Civista Bancshares Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 30, 2024

There are 8 speakers on the call.

Operator

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 Bancshares 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 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.

Operator

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 measure sorry, as well as the reconciliation of the GAAP to non GAAP measures. This call will be recorded and made available on Savista Bancher's website at www dotcipb.com. At the conclusion of Mr. Schafer's remarks, he and the Savista management team will take any questions you may have. Now I will turn the call over to Mr.

Operator

Shaffer. Please go ahead.

Speaker 1

Good afternoon. This is Dennis Shaffer, President and CEO of Savista Bancshares. I would like to thank you for joining us for our Q1 2024 earnings call. I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the Bank Chuck Pertru, 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 Q1 of $6,400,000 or $0.41 per diluted share, which represents a $6,500,000 decline from our Q1 in 2023 and a $3,300,000 decline from our linked quarter.

Speaker 1

While we are disappointed in our results, we knew there would be headwinds as we stepped away from the 3rd party processor of income tax refunds and we did not have the benefit of a $1,500,000 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 $3,800,000 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.

Speaker 1

During the Q3 of 2023, we announced that Subsystem would be stepping away from the 3rd party processor of tax refunds due to increased scrutiny from our regulators. Savista earned $1,900,000 $475,000 respectively during the 1st 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, 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 Q1 of 2023.

Speaker 1

We anticipate these changes will reduce service charge revenue by $1,200,000 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 were 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 1st and second quarters.

Speaker 1

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 tiered 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 percent during the quarter.

Speaker 1

We have a number of initiatives in progress to reduce costs and our reliance on broker 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 $100,000,000 in low cost funds at the current rate of 86 basis points into participating banks. We also 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.

Speaker 1

And 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 $75,000,000 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.

Speaker 1

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 portfolio. This was primarily attributable to a hospitality credit and a cellular tower 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.

Speaker 1

Earlier, we announced a quarterly dividend of $0.16 per share based on our March 29 share price. This represents a 4.16 percent 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 percent in comparison to the linked quarter and 2.6 percent in comparison to the linked quarter and $2,600,000 or 23.2 percent in comparison to the prior year Q1. 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.

Speaker 1

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 subsidiary. The primary drivers for the decline for the prior year's Q1 were $1,900,000 in tax refund processing fees earned in the prior year that I mentioned earlier and a non recurring $1,500,000 signing bonus that we recognized in the Q1 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 $27,700,000 represents a $2,300,000 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 Savista is self insured for our employee health insurance.

Speaker 1

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 3rd 4th quarters of the prior year. In addition, the combination of truing up our marketing accrual in the previous quarter and the resumption of our monthly marketing accruals in the current quarter accounted for $669,000 of the increase. Compared to the prior year's Q1, non interest expense increased $257,000 or 1%. The increase is attributable to our normal annual merit increases, which take place each April and 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.

Speaker 1

Turning our focus to the balance sheet. For the quarter, total loans and leases grew by $36,400,000 This represents an annualized growth rate of 5%. While we experienced increases in nearly every loan category, our most significant increases were 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 5 years or less. New and renewed commercial loans were originated at an average rate of 7.92% during the quarter.

Speaker 1

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 2 storey 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 $244,000,000 at March 31. 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 $4,300,000 or negative 0.1 percent since the beginning of the year.

Speaker 1

However, if we back out non core tax program and broker deposits, our deposit balances declined to $29,000,000 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 31. With respect to FDIC insured deposits, excluding Savista's own deposit accounts and those related to the tax program, 13.1% or $392,300,000 of our deposits were in excess of the FDIC limit at quarter end.

Speaker 1

Our cash and unpledged securities at March 31 were $452,000,000 which more than covered these uninsured deposits. Other than the $369,500,000 of public funds with various municipalities across our footprint, we had no deposit concentration at March 31. 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 Sadiska's most valuable characteristics contributing significantly to our solid net interest margin and overall profitability.

Speaker 1

The interest rate environment continues to put pressure on bond portfolios. At March 31, all of our securities were classified as available for sale and had $62,500,000 of unrealized losses associated with them. This represented an increase of unrealized losses of $7,900,000 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 $608,300,000 which represented 15.7% of our balance sheet.

