Prepared remarks
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 and 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 gap to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civd.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, Richard J. 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 of 2025, and a $674 thousand decline from our linked quarter. This also represents an increase in pre-provision net revenue of $5 million, or 36% over our second quarter of 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 thousand, or 2% compared to the linked quarter. The increase was attributable to an increase in our earning yield of 1 basis point to 5.67% while our overall funding cost declined by 2 basis points to 1.94%. Our net interest margin expanded by 4 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 2 basis points from the linked quarter, while our cost of deposits was 1.83%, down 13 basis points year over year and 2 basis points higher than our linked quarter sequentially. Our cost of core deposits increased by 4 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 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 paydowns. Our ROA for the quarter was 1.34%, our ROE for the quarter was 10.23%, and 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 30 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. Noninterest income for the second quarter was $9 million, which represented a decline of $424 thousand from our first quarter. The primary driver of the decline from our linked quarter was $444 thousand 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. Noninterest 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 thousand increase in service charges 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 thousand 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, and a $600 thousand increase in lease revenue and residual income resulting from nonrecurring adjustments from our leasing division's core system conversion last year. Noninterest 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 operational expenses, which were partially offset by merit increases and investments into the company. Compared to the prior year's second quarter, noninterest 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 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 30, which compares to $175 million at March 31, and $161 million at December 31. 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 30, 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 30, 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 2 basis points to 1.94%, we continue to see migration from lower-interest-bearing accounts into higher-rate deposit accounts. As a result, our cost of deposits excluding broker deposits increased by 4 basis points from the linked quarter to 1.59%. Our deposit base continues to be fairly granular, with our average deposit account excluding CDs approximately $29,000. Other than the $555 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 a $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 the 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 a value, and we will continue to evaluate opportunities. During the quarter, we made a $1.3 million provision to our allowance for loan losses, a $519 thousand provision for undrawn construction lines, and had net charge-offs of $74 thousand. 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 06/30/2026, which is consistent with 1.28% at 12/31/2025. Similarly, our ratio of allowance to nonperforming 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 noninterest income from diversified revenue streams, and our continued control of noninterest 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, 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. And now we will be happy to address any questions that you may have. Thank you.
Ladies and gentlemen, we will now begin the question-and-answer session. 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. To decline from the polling process, please press the star followed by the number 2. If you are using a speakerphone, please lift the handset before pressing the keys. Your first question comes from Jeff Rulis of D.A. Davidson. Please go ahead.
Questions and answers
Yeah. Thanks. I appreciate it. Maybe just on the expense side — it looks like a pretty encouraging level. What are your thoughts on maintaining that level or potential growth from here? Any expectation on the expense side?
Yeah. So on the noninterest expense side — this is Ian — we had expenses of $28.7 million, a little bit better than the guidance we gave of $29.2 million to $29.7 million. For the remainder of the year, we are going to do some reinvestments back into the company for revenue-producing colleagues, marketing spend, and technology investments. We expect our expenses to be in that $29.6 million to $30 million range in Q3 and probably Q4 about the same.
Okay. Appreciate it. And then maybe if I hop to the margin — just want to check in on any further room for growth. I think you laid out the funding side and the push and pull, but do you see additional opportunities to support further expansion or a flattish outlook on the margin front?
Yes. Right now, if we think of no rate movement, we would expect Q3 to be flat from where we are — plus or minus 1 to 2 basis points. And then in Q4, we could see another 1 to 2 basis points of expansion. So it could end up in the upper 380s to low 390s. That expansion would be driven by earning asset repricing and loan pricing, partially offset by higher funding costs.
And Ian, that would be more on expansion coming from the earning asset side of the book or loan repricing opportunities? Is that the positive driver?
Correct. It is going to be that side of it, partially offset by higher funding costs.
Well, thank you. Dennis, always great energy for the business. All the best in the career transition. Thanks.
Thanks, Jeff.
Your next question comes from Brendan Nosal of Public Group. Please go ahead.
Hey. Good afternoon, everybody. And Dennis, congratulations on this being your final earnings call. Hope you are doing well.
Thank you, Brendan.
Maybe starting off here on capital. I had to go pretty far back in my model to find a quarter with a tangible common equity ratio that has 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 will have in the future. Could you update us on how you think about putting this level of capital to work outside of just natural growth in the business?
Yeah. Right now, we have been deploying most of our capital into technology, people, and infrastructure. We have filled some open positions and added producers, particularly on the lending side, treasury management, and private banking. We are also looking at some existing areas and some of our growth markets to add a few more branches, and we have been evaluating technology investments that we believe can help us continue to grow revenue and profitability. Regarding stock repurchases, we do think our stock is a value, but with the price being up, we have not bought any shares back recently. We believe investment into our people, technology, and infrastructure generates a higher long-term return for us and helps us scale efficiency and lower some of our deposit and operating cost. Having that robust capital stack provides strategic flexibility and helps us absorb risk as the economy shifts. Everything is on the table — dividend increases, share repurchases, M&A — we continue to evaluate and determine the best uses of capital. It has been quiet on the M&A front here in Ohio, but those are other avenues to deploy capital. For now, the focus has really been investing back into the company because we think that generates a higher long-term return.
I would add that we are also analyzing the treatment of our subordinated debt that comes due in December and how we will handle that piece, in addition to the items Dennis listed.
Okay. Thanks for the thoughts there. Maybe pivoting to funding — can you update us on the competitive landscape for core funding and how it has evolved over the past couple of months?
