Civista Bancshares, Inc. Q2 2026 Earnings Call

Good afternoon. My name is Hannah, and I will be your moderator for today. 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 Civista Bancshares Incorporated 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, 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 Civista Bancshares website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management team will take any questions you may have. Now, I will turn the call over to Mr. Shaffer.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our second quarter 2026 earnings call. I am joined today by Chuck Parcher, EVP of the company and President of the bank, Rich Dutton, SVP of the company and Chief Operating Officer of the bank, Ian Whinnem, 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 $14.3 million, or $0.69 per diluted share, which represents a $3.3 million, or 30% increase over our second quarter in 2025, and a $674,000 decline from our linked quarter. This also represents an increase in pre-provision net revenue of $5 million, or 36%, over our second quarter in 2025, and a $1.6 million, or 9% increase over the linked quarter.

Net interest income for the quarter was $38.6 million, which represents an increase of $770,000, or 2%, compared to the linked quarter. The increase was attributable to an increase in our earning asset yield of one basis point to 5.67%, while our overall funding costs declined by two basis points to 1.94%. Our net interest margin expanded by four basis points to 3.89% as we continued our disciplined approach to managing our asset pricing and funding costs. Our cost of funds was 1.94% for the quarter, down 37 basis points from the second quarter of 2025 and two basis points from the linked quarter. While our cost of deposits was 1.83%, down 13 basis points year-over-year and two basis points higher than our linked quarter sequentially.

Our cost of core deposits increased by four basis points to 1.59% compared to our linked quarter, which was offset by the repricing of $150 million of brokered CDs that matured in late March that carried a weighted average rate of 3.92%. We were again able to reduce our brokered funding and replace these deposits with $125 million of CDs laddered over the next nine months at an average rate of 3.80%, representing a savings of 12 basis points. Over the last eight quarters, we have reduced our reliance on brokered funding by $276 million, or 44%. Despite $68 million in early payoffs, our loan balances grew by $25.2 million, or at an annual growth rate of 3.1% during the quarter. Our lending teams generated $351 million in new organic loan production during the quarter that was partially offset by early payoffs in addition to normal principal pay-downs.

Our ROA for the quarter was 1.34%. Our ROE for the quarter was 10.23%. Our tangible book value per share grew for the seventh consecutive quarter to $20.43, which represents an average return of 15.5% over that period. Earlier this week, we announced a quarterly dividend of $0.18 per share, which is consistent with our prior quarter. Based on our June 30th closing share price of $28.22, this represents a 2.55% yield and a dividend payout ratio of 26.14%. Our strong financial performance and our ability to consistently create capital continues to give us options as we evaluate the best ways to put our capital to use. Non-interest income for the second quarter was $9 million, which represented a decline of $424,000 from our first quarter.

The primary driver of the decline from our linked quarter was $444,000 in other income recognized during the first quarter that was the result of claims that had been reserved for by our captive insurance subsidiary that subsequently did not materialize. Non-interest income year-to-date was $18.4 million, which represented a $4 million, or 27.6%, increase over the same period in the prior year. The primary drivers of this increase were a $500,000 increase in service charges, which were related to increased fees from our business customers and increased overdraft fees generated from retail accounts, a $1.7 million increase in net gains on the sale of mortgage loans and leases related to increased sales volume on both loans and leases, coupled with more favorable pricing.

The $444,000 in other income recognized during the first quarter that was the result of claims that had been reserved for by our captive insurance subsidiary that subsequently did not materialize. A $600,000 increase in lease revenue and residual income resulting from non-recurring adjustments from our leasing division's core system conversion last year. Non-interest expense for the quarter was $28.7 million and represents a $1.2 million, or 4.1%, decrease from our linked quarter. This decline was attributable to reductions in compensation expense, contracted data processing, professional services, and equipment expense associated with Farmers Savings Bank related to operational expenses, which were partially offset by merit increases and investments into the company. Compared to the prior year's second quarter, non-interest expense increased $1.2 million, or 4.3%.

