Civista Bancshares, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Savista Bank Shares, Inc. 4th Quarter 2024 Earnings Conference 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 NANGAP measures, which are intended to supplement but not substitute 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 Civista Ventures' website at www.civv.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.

Thank you.

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 fourth quarter 2024 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President and Chief Lending Officer of the bank. Rich Dutton, SVP of the company and Chief Operating Officer of the bank. Ian Winham, 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 fourth quarter of $9.9 million or 63 cents per diluted share, which represents a $1.5 million or 18% increase over the length quarter and a $237,000 increase over our fourth quarter in 2023. We also reported net income for the year of $31.7 million, or $2.01 per diluted share, which compares to $43 million, or $2.73 per diluted share for 2023. Our ROA for the year was 0.80%, However, it was 0.97% for the quarter, continuing our spring of improving our ROA for each quarter of 2024. As I have mentioned during previous calls, 2024 was a year of transition for Savista as we looked to replace nearly $5.2 million of 2023 non-interest income. This included $1.4 million due to changes to the way we process overdrafts, $2.4 million in tax refund processing revenue, and a $1.5 million MasterCard renewal fee. I am happy to report that our non-interest income for 2024 was $585,000 greater than our non-interest income for 2023. We were able to make up this lost revenue by increasing other service charges, increased gains on the sale of mortgages, increased lease and loan originations, and increased lease and residual fee income. Loan demand continues to be strong in each of our markets. However, we continue to be disciplined in our approach to loan and lease pricing, which had the intended impact of slowing growth. Our loan and lease portfolio grew at an annualized rate of 4.9% during the fourth quarter and a respectable rate of 7.7% for the year. Core deposit funding continues to be a focus, and we were pleased that our core deposit funding grew organically by over $36 million during the quarter, which allowed us to reduce our reliance on brokered funding. While overall the impact was a slight decline in total deposits from the end of our third quarter, this represents a shift toward more relationship funding that we believe contributes to the overall value of our core deposit franchise. Currently, we have a number of core deposit gathering 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 $31.4 million, which represents an increase of $2.1 million, or 7.3%, compared to our linked quarter. While our earning asset yield increased by one basis point, the increase in net interest income was primarily attributable to a 19 basis point decline in our overall funding costs. which ended the year at 2.41%. Our decline in our funding cost was largely attributable to $200 million in brokered CDs that matured in October. They carried a rate of 5.58%, and we were able to reduce or replace them by laddering brokered CDs over the subsequent 12 months at a blended rate of 4.32%. The result was was that our margin expanded by 20 basis points during the quarter to 3.36% and was 3.21% for the year. Similarly, we had $150 million in brokered CDs that matured in the last half of December that carried a rate of 5.08%. We were able to reduce and replace them with $125 million of CDs laddered over the next 12 months at a blended rate of 4.37%, representing a savings of 71 basis points. While this had little impact on our fourth quarter results, we do anticipate that it will further reduce our overall funding costs in the first quarter of 2025. We also have another $150 million of brokered CDs at a rate of 5.18%, that will mature at the end of the first quarter that we anticipate being able to replace at a lower cost. We believe that our margin trough during the second quarter of 2024 and will continue to expand over the next few quarters. Earlier this month, we announced a penny per share increase in our quarterly dividend to 17 cents per share. Based on our year-end market close of $21.51, This represents an annualized yield of 3.16%. During the quarter, non-interest income decreased $671,000 or 6.9% from the late quarter and increased $192,000 or 2.2% from the fourth quarter of 2023. The primary driver of the decline from our linked quarter was a $1.1 million decline in lease revenue and residual fees. As we have noted, leasing fees, particularly residual income, is less predictable than more traditional banking fees. The primary drivers for the increase from the prior year's fourth quarter were a $384,000 increase in gains from the sale of mortgage loans and leases, and the receipt of a $319,000 death benefit on life insurance policy held on a former employee. As I mentioned, we are particularly proud of the fact that our year-to-date non-interest income increased $585,000, or 1.6%, in comparison to the prior year. Non-interest expense for the quarter of $28.3 million represents a 1.1% increase from our linked quarter. Our continued focus on expense control yielded improvement in nearly every category of non-interest expense. However, these declines in non-interest expense were offset by an increase in professional fees as we continued using consultants as we transitioned in our new finance team as our control were retired in July and we experienced the resignations of two other tenured employees in our finance department during the third quarter. These positions have all been filled. We will continue to utilize consultants in a reduced capacity during the first quarter of 2025 and do not anticipate needing them beyond the end of the first quarter. As we discussed during last quarter's call, we are in the process of converting our lease accounting and servicing systems. This will consolidate a number of systems and introduce automation to a number of tasks currently being manually performed. We noted during our last call that we had identified a reconciling item and established a reserve against it, which was included in other non-interest expense. As we continued the process, we increased the reserve by another $482,000 during the quarter. We expect the conversion to be completed during the first quarter. Year to date, non-interest expense increased $4.9 million or 4.6% over the prior year. Compensation expense increased $3.5 million over the prior year due to merit increases, insurance, and other payroll related expenses. Taxes and assessments increased $1 million, primarily due to an FDIC accrual adjustment in the fourth quarter of 2024, coupled with an increase year over year in our total assessment base. Software maintenance expense was up $777,000 due to new software contracts, aiming at improving our ability to detect and mitigate fraud losses, as well as increases and costs associated with existing software contracts. These increases were partially offset by a $1.5 million decline in depreciation on equipment we own related to our operating lease contracts, which are included in equipment maintenance and depreciation. We continue to originate fewer operating leases and are purchasing residual value insurance on those operating leases that we do originate with a goal of