Speaker 1

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 31, down slightly from 6.36 percent at December 31, 2023. Savista's 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 a value. While our capital levels remain strong, we recognize our tangible common equity ratios spring low.

Speaker 1

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 we'll balance any repurchases and the payment of dividends with building capital to support growth. As we stated in an earlier 8 ks, the Board reauthorized a new stock repurchase program of $13,500,000 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 $2,000,000 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 2 credits.

Speaker 1

A $3,300,000 hospitality credit, which we expect to resolve via the sale of the properties and have a substantial guarantor backing and a $4,000,000 cellular tower credit, which we expect to resolve in the next 6 months. I would note that neither of these credit issues were related to underwriting weakness. The hotel had an issue with Inspire suppression system during the pandemic that prevented it from operating for 17 months and continues to limit operations. The cellular power business suffered an internal fraud where an employee caused significant damage to the company for personal gain. Our ratio of a balance for credit losses improved from 1.3% at December 31, 2023 to 1.34% at March 31.

Speaker 1

In addition, our allowance for credit losses to non performing credits increased from 245.67 percent at December 31, 2023 to 247.06% at March 31. In summary, although our margin compression was more than we anticipated, our margin remains strong and 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, Savista continues to generate solid earnings and our focus continues to be on creating shareholder value.

Speaker 1

Thank you for your attention this afternoon and your investment. And now we will be happy to address any questions that you may have.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question is from Brandon Nossall from Hovde Group. Please ask your question.

Speaker 2

Hey, good afternoon folks. Hope you're doing well.

Speaker 1

Hi Brandon.

Speaker 2

Maybe just to start off here, I think you folks have historically had the CFO position vacant for quite a long time. So just maybe talk through the decision to formally fill that CFO position with your announcement earlier today and why now is the right

Speaker 1

time? Well, I think that Todd Michael has filled that role for us for the last 30 years and he's done a great job at that. But Todd is approaching retirement age. He'll be retiring over in the next couple of years. And we wanted to have sufficient time.

Speaker 1

Todd has a lot of institutional knowledge and we think he'll bring value working with our new CFO. But we just thought the timing of that was is right now given his plans for the future.

Speaker 2

Great. Thanks. Maybe one more for me. Moving to the expense base, even though costs were up sequentially, they still came in quite a bit better than I was expecting. I think on the last earnings call, you folks pinpointed like $28,700,000 of expenses per quarter for the final three quarters of the year.

Speaker 2

Just kind of curious to hear your updated thoughts on the expense base and how you expect that to trend going forward?

Speaker 3

Brandon, this is Rich. We did. We guided last quarter, I think during the call, the $28,400,000 And I would say that's a good number for the rest of the year. And the big difference that we're going to have between the Q1 and the rest of the year is, as you'll recall, our merit increases go into effect April 1 every year. And that's really the only significant, I think, additional cash expenditure that we've got slated for in our budget between now and the end of the year.

Speaker 1

Yes. We've really focused on expense control here near the end of last year and going into this year, just knowing the lost revenues that we would have. So I think that's really good if we're guiding to the because I think we're starting to see some of the expense control initiatives that we put into place. So I think that number that Rich gave, if we guided last quarter, our merit increases went into effect in the second quarter. I think that's showing that I think we are controlling other expenses.

Speaker 2

Yes, yes. That's perfect. All right. Thank you for taking my questions.

Speaker 3

Thank you.

Operator

Thank you. Your next question is from Justin Reilly from Piper Sandler. Please ask your question.

Speaker 4

Hey, good afternoon guys.

Speaker 5

Wanted to hit on the net interest margin for the quarter. Given some of the dynamics you discussed in the prepared remarks, can you unpack a little more just what you're seeing as far as lingering upward pressure on the funding side? Where we may be on that? When you get to a spot where asset repricing allows for margin stabilization and let's call it a flat rate environment?

Speaker 3

Yes, Justin. This is Rich again.