The increase was attributable to increases in compensation, marketing, the amortization on our core deposit intangible, and software maintenance, and was partially offset by reductions in our FDIC assessment and professional services. Our efficiency ratio for the quarter improved to 58.2% compared to 60.1% for the linked quarter and 64.5% for the prior year's second quarter. Our effective tax rate was 16.66% for the quarter and 16.72% year to date. Turning our focus to the balance sheet. For the quarter, total loans and leases grew by $25 million, which represents an annualized growth rate of 3.1%. As we signaled during our last quarter's call, solid loan production across our footprint continued into the second quarter, with our lending teams generating nearly $351 million of new loans during the quarter. We did experience $68 million in payoffs, which partially offset our loan growth.

To put this in perspective, year to date, we have generated $565 million in organic loan production and have experienced $151 million in payoffs. This compares to the prior year's first six months, when we originated $405 million in new loans and we experienced $46 million in loan payoffs. We do consider our payoffs good payoffs as they were successful real estate projects that were sold or taken to the permanent market. We also had a few loans to operating companies that were acquired, and those loans were also paid off. Additionally, our undrawn construction lines were $250 million at June 30th, which compares to $175 million at March 31st and $161 million at December 31st.

During the quarter, new and renewed commercial loans were originated at an average rate of 6.68%, residential real estate loans were originated at 6.32%, and loans and leases originated by our leasing division were at an average rate of 9.05%. Loans, including construction secured by office buildings, make up just 4.6% of our total loan portfolio. 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. We remain mindful of our non-owner occupied CRE concentration and continue to focus on diversifying our loan portfolio. At June 30th, 2026, our CRE to risk-based capital ratio was 262%. Loan demand remains solid in each of our markets and our pipelines continue to grow.

At June 30th, 2026, our residential mortgage loan pipeline was up 14%, and our commercial loan pipeline was up 42% over the prior year. We anticipate growing the loan portfolio at a mid-single digit rate over the balance of the year. On the funding side, total deposits were mostly flat, declining $44 million, or 1.2%, for the quarter. Part of this decline was due to a $25 million reduction in brokered deposits. In addition, as in previous years, tax payments by our commercial and retail customers, as well as the collection and distribution of funds by our municipal customers, put pressure on our deposit balances during the second quarter.

While deposits backed up slightly this quarter, we remain focused on growing core funding, which has allowed us to grow our core deposit base in six of the last eight quarters while reducing our cost of funds during this time by 71 basis points. While our overall cost of funding declined by two basis points to 1.94%, we continue to see migration from lower rate interest-bearing accounts into higher rate deposit accounts. As a result, our cost of deposits, excluding broker deposits, increased by four basis points from the linked quarter 1.59%. Our deposit base continues to be fairly granular, with our average deposit account, excluding CDs, approximately $29,000. Other than the $519 million of public funds, which are primarily operating accounts with various municipalities across our footprint, we had no deposit concentration at quarter end.

We believe our low-cost deposit franchise continues to be one of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our securities portfolio as a significant source of liquidity. At quarter end, our securities portfolio totaled $670 million, which represented 16% of our balance sheet, and when combined with our cash balances, represents 21% of our total deposits. Our securities are classified as available for sale and had $34.9 million or 5.2% of unrealized losses associated with them. Civista's strong earnings continue to create capital, and our overall goal remains to maintain our capital at a level that supports organic growth and allows for prudent investment into our company. Earlier this week, we announced an $0.18 per share dividend based on the quarter end market close of $28.22. This represents an annualized yield of 2.55% and a payout ratio of 26.14%.

We view this as a sign of confidence management and our board of directors have in Civista's ability to continue generating strong earnings. While we have not repurchased any shares over the past several quarters, our regulatory capital and tangible common equity ratios are strong and continue to grow. Even with the recent increase in our stock price, we continue to believe our stock is of value and will continue to evaluate repurchase opportunities. During the quarter, we made a $1.3 million provision to our allowance for loan losses, a $519,000 provision for undrawn construction lines, and had net charge-offs of $74,000. While our credit metrics continue to normalize, our credit metrics remain strong. Our ratio of the allowance for credit losses to total loans is 1.28% at June 30th, 2026, which is consistent with 1.28% at December 31st, 2025.

Similarly, our ratio of allowance to non-performing loans of almost 137% improved slightly when comparing the same periods. Other than the general concern over the impact of macroeconomic uncertainties, the economy across Ohio and Southeastern Indiana is showing no signs of deterioration, and our credit quality remains strong. In summary, we are pleased with the increase in our pre-provision net revenue, the continued expansion of our net interest margin, our ability to generate non-interest income from diversified revenue streams, and our continued control of non-interest expense. Our core funding remains stable, allowing us to further reduce our brokered funding, and loan demand across our footprint continues to build, giving us confidence in our ability to grow both core deposits and loans at a mid-single-digit rate for the balance of 2026.

