Civista Bancshares, Inc. Q2 FY2025 earnings call

• Net income increased with pre-provision net revenue up $3.3 million or 37.5% over second quarter 2024. - Net interest income up due to earning asset yield increasing 13 basis points to 5.84% while funding costs steady. Margin expanded 13 basis points to 3.64%. - Loan and lease portfolio grew 6.8% annualized, with solid loan demand. - Announced quarterly dividend of $0.17 per share. - Entered into agreement to acquire Farmers Savings Bank and $88.5 million follow-on capital offering. - Balance sheet: Total loans and leases grew $47.1 million, deposits mostly flat. Security portfolio had $63.1 million unrealized losses. Tier 1 leverage ratio 8.8% at quarter end. Credit quality strong with criticized credits down and allowance for credit losses ratios stable.

Net income for the second quarter was $11 million or $0.71 per diluted share, a $4 million or 56% increase over second quarter 2024 and $847,000 increase over linked quarter. Net interest income was $34.8 million, an increase of $2 million or 6.2% compared to linked quarter. Noninterest income declined $1.3 million or 16.2% from first quarter and $3.8 million from second quarter 2024. Noninterest expense was $27.5 million, a $356,000 or 1.3% increase over first quarter but a $907,000 or 3.2% decline from prior year second quarter. Loan and lease portfolio grew at an annualized rate of 6.8% during the quarter, with residential loans increasing by $42 million. The efficiency ratio improved to 64.5% compared to 64.9% linked quarter and 72.6% prior year second quarter.

• Anticipate loan growth to remain mid-single digit for balance of 2025 and accelerate to high single digits in 2026. - Margin expected to be low to mid 3.50% in third quarter, expanding in fourth quarter. - Post capital raise and Farmers acquisition, TCE ratio above 8% and CRE ratio below 300%.

• Interest rate environment putting pressure on bond portfolios with $63.1 million unrealized losses. - Competitive environment affecting lending and funding with larger regionals stepping back into asset classes. - Uncertainties in economy and expense pressures on borrower space impacting credit quality.

Q: Maybe just starting off here on the core margin. Actually the onetime noise that you guys called out, it more or less came in as expected, it was up nicely from the first quarter. Any thoughts on how that core margin trends over the balance of the second half as you weigh deposit competition with a pickup in asset yields on remixing?

A: Ian Whinnem said as we shift focus on CDs to shorter term, with loans repricing and $75 million capital paying down borrowings, expect margin in third quarter low to mid 3.50%, expanding in fourth quarter.

Q: One more for me before I step back. Can you just update us on the competitive environment and how it's evolved for both lending and funding, we're hearing that several larger regionals are starting to step back into certain asset classes and trying to grow loans again. So I'm just kind of curious what your experience is?

A: Charles A. Parcher said seeing regions get more aggressive, opportunities from acquisition, but competitive market across deposits and lending.

Q: Dennis, you said in your prepared remarks, you're seeing solid loan growth across the footprint. Could you just talk about maybe specific markets or sectors that are behind the demand? And were you maybe a bit more selective on loan growth in the second quarter, given the loan-to-deposit ratio? And I think that kind of feeds into your optimism for accelerated loan growth next year?

A: Dennis G. Shaffer said loan growth in second quarter was residential, muted CRE due to concentration, additional capital to accelerate growth. Charles A. Parcher added Ohio cities doing well, office demand in suburbs.

Q: And then as a follow-up, Dennis, thanks for running through some of the deposit initiatives. I believe it was last year when you announced a few other initiatives, one, I believe, with the state of Ohio. Can you just talk about the last year's deposit growth strategy in those initiatives. Are they at capacity? And then what do you think some of these newer initiatives can add to the balance sheet over the next few years?

A: Dennis G. Shaffer said some last year initiatives at capacity, new initiatives with mantle product to expand footprint, hiring treasury management officers, adding branches as strategic plan.

Q: I've been jumping around calls. So sorry, if this is already covered. But after adjusting for the onetimer in leasing fee income this quarter, still a little bit below what we had, and I know that line item can jump around quite a bit. Can you give us an update on maybe what we should be projecting going forward there?

A: Dennis G. Shaffer and Ian Whinnem said first half slow due to CapEx and core system conversion, expecting back half rebound with bonus depreciation and tariffs.

Q: And you just touched on my next question related to the tariffs. Have you guys done kind of like a good deep dive into your loan book, see where you have exposure, if any? And what were the results of that?

A: Charles A. Parcher said looked at loan book, most manufacturers optimistic but waiting on CapEx spend to play out.

Q: Loan growth was a little bit higher through May. Was there some payoffs in commercial by the end of the quarter in June? Just trying to understand that shift.

A: Charles A. Parcher said run rate consistent, Dennis G. Shaffer said mantle initiative just kicked off July 7 with some CD balance pickup, Ian Whinnem said leasing side impacts loan balances as half are sold.

Q: And in the average balance sheet, was there anything interesting going on in deposit costs? It seems like CDs came down, but then your other line kind of saw a jump in deposit cost. Is that just some of the public funds? Your overall deposit costs were fine, but does it seem like some of the geographies shifted around.

A: Ian Whinnem said seen shift in larger deposits in pricing buckets for public funds, Dennis G. Shaffer said competitive environment led to tweaking higher deposit balances, still discounting to effective funds rate.