Speaker 1

I can't remember if you were on

Speaker 3

the call last time or not, but I don't have a great track record of predicting what our margin is going to do. But I think even with the contraction, I mean our margin is respectable And I think the initiatives that Dennis discussed, the Ohio homebuyers, we feel pretty confident we're going to be able to bring in $100,000,000 of pretty low cost funding related to that and the opportunity to move some of the cash balances that our wealth management group has that are off balance sheet, on our balance sheet are 2 opportunities to kind of reduce funding. And again, I think absent growth and probably the bigger wild card is absent a migration from the non interest bearing deposits into higher whether they're money market or even CDs. I mean that's the thing that I think we continue to it's just I don't know if it's impossible to model, but we haven't figured out how to model that. I think our models tell us that if nothing changes and we don't have any significant crazy movements in interest rates, then again, it will contract by basis points.

Speaker 3

But I've said that 2 quarters in a row and I've been wrong 2 quarters in a row.

Speaker 1

And so the main difference, I think, Justin, is we are starting to see some positives. We are we were able to reprice some brokered near the end of March. Some of the brokered deposits, we did see some improvement there. We were able to get that funding at 22 basis points less than we got we had it on the books for. We have a lot of our CD specials are starting rates haven't moved.

Speaker 1

So those rates were high back mid year last year, mid end of Q3, those rates will adjust downward at their next re pricing here over the next the ones that are coming due over the next quarter or so. So there are some positive signs. But I do think as Rich alluded to, it all comes down to the loan how fast we grow loans,

Speaker 6

because we're

Speaker 1

going to need funding for that. And we may not get the benefit of like the wealth program and the tax money. That may be a 3rd quarter thing. We're starting to implement and we'll be able to start taking those Homebuyer Plus deposits here early in the 1st week of May here. But how quickly we put those on the balance sheet will really depend on what that where our margin goes in that second quarter.

Speaker 1

But the Q3, I think we should see good improvement because we also have more loans and assets repricing than we have the first half of the year. So there's a couple of factors, I think at least some positive signs that we see that the margin might start stabilizing.

Speaker 5

Okay, got you. That's helpful. And then I guess just dovetailing off some of that. What do you have, I'm not sure if you're able to quantify just in terms of brokered funding that's maturing through the balance of the year. And what does that repricing look like looking forward here?

Speaker 1

That is all in the Q4. The remainder of it, we have nothing repricing. We had a slug $151,000,000 that repriced March 20. So we really didn't get much benefit of that in the Q1. And the next 2 slugs of our brokerage stuff is really in the Q4 late in Q4 that will reprice.

Speaker 3

That's right, Brendan. So we've got $500,000,000 and that's been kind of constant of brokered CDs. And as Dennis said, we've got $200,000,000 of that that will come due or mature in November of this year. The rest of it goes into 25. And that's really been with PPA.

Speaker 5

Okay. That's helpful. And then just shifting gears a little. I know the focus here has been rebuilding capital levels, getting TC back to 7%, 7.5%. But just looking for any high level commentary on the environment for M and A, which, of course, has remained fairly quiet, but just more so trying to get a sense of just where your capital priorities stand over maybe the medium or longer term?

Speaker 1

Yes. I mean, I think there's a lot of dialogue happening around M and A. I just think it's really tough environment to do any M and A right now, whether you're a buyer or a seller. The loan marks, trying to figure that out in this environment with a lot of times you really have to dive into how buyer or sellers loan books are repricing. What's the effect of higher rates for the ham on those books and things like that.

Speaker 1

So I think the marks that you're doing are pretty heavy. So I just for us, we're focused on building our capital base right now because we just think it's too tough an environment right now to do any type of M and A.

Speaker 5

Okay, got it. Thanks for taking my questions guys. Appreciate it.

Operator

Thank you. Your next question is from Terry McEvoy from Stephens. Please ask your question.

Speaker 7

Hi, thanks. Good afternoon, everybody.

Speaker 1

Hey, Terry.

Speaker 3

Maybe you

Speaker 7

could just talk about loan pipelines, confidence in that mid single digit growth rate over the remainder of the year? And do you think that growth will continue to come from kind of multifamily and metro Ohio markets and some of the other categories that Dennis talked about earlier?

Speaker 6

Yes, Terry, this is Chuck. Pipelines are actually pretty good right now. And when I compare it to last year, our pipeline right now is actually higher than it was last year sitting at the same time. Now I would tell you that our pull through rates have not been quite as strong as they were in the past just because we're really trying to be very mindful of margin and holding rates at well above 8 in the last as far as new originations on most especially real estate deals. So our pools and rate hasn't been what it has been.