The first half of 2026 has set us up for what should be another good year, and our focus continues to be on creating value for our shareholders. As most of you are aware that while I will remain in my capacity as chairman of the board, this will be my final earnings call as chief executive officer of Civista Bancshares. It has been my privilege to serve our customers, communities, shareholders, and my colleagues throughout my 17 years here at Civista. I am grateful for the dedication of our employees and the support of our board throughout my tenure. As Chuck Parcher assumes the role of president and CEO next month, I am confident Civista is well-positioned for continued success. Chuck brings extensive leadership experience, a deep understanding of our company and our markets, and a strong commitment to our customers, employees, and communities.

I could not be more confident in Chuck, our leadership team, and in our employees. Thank you for your attention this afternoon and your investment in our company. Now we'll be happy to address any questions that you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press the star followed by the number 1 on your touch tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number 2. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Jeff Rulis of D.A. Davidson. Please go ahead. Yeah.

Thanks. Appreciate it. Maybe just on the expense side. It looks like a pretty encouraging level. I guess, your thoughts on maintaining that level or maybe growth from here, any expectation on the expense side?

Yeah. On the non-interest expense. This is Ian, by the way. On the non-interest expense side, we had expense of $28.7 million, a little bit better than the guidance we gave of $29.2 million to $29.7 million. Remainder of the year, we're going to do some reinvestments back into the company for revenue-producing colleagues and marketing spend and technology investments. I think we expect our expenses to be in that $29.6 million to $30 million in Q3, and probably Q4 about the same.

Okay. Appreciate it. Maybe if I were to hop to the margin, just wanted to kind of check in on any further room for growth. I think it laid out the kind of the funding side and the push and pull. Just wanted to see if there's any other opportunities to support any further expansion, or you see sort of a flattish outlook on the margin front.

Yeah. Right now, if we think of no rate movement, we would expect Q3 to be flat from where we are, plus or minus one to two basis points. In Q4, we could see another one to two basis points of expansion. We could end up in the upper 380s to low 390s.

Ian, that would be more on the expansion leading to the, on the earning asset side of the book or loan repricing opportunities? Is that what's the positive?

Correct. Yeah, it's going to be that side of it.

Okay Partially offset by the higher funding costs.

Got it. Well, thank you. Dennis, always great energy for the business. All the best in the career transition. Thanks. Thank you, Jeff. Your next question comes from Brendan Nosal of Piper Sandler.

Please go ahead. Hey, good afternoon, everybody.

Dennis, congratulations on this being your final earnings call. Hope you're all doing well.

Thank you, Brendan. Yeah. Maybe starting off here on capital.

I've got to go pretty far back in my model to find a quarter with a TC ratio that's got a 10 handle. It feels like organic growth is probably never going to be enough to fully absorb the level you have today and the generation you'll have in the future. Maybe just update us on how you think about putting this level of capital to work outside of just kind of natural growth in the business.

Yeah. Sure. Right now, we have been deploying most of our capital into technology and people and infrastructure. We have filled some open positions and added some producers, particularly on the lending side and treasury management and private banking. We are looking also at some of the existing areas in some of our growth markets to add a few more branches. We've been looking at some technology investments that we believe can help us continue to grow revenue and profitability. Although as it pertains like stock repurchases, we do think our stock is of value. With the stock price being up, we haven't bought any shares back. We do believe investment into our people and technology and the infrastructure generates a higher, I think, long-term return for us and does help us scale efficiency and lower some of our deposit and operating costs.

I think just having that robust capital stack does provide us a lot of strategic flexibility, and helps us just to absorb risk and as the economy shifts as it does. Everything's on the table, and we continue to evaluate and determine dividend increases the best use of the capital share repurchases. Obviously, we continue to have dialogue as it relates to M&A just to keep good relations. It's been awful quiet here in Ohio. Those are other good ways to deploy our capital. Right now, the focus has really been in investing back into the company because we think that does generate a little bit of a higher long-term return for us.

