Civista Bancshares, Inc. (CIVB) Earnings

Management highlights

- **Executive Leadership Transition**: This is outgoing CEO Dennis Shaffer's final earnings call; Shaffer will remain Chairman of the Board, and current EVP and Bank President Chuck Parcher will assume the role of President and CEO next month. Shaffer expressed full confidence in Parcher and the existing leadership team to continue driving strong performance. - **Balance Sheet & Loan Portfolio Updates**: The company has reduced reliance on brokered funding by $276 million (44%) over the last eight quarters, most recently replacing $150 million in high-cost matured brokered CDs with lower-cost laddered CDs, saving 12 basis points in interest costs. Office building loans (all low-rise suburban/small market properties, not high-rise central business district assets) make up only 4.6% of the total loan portfolio. Non-owner-occupied commercial real estate (CRE) makes up 262% of risk-based capital, and management continues to focus on portfolio diversification. Total loan pipelines have grown significantly YoY: residential mortgage pipeline up 14%, commercial loan pipeline up 42%. Undrawn construction lines increased to $250 million at quarter end from $175 million at the end of Q1. - **Credit Quality**: Credit metrics remain strong despite ongoing normalization. The allowance for credit losses to total loans held steady at 1.28% from the end of 2025, and the allowance to non-performing loans ratio improved slightly to nearly 137%. Net charge-offs totaled just $74,000 for the quarter. The operating economies across the company's footprint (Ohio and southeastern Indiana) show no signs of deterioration. - **Capital & Dividend**: The company maintained its quarterly dividend at 18 cents per share, representing a 2.55% yield and 26.14% payout ratio based on Q2 end closing share price. Tangible book value per share has grown for seven consecutive quarters to $20.43, with an average 15.5% return over that period. Regulatory capital and tangible common equity ratios are strong and growing. - **Cost Management**: Non-interest expense decreased sequentially due to operational cost reductions from the Farmers Savings Bank integration, partially offset by merit increases and strategic business investments.

Guidance

- Loan portfolio growth is expected to be a mid-single-digit rate for the remainder of 2026, with payoff levels expected to moderate from elevated first half levels, supported by growing loan pipelines and drawdowns on existing undrawn construction lines. - Non-interest expense is projected to be between $29.6 million and $30 million in Q3 2026, with Q4 2026 expected to be approximately the same as Q3. - Net interest margin is expected to be flat (plus or minus 1-2 basis points) in Q3 2026, with an additional 1-2 basis points of expansion expected in Q4 2026, resulting in a final NIM in the upper 380s to below 390 basis points. Expansion will be driven by loan repricing of higher-yielding new originations, partially offset by gradually higher core deposit funding costs. - Non-interest income is projected to be between $9 million and $9.3 million in Q3 2026, with Q4 2026 expected to be roughly flat sequentially. - Management plans to continue reducing brokered deposits by $25 million per quarter for the remaining two quarters of 2026.

Segment performance

Savista Bancshares is a single-segment banking operation, so overall consolidated financial performance is reported as follows: Q2 2026 net income was $14.3 million (69 cents per diluted share), a 30% ($3.3 million) increase year-over-year (YoY) from Q2 2025 and a $674,000 decrease from the prior linked quarter (Q1 2026). Pre-provision net revenue was up 36% ($5 million) YoY and up 9% ($1.6 million) sequentially. Net interest income was $38.6 million, a 2% ($770,000) increase sequentially, with net interest margin expanding 4 basis points to 3.89%. Noninterest income was $9 million in Q2 2026, a $424,000 sequential decline driven by one-time other income recorded in Q1 2026; year-to-date noninterest income was $18.4 million, a 27.6% ($4 million) increase YoY. Noninterest expense was $28.7 million, a 4.1% ($1.2 million) sequential decrease and a 4.3% ($1.2 million) increase YoY; the efficiency ratio improved to 58.2% from 60.1% sequentially and 64.5% YoY. Total loans and leases grew $25.2 million (3.1% annualized) in Q2 2026, with $351 million in new organic loan production partially offset by $68 million in early payoffs. Total deposits declined 1.2% ($44 million) sequentially, with a $25 million reduction in brokered deposits. At quarter end, the securities portfolio totaled $670 million (16% of total assets) with $34.9 million in unrealized losses.

Risks & headwinds

- Core deposit funding markets are highly competitive across all operating regions, with some competitors offering what management describes as irrational deposit rates, putting upward pressure on industry-wide funding costs and creating pressure to attract and retain low-cost core deposits. - Upward movement in longer-term interest rates has made it more challenging to achieve targeted higher yields on new loan originations amid competitive lending markets. - Macroeconomic uncertainty creates general credit risk, particularly for non-owner-occupied CRE, though management notes the company has limited exposure to high-risk office segments. - M&A activity in the company's target geographic markets (Ohio and Indiana) remains very quiet, limiting near-term opportunities to deploy excess capital via acquisitions. - Unrealized losses on the company's available-for-sale securities portfolio totaled $34.9 million (5.2% of the portfolio), though the portfolio remains a core source of balance sheet liquidity.

Analyst Q&A

• Q: Analyst asks about the sustainability of the lower Q2 non-interest expense level, and what expense growth is expected for the remainder of 2026. /

  A: CFO Ian Whinnem confirms Q2 non-interest expense of $28.7 million came in below the prior guidance range of $29.2 to $29.7 million. He notes the company plans to reinvest in revenue-generating staff, marketing, and technology for the rest of the year, and expects non-interest expenses to land between $29.6 and $30 million in Q3, with Q4 coming in at roughly the same level. /

• Q: Analyst asks how the company plans to deploy its excess strong capital position beyond organic loan growth, and whether other uses like share repurchases or M&A are being considered. /

  A: Outgoing CEO Dennis Shaffer explains the current priority is reinvesting excess capital back into the company: adding lending, treasury management, and private banking producers, investing in technology and infrastructure, and evaluating new branch openings in growth markets. Management believes internal investments generate higher long-term returns than other uses, while the strong capital base provides strategic flexibility to absorb economic risk. Chuck Parcher adds the company is also planning for maturing sub-debt due in December as part of its capital planning. All options (dividend increases, share repurchases, M&A) remain under evaluation, but M&A activity is currently very quiet in the company's target markets. /

• Q: Analyst asks about the drivers of the projected mid-single-digit loan growth for the second half of 2026, whether it will come from higher production or lower payoffs, and what segments will drive growth. /

  A: Chuck Parcher notes growth will come from both higher production and moderating payoffs, as the elevated payoff levels of the first half are not expected to continue into the second half. Management is confident in the guide due to strong pipeline growth and available undrawn construction lines that will be drawn down during the construction season. Dennis Shaffer adds payoffs are generally predictable, as the commercial team tracks upcoming customer transactions, and confirms robust pipeline growth across segments supports the expected growth rate. /

• Q: Analyst asks for an update on credit quality and any specific segments or credits that are causing concern, and if any pullback is planned. /

  A: Credit Risk Officer Mike responds that there are no segments the firm is pulling back from entirely, though some segments have tighter underwriting standards. A small number of credits are being actively managed, and are already appropriately reserved for. Chuck Parcher adds there are no systemic credit issues across the entire loan book. Dennis Shaffer notes the company has no exposure to non-depository financial institution lending, and very limited exposure to high-risk urban office lending, consistent with earlier commentary.