Civista Bancshares, Inc.

Thank you. . . . Thank you for watching. Thank you for watching. Thank you for watching. Thank you for watching. Thank you for watching. Thank you for watching. Thank you for watching. Good afternoon, my name is Hannah and I'll 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, Inc. that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. 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 in 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, 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 69 cents 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 length quarter. Net interest income for the quarter was $38.6 million, which represents an increase of $770,000 or 2% compared to the length 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 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 18 cents 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. Noninterest 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, and 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 length 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 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 broker 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 remained 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. So this is 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, 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-provisioned 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, and 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 one on your touchstone phone. You will hear a prompt that your hand has been raised. If you wish to decline from the polling process, please press the star followed by the number two. If you're using a speakerphone, please lift the handset before pressing end keys. Your first question comes from Jeff Rulic of DA Davidson. Please go ahead.