I would add, this is Chuck. I would add that the other thing that we're analyzing with some of that excess capital is we've got the sub-debt coming due in December, and how we're going to handle that piece of it as well, besides all the other items that Dennis listed.

Yeah. Okay. Thanks for the thoughts there.

Maybe pivoting to funding. Can you just update us on the competitive landscape for core funding and maybe speak to how it's evolved over the past couple of months?

Yeah, it's been very competitive, I think. For us, we still think if we can raise deposits at a cheaper cost, because we still have some broker deposits, we've brought those down substantially. If we can still raise deposits that are cheaper than some of the brokered funds, it does make sense for us. It is more competitive today, both on the commercial and retail side. We see it in all aspects, even on the public fund side. People looking for yield. Many of the projects that we have working on at the bank, and we have a big focus on trying to drive in core operating accounts, the accounts that are a little bit less costly and stuff. The competitive landscape is and it has been very competitive. Chuck, I don't know if you have anything to add?

No, I would just say that it's equally competitive in all of our markets. I wouldn't say there's any one market that's any more competitive than any other market. We're seeing, I don't want to say irrational rates, but we're seeing some irrational rates in almost every market.

Brendan, we've added, as I mentioned, we are adding producers and some of those producers we've added on the treasury management side, the private banking side. Those people have some experience, and have some books of business that hopefully they can move over some deposits as well. We are investing some of that capital in the people that can bring us deposits, not just loans, because we want to kind of mirror those two as we move forward.

Yep. Okay. Fantastic. Thanks for taking my questions.

Your next question comes from Adam Krall of Piper Sandler. Please go ahead. Hey, guys.

Hope you're doing well, and thanks for taking my questions.

You're welcome. Maybe starting on the mid-single digit loan growth guide for the back half.

It seems like payoff levels have remained elevated for you guys while production seems to be accelerating. I guess I'd be curious if you could expand on the growth guide. Do you expect a pickup in growth to be more a function of less payoffs or greater loan production? More broadly, just what segments you expect to kind of drive the growth?

I would think it's really both, I guess is the right way to say it, Adam. We don't feel like our back half payoffs are going to be at the same level that our first half was. Based on our pipeline and the growth of what we've got right now in unused construction funds that'll get drawn down here over the construction season, we feel pretty confident in that mid-single digit number.

Our commercial lenders, they know their customers. Payouts aren't surprises to us, so we're able to kind of track. We know if a company's going to sell, or we know if a loan's going to go to the permanent market. Based on what we know, we do think payoffs will subside a little bit in the second half of the year. As I mentioned in my earlier comments, the pipelines are pretty robust and even our construction pipeline is up. We do feel pretty good where we're headed with loan growth.

Got it. I appreciate the color there. Just a question on loan pricing. It sounds like from your comments, on a blended basis, it's still coming on above the portfolio. I'd just be curious to hear from a competitive landscape how pricing has been in your markets.

It's definitely competitive, just like the deposit pricing. Obviously, if this five-year holds and continues to push up a few more basis points, a lot of the new loans are going to have to have a high six, low seven handle for it to make sense for us to put on the books. We feel like we're not losing a ton of stuff to rate just because of our relationships with our customers. It's definitely been a little bit more of a struggle as that five-year pushed up to get the increased yield with that increase in five-year.

Got it. Last one from me, maybe for Ian. With core fee income down a bit during the quarter, I know leasing can jump around quarter-to-quarter, was just curious how you're thinking about core fee income run rate in the back half.

Yeah. It becomes really dependent on interest rates and how that mortgage business ends up with originations. We came in a little bit below the guidance we had last time at $9 million. We're expecting for Q3 to be between $9 million-$9.3 million, probably flat in Q4.

Got it. Thanks for taking my questions. Dennis, wish you best of luck in retirement.

Thank you, Adam. Your next question comes from Tyler Cashe-Sherry of Stephens Inc. Please go ahead.

Hey, good morning. This is Tyler on from Embreace.

Hi, Tyler. Hi, Tyler. Hey.

Could you just update us on the percentage of the loan portfolio that's pure floating rate today? Maybe if you have it, a dollar amount on how much of the portfolio is scheduled to reprice throughout 2026 and 2027?

We have about $900 million or so that's purely floating. Rich is looking for the exact numbers today.

I'll pull up as fast as I can.

I think we have $900 million, maybe close to a billion, that just is 30 days or less.