Speaker 6

We're still seeing really good strong demand, especially in the multifamily area. Obviously, Columbus can't build units fast enough, but we're seeing really good growth in Cincinnati and Cleveland too as far as the metro markets with some and we've got some stuff coming on both in Toledo and in date too. So I would say that the 5 major metro markets are

Speaker 3

doing well in the multifamily side. We really

Speaker 6

haven't seen really any what I would call rate concessions or rate pressures across any of our categories so far. And we're really seeing especially in the multifamily area, most stuff as it's coming on and efforts being built, the rents are actually higher than what's being projected in the appraisal. So we feel pretty good about where we sit here in Ohio and Southeast Indiana and Northern Kentucky. We feel like the demand is still pretty strong. The one thing that I think we talked about last call, it's taken a little bit more equity in these projects to get them to work from a cash flow perspective.

Speaker 6

But the bigger developers are willing to put that extra cash in and make them work.

Speaker 7

That's great. Thanks for the color there. As a follow-up, I know that's a tough question. How are you thinking about the non interest bearing funds coming out of the tax refund processing program that was $19,500,000 last quarter? Should we kind of model out $20,000,000 per quarter going forward or was the Q1 a bit outsized in your view?

Speaker 3

Well, that's probably fair. I think at the end of the March, we had about $31,000,000 left in there, Terry.

Speaker 5

Okay.

Speaker 1

We're kind

Speaker 3

of at the mercy, if you will, of the tax processing partner that we have. I mean, they're going to at some point going to move that money out. But we thought that was going to happen in December and I guess we're fine if they want to leave it because it's free money to us. But right now the conversation is that would be gone sometime in the second quarter.

Speaker 7

And then just one last quick one. The $1,200,000 of overdraft service charge revenue that's lost this year, Is that fully captured in the 1Q run rate or is there incrementally more to come down a bit in the remainder of the year?

Speaker 3

I would say that our Q1 is typically our highest NSF quarter post holidays. So if we had 375 $1,000 less of NSF income in the Q1, it's going to be something less than that. And over the course of 12 months, we're kind of projecting the 1.2

Speaker 7

Okay. Thanks for taking my questions. Have a good day.

Speaker 1

Thanks, sir.

Operator

Thank you. Your next question is from Kevin Susser from KBW. Please ask your question.

Speaker 4

Hey, good afternoon. Thanks for taking my question.

Speaker 1

Hi, Tim.

Speaker 4

I had a follow-up on your loan commentary. I think you guys raised your guidance expectation from low single digit last quarter to mid single digits. And I think I remember you guys mentioning something about it sounds like the competitive environment was getting a little bit more intense last quarter. Have you seen that moderate a little bit? And is that maybe what drove the upside to guide here?

Speaker 6

I think all along, Tim, we were projecting mid single digits, that 5%, 6% range, 5% I think is what we really focused on. And we have seen a little bit of relief, not a lot. There's a lot of competitors out there. As we talked about, I think last call, we've seen a lot of competitors come back, bidding treasury plus as compared to kind of really looking at cost of funds more so with the inverted yield curve that put us in a little bit competitive disadvantage. But all in all, as you know, the 5% and 10% have actually come back up a little bit in this Q1 and into the Q2.

Speaker 6

So that treasury plus has got a little closer to what we're offering. But I feel I just feel like we really haven't changed our guidance thing. I don't at least I don't feel that way after the Q1 results.

Speaker 3

Well, the only thing I'd add to that, Tim, is that we're I mean the governor really on our loan growth is our ability to fund that

Speaker 6

loan growth.

Speaker 3

And again, we're disciplined in how the loan guys price those. But as big impediment to grow our balance sheet is competition is our ability to fund that. Right.

Speaker 4

Can you guys remind us what percent of your loans are floating rate and how you'd expect loan yields to trend in a downward rate environment and then what the overall impact on the NIM would be if we just got maybe 1 or 2 basis cuts towards the end of the year?

Speaker 1

Well, we think that will benefit us. The rate cuts probably benefit us a little bit because again, we've been funding some of that with overnight borrowings. So those have been trending upwards. I think they were up $30,000,000 from twelvethirty one to threethirty 1. So we would benefit from that.