Yes. It has been very competitive. We still think if we can raise deposits at a cheaper cost than some brokered funds, it makes sense. We have brought brokered deposits down substantially, but it is more competitive today on the commercial and retail side, and even the public funds side. People are looking for yield. We are focused on driving in core operating accounts that are less costly. The competitive landscape has been intense across all our markets. We have added producers on the treasury management and private banking sides who have books of business that can move over deposits as well. We are investing capital in people that can bring us deposits, not just loans, to better mirror funding and lending as we move forward.
I would just say it is equally competitive in all of our markets. I would not say there is any one market more competitive than another. We are seeing some irrational rates in almost every market.
Yep. Okay. Fantastic. Thanks for taking my questions.
Your next question comes from Adam Kroll of Piper Sandler. Please go ahead.
Hey. I hope you are doing well and thanks for taking my questions.
You are 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 while production seems to be accelerating. Do you expect the pickup in growth to be more a function of fewer payoffs or greater loan production? More broadly, what segments do you expect to drive growth?
I would say it is both. We do not feel like our back half payoffs are going to be at the same level as our first half. Based on our pipeline and the growth of unused construction funds that will get drawn down over the construction season, we feel pretty confident in that mid-single-digit number.
Our commercial lenders know their customers, so payoffs are often anticipated and not surprises. We expect payoffs to subside in the second half of the year. As I mentioned earlier, pipelines are robust and our construction pipeline is up, so we feel pretty good about where we are headed with loan growth.
Got it. I appreciate the color. And on loan pricing, it sounds like on a blended basis it is still coming in above the portfolio. How has pricing been in your markets competitively?
It is definitely competitive, similar to deposit pricing. If the five-year holds and continues to push up a few basis points, a lot of new loans will need to have a high-6 to low-7 handle to make sense for us to put on the book. We are losing some volume to rate because of our relationships with customers, but it has been a struggle to get increased yield as the five-year has pushed up.
Got it. And last one for me, maybe for Ian: with core fee income down a bit during the quarter, I know leasing can jump around quarter to quarter, but how are you thinking about core fee income run rate in the back half?
It becomes really dependent on interest rates and how mortgage originations play out. We came in a little bit below the guidance we had at $9 million. We are expecting Q3 to be between $9 million and $9.3 million and then be flat in Q4.
Got it. Thanks for taking my questions, and Dennis, best of luck in retirement.
Thank you, Adam.
Your next question comes from Tyler Kaczak of Stephens Incorporated. Please go ahead.
Hey. Good morning. This is Tyler, on for Matt Breese.
Hi there.
Hi, Tyler.
Could you update us on the percentage of the loan portfolio that is pure floating rate today? And do you have 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 is purely floating, roughly 30 days or less. Richard is looking for the exact numbers, but it is close to $1 billion that will reprice in the next 30 days or next several months.
So $880 million reprices in the next 30 days. That is not all floating daily, but most of that will reprice. Right at about $1 billion will reprice in the next six months, and then another $140 million in the next year. So that is about 50% of the portfolio that will reprice in the next 12 months.
That is the commercial floor portfolio. Everything we put on the books is generally five years or less, even most residential loans.
Okay. Great. That is helpful. Heading back to funding, I think the brokered runoff has been about $20 to $30 million a quarter. Is that how you are thinking about it going forward?
Yes. We are planning on reducing brokered by $25 million each of the next two quarters.
Great. And just lastly, could you give us an update on M&A and how discussions have transitioned since last quarter?
Still very quiet in Ohio and Indiana on the M&A front as far as potential targets. We continue to maintain relations and reach out to targets and people we think would make good partners, but it is very quiet right now. M&A could be a good way to deploy excess capital if the numbers work out, but right now we are focused on organic growth. When we raised capital we intended to grow organically, drive EPS and tangible book value, and I think we have been successful in doing both. We will continue to evaluate how we deploy capital going forward.
And Dennis, I would be remiss if I did not echo the congratulations on the career step. Wish you the best of luck.
Yeah. Thank you.
Next question comes from Timothy Switzer of KBW. Please go ahead.
Hi, everyone. Thank you for taking my question.
Hi, Timothy.
Hi, Timothy.
My question relates to credit. Credit came in really solid this quarter. Are there any larger commercial credits that you are keeping an eye on currently? Any areas you guys want to pull back from or areas of concern?
We are not pulling back from any major lending types. There are some areas where we have higher underwriting standards if we are going to do them, but we have not decided to stop lending in any sector. We have a few credits we are working through and have appropriately reserved for, and we are managing those.
The nice part is we do not see any systemic issues in the book at all. We have no nondepository financial institution financing and very little office exposure, as I mentioned earlier. We are mindful of areas of concern, but we do not have meaningful exposure to some of the higher-risk categories.
Great. And on your commentary regarding strong pipelines, are any particular geographies or categories looking stronger than others at the moment?
It is well spread throughout all our regions. I would not say any one geography is standing out.
The Ohio economy and southeastern Indiana remain strong. We are seeing job growth and companies moving into Ohio, which is helping drive loan demand across our footprint.
That is great. One more: you touched on some technology investments. Are you making any investments in AI or seeing any realized use cases or efficiencies related to that?
We have made minor investments into AI. We are taking a human-in-the-loop, colleague-based approach to AI, focusing on data and prospecting use cases. No real efficiencies have been realized at this time. In addition to AI, we have implemented some robotic process automation where we are seeing good results. Overall, we view these tools as building bandwidth that allows us to grow without hiring additional people as the company expands.
Thank you so much, and congrats, Dennis, as well.
Thank you, Timothy.
As a reminder, if you wish to ask a question, please press star 1. There are no further questions at this time. I will now turn the call back over to Mr. Shaffer. Please continue.
Thank you. Well, in closing, I just want to thank everyone for your 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 the disciplined approach we take to managing Civista. I remain confident that we are well positioned for future long-term success, and I look forward to listening 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. You may now disconnect.