista. In addition to the deposits raised from these two initiatives, we had $49 million of organic growth during the quarter. Currently, we have a number of other deposit initiatives underway, and I continue to be encouraged by our ability to remain disciplined in pricing both our loans and deposits through this entire interest rate cycle. We reported net interest income for the quarter of $29.2 million, which represents an increase of $1.5 million, or 5.3% compared to our late quarter. While our overall cost of funding was unchanged at 2.61%, our yield on earning assets increased by seven basis points to 5.65%. This resulted in our margin expanding by seven basis points to 3.16% compared to our linked quarter. While one quarter is not a trend, We do believe that our margin trough during the second quarter and will continue to expand over the next few quarters. I will also point out that we had approximately $200 million in brokered CDs that matured in the last half of October that carried a rate of 5.58%. We were able to replace them with CDs laddered over the next 12 months at a blended rate of 4.32%. with a savings of 126 basis points. We also have another $150 million of brokered CDs at a rate of 5.08% that will mature at the end of the fourth quarter that we anticipate replacing at a lower cost. Earlier this month, many of you noticed that we filed a $200 million shelf offering. While we have no immediate plans to use the offering, our preceding shelf offering expired yesterday, and we believe it is prudent to maintain the flexibility that having a shelf offering in place affords us as we manage the company. We also recently announced the closure of our Perry Street branch located in Napoleon, Ohio, which is scheduled to close in early December. We expect this closure to result in savings of $234,000 annually beginning in 2025. Given the proximity of our other two Napoleon branch locations, we do not anticipate losing any deposits. Last Friday, we announced a quarterly dividend of $0.16 per share, which is no change from the prior quarter. Based on our October 25 share price of $17.84, this represents a 3.59% yield and a dividend payout ratio of 30.1% for the third quarter. During the quarter, non-interest income decreased 857,000, or 8.1%, from the linked quarter and increased $1.5 million, or 19.2%, from the third quarter of 2023. The primary driver of the decline from our link quarter was a $1.1 million decline in lease revenue and residual fees. As we are learning, leasing fees, particularly residual income, is less predictable than more traditional banking fees. This decline was partially offset by a $539,000 increase in gain on sale of mortgage loans and leases and the receipt of a $319,000 death benefit on a life insurance policy held on a former employee during the quarter. The primary drivers for the increase from the prior year's third quarter were a $640,000 increase in gains from the sale of mortgage loans and leases, a $515,000 increase in lease revenue and residual income, and the receipt of a $319,000 death benefit on the life insurance policy held on a former employee. We are particularly proud of the fact that our year-to-date non-interest income increased 391,000 or 1.4% in comparison to the prior year. This is particularly impressive given the reduction in fee income related to overdraft, the elimination of the tax processing relationship, and the one-time bonus we received in 2023 for entering a new debit brand agreement. This year, we've managed to replace nearly $5.7 million in lost fee revenue by adding new deposit customers, increasing service charges, increasing gains on the sale of mortgage loans and leases, and through increased lease revenue and residual income. Non-interest expense for the quarter of $28 million represents an 8.1% decline from our linked quarter as our continued focus on expense control yielded improvement in nearly every category of non-interest expense. We are in the process of converting our lease accounting and servicing systems. Not only will this consolidate a number of systems we are currently using, it will introduce automation to a number of tasks currently being manually performed. As part of the conversion process, we identified a reconciling item that we are still investigating. Although we continue to gather information, we believe it prudent to establish an $800,000 reserve against a suspense account, which is included in other non-interest expense. We expect the conversion to be completed during the fourth quarter. Year to date, our non-interest expense increased $2.5 million, or 3.1% over the prior year. Our compensation expense increased $2.8 million over the prior year due to merit increases, insurance, and other payroll-related expenses, and software maintenance expense was up $540,000 due to new software contracts aimed at improving our ability to detect fraud and mitigate fraud losses, as well as increases in costs associated with existing software contracts. These increases were partially offset by a $795,000 decline in depreciation related to equipment we own, related to operating lease contracts, which is included in equipment maintenance and depreciation. We have been originating fewer operating leases and purchasing residual value insurance on those operating leases that we do not originate with a goal of reducing and eventually eliminating depreciation expense related to operating leases. Our efficiency ratio for the quarter was 70.2%, which is an improvement over the late quarter, but not where we would like it to be. Backing out the impact of the $800,000 reserve, our efficiency ratio would have been 2% less. While it is part of our ongoing operations, if we were to back out the equipment depreciation related to operating leases, our efficiency ratio would have been another percent less. In addition to the recently announced branch closure, we are investigating a number of other opportunities to reduce expenses across the bank. We remain a very tax-efficient company. Our effective tax rate was 15.6%. for the quarter and 13.5% year-to-date. Turning our focus to the balance sheet, total loans and leases grew by $29 million during the quarter. This represents an annualized growth rate of 4%. During the quarter, we experienced increases in residential real estate and real estate construction loans that were partially offset by declines in CNI and CRE 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. Savista remains a CRE lending bank. However, we have been more aggressive in pricing C&I loans and remain very disciplined in how we are pricing commercial real estate loans as we work to manage our CRE loans to risk-based capital level and better align our lending and core funding. During the quarter, new and renewed commercial loans were originated at an average rate of 7.59%. Portfolioed and sold residential real estate loans were originated at 6.6%. And loans and leases originated by our leasing division were at an average rate of 9.87%. 