Speaker 1

And we also have more loans repricing. A lot of our loans are tied to 75% of our book or more tied to treasuries. And those even if short term rates come up, it looks like the yield curve is trying to correct itself a little bit and those treasury rates are higher. So as that book re prices, we should benefit. Just to kind of

Speaker 6

give you some raw numbers, about a little over 25% of our book is floating daily from that perspective, Tim. So then and when we started out the year, we did a deep dive and we had about $140,000,000 that we're going to reprice in 2024, of which only $15,000,000 of that was re pricing in the Q1. So when Dennis mentioned earlier we feel good about some of the repricing and some of the margin help in the second half of the year.

Speaker 1

Out of that $140,000,000

Speaker 6

$93,000,000 of is going to be moving in the second half of the year.

Speaker 4

Great. Appreciate all the detail. Thank you, guys.

Operator

Thank you. Your next question is from Manuel Neves from D. A. Davidson. Please ask your question.

Speaker 1

Hey, I think a lot of my questions have been answered, but

Speaker 5

could you help quantify the potential size of the wealth management

Speaker 1

opportunity. And you said it was $75,000,000 in Q3. Is there more after that? Or is it just

Speaker 3

that amount?

Speaker 6

So, Manuel,

Speaker 3

this is Rich. It's just a transaction. Those deposits are sitting in our wealth department now. And once we get the mechanics of that squared away, we'll just move that money over to the bank. And it's not going to be super cheap money, but it will be certainly less than what we borrow overnight at.

Speaker 3

And then I would

Speaker 1

add that we mentioned those two initiatives, but there are a number of other initiatives that we think that we'll be able to add deposits. I mean, we have a we're looking at all our public funds in the markets that we where we have branches. We're looking at schools and libraries and maybe

Speaker 3

a

Speaker 1

little bit more of that funding. We have a number of we've maybe a little bit more of that funding. We have a number of we've pulled a number of reports, for instance, with customers with lending with no or little loan or deposit relationships. We'll be targeting those customers and stuff. So I think there's a number of initiatives underway in addition to the State of Ohio's Homebuyer Plus program and that wealth program that we think can have an immediate impact on our funding costs.

Speaker 1

I wouldn't say immediate. Well, over time, over the next year, I would say, as I mentioned in my remarks, over the next year.

Speaker 5

Okay. I appreciate that. Thank you.

Operator

Your next question is from Daniel Cardenas from Janney Montgomery Scott. Please ask your question.

Speaker 5

Good afternoon, guys.

Speaker 1

Good afternoon.

Speaker 5

A couple of questions on the fee income side. I mean, I appreciate all the color that you guys have given and it sounds like you're working to try to patch up some of the holes that have been created. But how should we think of a good run rate for you guys on a go forward basis?

Speaker 3

So if we had $8,500,000 for the quarter, again, I think the wild card in there right now for us is mortgage banking. And again, we're coming into probably the best time for that. I'll let Chuck talk about it. But I don't I guess the other wildcard is lease the PDs related to our leasing. And again, we're I guess we're a year into it, but we're still those are some pretty lumpy revenues depending on when pieces of equipment get sold and whatnot.

Speaker 3

But I'll let Chuck talk about mortgage banking a little bit.

Speaker 6

Well, Dan, our Q1 production in mortgages, even though it doesn't show as well on the gain on sale, we did about $10,000,000 more dollars in production in the Q1 of this year as compared to the Q1 last year. We feel like we've got a really solid pipeline there. We're still limited a little bit in Ohio and just the amount of inventory that's out there. It's just we've got a lot of preapprovals and people can't still buy houses. But we have put a concerted effort going into this year about getting more of our production being salable as compared to portfolio.

Speaker 6

Obviously, the construction piece and our CRA piece have to go on the books, but the rest of the stuff we're really pushing towards more of a saleable product. And it seems like the consumer is getting a little bit more adjusted to having higher rates.