Yeah. $880 million reprices in the next 30 days. That's not all floating daily, but most of that is.

Yeah. Like Dennis said, right at a billion will reprice in the next six months.

Another $140 million in the next year. Again, that's about 50% of the portfolio that we'll reprice in the next 12 months.

Yeah. Okay, great. Yeah, that's the commercial portfolio.

That's the commercial portfolio. Everything we put on the books is generally, most of it's five years or less.

For the most part, even if we're portfolioing a residential loan, it'd be five years or less.

Okay, great. That's helpful. Then just headed back to funding. I think the brokered runoff has been about $20 million or $25 million-$30 million a quarter. Is that how you're thinking about it going forward?

Yeah. We're planning on reducing brokered $25 million each the next two quarters.

Great. Just lastly, I don't think it's been touched on yet. Could you just give us an update on M&A and maybe how discussions have transitioned from last quarter to this one?

Yeah, still very quiet in Ohio and Indiana on the M&A front as far as some of our targets. Continue to maintain very good relations with them, continue to reach out just to some of our targets, and people that we think would make good partners. Very quiet right now on the M&A front. Again, we think that could potentially, if the numbers work out, would be a good way to deploy some of the excess capital. Right now, we've really been focused on organically growing the bank. That's what we kind of stated when we raised the capital. We want to kind of organically grow the bank, really drive our EPS up and the tangible book value. I think in my earlier comments, you've seen that we've been successful in growing both of those things.

We'll just continue to evaluate how we deploy capital as we move forward.

Great. Dennis, I'd be remiss if I didn't echo the congratulations on the career step. Wish you the best of luck, and that'll be it for me.

Yeah. Thank you, Tyler. Next question comes from Emily Lee of KBW.

Please go ahead. Hi, everyone.

This is Emily stepping in for Tim Switzer today. Thank you for taking my question.

Hi, Emily. Hi, Emily. My question is related to credit.

Credit came in really solid this quarter, but are there any larger commercial credits that maybe you're keeping an eye on currently? Any areas that you guys want to pull back at all, or any areas or levels of concern?

This is Mike. There certainly aren't any areas that we're really pulling back from. There's some areas that we have some higher underwriting standards for if we're going to do them, but we don't have any lending types that we've said no to that we're just not going to do any. We have a few credits that we are working through, but they're appropriately reserved for, and so we're managing those and working through them.

Yeah. The nice part is, Emily, we don't see any really systemic issues in the book at all.

Emily, we have no non-depository financial institution financing. We have very little office that we mentioned in the earlier comments. Those are areas, although that we don't really say we're not doing, we don't have any really much or any exposure in some of those areas.

Great to hear. Just on your commentary regarding strong pipelines, are there any particular geographies or categories that have been looking stronger than others at the moment?

It's really well spread out through all our different regions. I would say no, we don't have anything that sticks out from one major geographic location.

The Ohio economy and Southeastern Indiana, which is just right across the river in Southwestern Ohio remains strong. Very strong. We are adding jobs. I think that's fueling some of that demand. The whole state is really, there are companies moving into Ohio and creating employment. I think that's helping drive some of that loan demand.

That's great. Thank you. Then just one more for me. You touched on some investments you were making on the technology front. Are you making any investments in AI, or have you kind of realized any use cases or efficiencies related to that?

Yeah. This is Ian. I would say that we've made minor investments into AI. We're doing more of a human-in-the-loop, colleague-based approach to AI, looking at it from a data standpoint, using it from a prospecting standpoint. No real efficiencies gained at this time. In addition to the AI, we have some robotic process automation that we're seeing some good results on. Really we think of it as building some bandwidth that allows us to grow without having to hire additional people as the company grows.

Understood. Well, thank you so much. Congrats, Dennis, as well. Thank you, Emily.

As a reminder, if you wish to ask a question, please press star one. There are no further questions at this time. I will now turn the call over to Mr. Shaffer. Please continue. Thank you. Well, in closing, I just want to thank everyone for your first-year investment in Civista and for joining today's call.

This quarter's results were due in large part to the continued hard work and discipline of our team and our employees. I am pleased with this quarter's accomplishments, our strong financial results, and just the disciplined approach we take to managing Civista. I remain confident that we are well-positioned for future long-term success. I just look forward to listening in in a few months as Chuck and the team share next quarter's results. Thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.