30th, loans secured by office buildings made 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 remain solid and our undrawn construction lines were $261 million at September 30th. We anticipate continuing to manage our loan growth to be in the low single-digit range for the next several quarters, allowing us to optimize funding and further improve our capital ratio. We continue to focus on other initiatives aimed at deepening relationships and attracting new, lower-cost deposits that have resulted in our total deposits growing by $246 million for the quarter. Our commercial lenders, treasury management officers, private bankers, and retail bankers continue to secure additional deposits and compensating balances from both business and personal customers. This success is attributed to our ongoing initiatives. We are executing our downward beta strategy by continuing to decrease deposit rates on virtually all of our deposit accounts. However, our cost of interest-bearing deposits increased by five basis points to 2.80% during the quarter as deposit customers migrated from non-interest-bearing into interest-bearing accounts, and many of our new accounts were opened at higher rates. For the quarter, our overall funding costs were unchanged at 2.61% in comparison to our length quarter. Our deposit base continues to be fairly granular with our average deposit account excluding CDs approximately $24,000. Non-interest bearing deposits and business operating accounts continue to be a focus. Non-interest bearing deposits made up 22% of total deposits at September 30th. With respect to FDIC insured deposits, excluding Savista's own deposit accounts, 13.4% or $430.9 million of our deposits were in excess of the FDIC limits at quarter end. Our cash and unquenched securities at September 30th were $493.2 million, which more than covered these uninsured deposits. the $462.1 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30th. We believe Civisys' low-cost deposit franchise is one of our most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our security portfolio as a source of liquidity At September 30th, our security portfolio was $629 million, which represented 15% of our balance sheet. And when combined with cash balances, represents 21.9% of our total deposits. We continue to see relief from the pressure that higher interest rates have been putting on our bond portfolio. At September 30th, all of our securities were classified as available for sale and had $44.6 million of unrealized loss associated with them. This represents a decline in unrealized losses of $17.9 million from the linked quarter and a $9.5 million decline since December 31st, 2023. Savista's 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 a real value. We ended the quarter with our Tier 1 leverage ratio at 8.45%, which is deemed well capitalized for regulatory purposes. Our tangible common equity ratio was 6.64% at September 30th, which was an increase from 6.19% at June 30, 2024. 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%, and we continue to make progress towards that target. To that end, we will continue to focus on earnings It will balance any repurchases and the payment of dividends with building capital to support growth. Despite the uncertainties associated with the national economy, the economy across Ohio and southeastern Indiana is holding up well. Our credit quality remains strong, and our credit metrics remain stable. We did make a $1 million net provision during the quarter, which was partially attributable to loan growth, but primarily attributable to the historically low prepayment and curtailment rates in our loan portfolio and its impact on the CECL model. Our ratio of allowance for credit losses to total loans is 1.36% at September 30th, improving from 1.34% at June 30th and 1.30% at December 31st, 2023. This change is primarily due to changes in interest rates and the quarterly updating of factors within our model. In addition, our allowance for credit losses to non-performing loans is 227% at September 30, 2024, compared to 246% at December 31, 2023. One and a half million dollars of the year-to-date increase in non-performing loans was attributable to fraud-related events that one of our clients experienced that we discussed during last quarter's call. In summary, we are very pleased with our third quarter results. Our disciplined approach to loan pricing and the way our teams are executing on our deposit initiatives brought better alignment between our lending and core funding. These efforts, coupled with the inflection in our net interest margin, yielded solid results that I believe sets us up for a strong finish to 2024. Savista remains very focused on creating shareholder value and serving our customers and communities. Thank you for your attention this afternoon and your investment, and now we'll be happy to address any questions you may have.

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star, followed by the number one on your touchstone 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 number two. If you are using a speakerphone, please lift the handset before pressing any key. One moment, please, for your first question. Our first question comes from the line of Justin Crowley from Piper Sandler. Go ahead, please.