Speaker 3

I mean a lot of people still aren't going to

Speaker 6

want to come off

Speaker 3

a 3% rate to get to 7% rate,

Speaker 6

but people that actually have been holding off making a move or starting to come into the marketplace because they need to and it doesn't look like the rates are going to come down in the

Speaker 1

real near distant future. Well, in the spring summer months, the volume should be up. So optimistic there. Also, we did create a syndication desk through our leasing company, which I think will help us with some of that gain on sale because we'll be at a that's going to be their sole function to work our relationships and get us the best pricing so that our gains improve, the cadence will happen, get us in some sort of cadence where that's happening a little bit quicker and things. So that was another one of our initiatives that we looked at was how do we maybe do a little bit better.

Speaker 1

We're going to incentivize who's running that area based on the bigger gains that he can get. He'll have a chance to earn a little bit of income and stuff, but that was another initiative that we undertook in the Q1.

Speaker 3

The only thing I'd add, we talked about the NSF fees being down $375,000 but our service charges were only down about $300,000 So we made that up with higher service charges and that's something we put in place during the quarter.

Speaker 1

Right. We only had 1 month of benefit on our service charge. We did increase some service charges across the board and we really only had 1 month of March was the only real month of benefit there. So we are trying to offset some of that lost revenue various ways.

Speaker 5

So it sounds like maybe you can stay flattish in Q2 and then start building up from there modestly.

Speaker 1

Yes.

Speaker 5

Okay. And then how should I I'm sorry.

Speaker 6

Dan, I was going to say the wildcard of that a little bit too is just our swap income. It kind of bounces up and down depending on our borrowers appetite for we did quite a few what I would call mid to short term swaps in the Q4. I think we generated $475,000 in the Q4. I think we generated $475,000 in the Q4. I think we would jump in on a 3 year swap at that time.

Speaker 6

The way the yield curve has been bouncing around, that hasn't been as appealing to some more borrowers. But depending on how the inversion of the yield curve goes over the next few months, we might be able to pick up a little more swap income too.

Speaker 5

That can be lumpy, right? So,

Speaker 1

got

Speaker 5

it. All right. And then tax rate for you guys, how should we be thinking about that?

Speaker 3

We came in a lot lower than we thought it would this time. Our effective rate was just under 12% this quarter, but we've always kind of said 15% or 16%, and I think that's what I'd love. I don't know what the tax preference items were and I should that drove that down this quarter, but that's about as low as we've ever seen. I should know the answer to that. If you wait until the very last, the question to ask me is one that I didn't know the answer to.

Speaker 5

No problem. All right. I'll stop there and step back. Thank you, guys.

Speaker 6

Thanks, Dan. Thanks, Dan.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Dennis Schaeffer for the closing remarks.

Speaker 1

Well, in closing, I just want to thank everyone for joining and those that have participated in the call today. Again,

Speaker 3

while we

Speaker 1

were not pleased with our Q1, we are confident that our strong core deposit franchise and just our disciplined approach to pricing deposits and managing the company positions us well for future success. So I look forward to talking to you all again in a few months to share our 2nd quarter results. Thank you for your time today.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Key Takeaways

  • In Q1 the bank reported net income of $6.4 M ($0.41/share), down $6.5 M from last year largely due to exiting the tax refund processing program, loss of a $1.5 M one-time bonus, and overdraft fee changes that trimmed non-interest income by $3.8 M.
  • Net interest margin contracted by 22 bps to 3.22% as deposit migration into higher-rate accounts and the end of interest-free funding drove funding costs up 35 bps to 2.54%, despite a 12 bps rise in earning-asset yields to 5.64%.
  • Management unveiled initiatives to lower funding costs and expenses, including the Ohio Home Buyers Plus Program (up to $100 M at 0.86%), moving $75 M of wealth management deposits on-balance sheet by Q3 at Fed funds minus 20–25 bps, and targeting ~$28.4 M in quarterly non-interest expense.
  • Loan and lease portfolios grew at a 5% annualized pace in Q1—driven by CRE, residential real estate, and construction—with almost all new production in adjustable-rate structures and a robust pipeline underpinning mid-single digit growth guidance for 2024.
  • Credit quality remains solid despite a $2 M CECL-driven provision for two individually stressed credits, and capital ratios are strong with an 8.62% Tier 1 leverage ratio, 6.26% tangible common equity, a 4.16% dividend yield, and a new $13.5 M share repurchase authorization.
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Earnings Conference Call
Civista Bancshares Q1 2024
00:00 / 00:00