eventually eliminating depreciation expense related to operating leases. We remain a very tax-efficient company. Our effective tax rate was 13.1% for the quarter and 13.4% year-to-date. Our efficiency ratio for the quarter was 68.3%, which is an improvement over the linked quarter, but continues to be higher than we would like. We did close a branch in December and anticipate $142,000 in annual savings as a result and are transitioning our after-hour calls away from a third-party provider to our automated system, which should yield another $180,000 in annual savings and improve our customer experience. We will continue our efforts in 2025 looking for revenue enhancements and cost efficiencies across the organization to bring this ratio more in line with our expectations. Turning our focus to the balance sheet, for the year, total loans and leases grew by $219.5 million. This represented a growth rate of 7.7%. as we experienced increases in commercial and ag loans, non-owner-occupied CRE loans, residential real estate, and real estate construction loans. During the quarter, total loans and leases grew by $37.3 million. This represents an annualized growth rate of 4.8%. The loans we originated for our portfolio continue to be virtually all adjustable rate, and our leases all have maturities of five years or less. Given today's rates, we expect approximately $180 million of our loans to reprice at higher rates over the next 12 months. Savista remains a CRE lending bank. However, we continue to be aggressive in pricing C&I loans and remain disciplined in how we are pricing commercial real estate loans as we work to manage our CRE to risk-based capital ratio and better align our lending and core fundings. During the quarter, new and renewed commercial loans were originated at an average rate of 7.72%. Portfolio and sold residential real estate loans were originated at 6.41%, and loans and leases originated by our leasing division were at an average rate of 9.32%. On December 31st, loans secured by office buildings made up 5.2% 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 office buildings located outside of central business districts. Along with year-to-date loan production, our pipelines remain solid and our undrawn construction lines were $238 million at December 31st. 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 ratios. Our commercial lenders, treasury management officers, private bankers, and retail teams continue to focus on deepening relationships and attracting core deposits. Total deposits were relatively unchanged from the linked quarter, However, we did lower our balance of broker deposits by $48 million. For the year, total deposits grew by $226.8 million, or 7.6%, on increases in savings in money market accounts and time deposits. In addition to the initiatives of our frontline teams, we were successful in adding money market deposits from the state of Ohio's Home Buyer Plus program and cash deposits held in our wealth management clients' accounts, which represented $95.7 million and $97 million, respectively. At December 31st, our loan-to-deposit ratio was 96%. During the quarter, our cost of interest-bearing deposits declined by one basic point to 2.79%, as we became more aggressive in pricing higher-balance money market accounts and time deposits as part of our initiative to replace wholesale funding with core deposits. Our deposit base continues to be fairly granular, with our average deposit account excluding CDs approximately $27,000. At December 31, 2024, non-interest-bearing deposits made up 21.9% of total deposits. With respect to FDIC insured deposits, excluding Savista's own deposit accounts, 13.4% or $431.7 million of our deposits were in excess of the FDIC limits at year end, and our cash and un-fledged securities of $499.3 million more than covered those uninsured deposits. Other than $463.3 million of public funds with various municipalities across our footprint, we had no deposit concentrations at December 31st. We believe that this low-cost deposit franchise continues to be 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 December 31st, our security portfolio was $652 million, which represents 15.9% of our balance sheet, and when combined with cash balances, represents 22.3% of our total deposit. At December 31st, 100% of our securities were classified as available for sale and had $53.4 million of unrealized losses associated with them. This represents an increase in unrealized losses of $13.5 million from our length quarter and $5.8 million increase since December 31st, 2023. Savista's earnings continue to create capital, and our overall goal remains to maintain capital adequate to support organic growth and potential acquisitions. Although we did not repurchase any shares during the quarter or year, we continue to believe our stock is of value. We ended the year with our Tier 1 leverage ratio at 8.60%, which is deemed well capitalized for regulatory purposes. Although earnings were strong, increasing our tangible common equity ratio from 6.36% at the previous year end to 6.43% at December 31st, 2024, we recognize our tangible common equity ratio screens low, and our 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 national economy, the economy across Ohio and southeastern Indiana is showing no signs of deterioration. Our credit quality remains strong. Our ratio of the allowance for credit losses to total loans is 1.29% at December 31st, which is consistent with 1.30% at December 31st, 2023. However, our allowance for credit losses to non-performing loans declined from 246% at December 31st, 2023 to 124% at December 31st, 2024. This was attributable to two loans totaling $16.4 million that were downgraded to non-performing during the quarter. One is an $8 million loan on a Molle family property that is under contract to be sold that is expected to close during the first quarter of 2025. The second is an $8.4 million CNI loan that is current but out of compliance with our loan terms. We have met with the borrowers and believe that the loan will be brought back into compliance during the first quarter of 2025. During the quarter, we did make a $697,000 provision, which was partially attributable to loan growth, but primarily attributable to the historically low prepayment and containment rates in our loan portfolio and its impact on our CECL model. As many of you may have seen, we are happy to announce last week or were happy to announce last week that we have promoted Chuck Parcher to Executive Vice President and Chief Lending Officer of the company and President and Chief Lending Officer of the bank. I will continue in my role of CEO and President of the company and CEO of the bank. This change reflects Savista's succession plan and our organization's commitment to stability, growth, and a strong future. Chuck's promotion is a well-deserved recognition of his contributions, and I look forward to working together with him to serve our customers, employees, and shareholders. In summary, we are very pleased with our fourth quarter and full year-end results. Our disciplined approach to loan pricing and the way our teams continue executing on our deposit initiatives is bringing our lending and core funding into alignment. These efforts, coupled with our expanding net interest margin, yielded solid results that I believe sets us up for a strong 2025. So VISTA remains focused 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.