Civista Bancshares, Inc. (CIVB) Earnings Call Transcript & Summary

Thank you. Good afternoon, ladies and gentlemen, and welcome to the Civista Bancshares, Inc. Third Quarter 2026 Earnings Call. [Operator Instructions] 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 involves risks and uncertainties. These factors could cause actual results to be materially different from any future results expressed or implied by such forward-thinking 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. The call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Parcher's remarks, he and the Civista management team will take any questions you may have.

Good afternoon, this is Chuck Parcher, President and CEO of Civista Bancshares. I'd like to thank you for joining us for our third quarter 2026 earnings call. I am joined today by 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 third quarter of $16 million, or $0.77 per diluted share, which represents a $3.3 million, or 26% increase over our third quarter in 2025, and a $1.7 million, or 12% increase over our linked quarter. This also represents an increase in pre-provision net revenue of $5.3 million, or 33% over our third quarter in 2025, and a $2.2 million, or 11% increase, over our linked quarter. Net interest income for the quarter totaled $39.4 million, which is 2% higher than the linked quarter. As a result, our net interest margin expanded by 4 basis points over our linked quarter to 3.93%, and by 35 basis points over the prior year's first 9 months. Our funding costs for the quarter increased by 3 basis points to 1.97%, which is 30 basis points lower than the previous year's third quarter, as we continue our disciplined approach to managing how we fund our balance sheet. A big part of our funding story during the quarter was our ability to grow non-interest-bearing deposits by $30.3 million and savings and money market accounts by $15.8 million, as we were able to attract new and additional deposits primarily from our business and municipal customers. Our cost of core deposits was 1.61%, excluding brokered funding, which is just a 2 basis point increase compared to our linked quarter, as we were able to replace our recent trend of CD growth with growth in lower cost deposit accounts. This success in attracting core funding allowed us to again reduce our reliance on brokered funding. During the quarter, we replaced $150 million of brokered CDs bearing a weighted average rate of 3.89%, with $125 million of brokered CDs maturing over the next 9 months with an average rate of 4.08%. During the past 9 quarters, we have reduced our brokered funding by $223 million, or 41%. Another big part of our story is the return of solid organic loan growth. Despite the continued headwinds of $47 million in early payoffs during the quarter, our loan balances grew by $38 million, or at an annual growth rate of 4.7%. Our lending and leasing teams generated $343 million in new organic production during the quarter that was partially offset by those early payoffs in addition to normal principal payouts. Our ROA and ROE for the quarter were 1.48% and 11.21% respectively. Continued strong financial performance and our ability to consistently create capital continues to provide options as we evaluate the most optimal ways to put our capital to use. One of those options is repurchasing shares when we feel the opportunity warrants, as it did during the quarter. During the quarter, we repurchased 82,075 shares of Treasury stock at an average price of $26.96. We ended the quarter with a healthy tangible common equity ratio of 9.88% compared to 9.54% at December 31st, 2025. Earlier this week, we announced a quarterly dividend of 18 cents per share, which is consistent with our prior quarter. Based on our September 30 closing share price of $26.38, this represents a 2.73% yield and a dividend payout ratio of 24.75%. During the quarter, net interest income increased $644,000, or 7% over the linked quarter, and was consistent with the third quarter of 2025. Controlling expenses is another area of focus and is evidenced by slight declines when comparing non-interest expense to both our linked quarter, which declined $675,000, or 2.4%, in our prior year's quarter, which declined $349,000 or 1.2%. While there was some noise from non-recurring costs associated with our acquisition of Farmers Savings Bank and our leasing division's core conversion in the prior year, there were no other significant changes in our non-interest expense categories. Our efficiency ratio for the quarter improved to 55.3% compared to 58.2% for the linked quarter and 61.4% for the prior year's third quarter. Our effective tax rate was 19.1% for the quarter and 17.6% year-to-date. Turning our focus to the balance sheet. For the quarter, total loans and leases grew by $38 million for an annualized rate of 4.7%. Loan demand remained solid across our footprint, while early payoffs seemed to subside, we experienced over $47 million of payoffs during the quarter. These early payoffs were primarily the result of businesses and properties being sold and real estate projects leasing up and moving on to the CMBS permanent market. While we view these payoffs as good, due to their successful nature, they continue to present headwinds to growing our loan totals. While loans were steady in nearly every category, we did experience a $25 million increase in our residential loan portfolio and a $15 million increase in our real estate construction portfolio. Loans we originate for our portfolio continue to be virtually all adjustable rate, and our leases primarily all have maturities of 5 years or less. Additionally, our undrawn construction lines were $268 million on September 30th, which compares favorably to $250 million on June 30th, $208 million at March 31st and $195 million at December 31st. This trend, coupled with additions to our lending team and the solid economic performance of Ohio and the greater Midwest, give us confidence that we will continue with mid single digit growth as we finish out 2026 and move into 2027. During the quarter, new and renewed commercial loans originated at an average rate of 6.87%, residential real estate loans originated at 6.45%, and loans and leases originated by our leasing division were at an average rate of 9.75%. With the rapid increase in interest rates during the second quarter of September, we anticipate that these rates will continue increasing during the fourth quarter. On the funding side, total deposits grew by $19 million, which is meaningful given that we were able to further reduce our dependence on broker deposits by $25 million during the quarter. As I mentioned, this growth was a result of a $30 million increase in non-interest-bearing accounts and a nearly $16 million increase in savings and money market accounts. This represents a $44 million increase in core deposit funding during the quarter as we continue to focus on core deposit generating initiatives. And while a quarter does not imply a trend, migration from non-interest-bearing and interest-bearing demand accounts into higher-rate time deposits subsided during the quarter, with our time deposit balances remaining unchanged during the quarter. The result, our total funding costs increased by only 3 basis points during the quarter as we continue to focus on attracting lower cost for deposits from our retail customers and operating accounts from our business and municipal customers. Our deposit base continues to be fairly granular, with our average deposit account excluding CDs of approximately $29,000. At quarter end, our loan to deposit ratio was 94.7%, which is consistent with our linked quarter. With more than $544 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30th. We believe our low-cost deposit franchise is 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 $640 million, which represented 15% of our balance sheet, and when combined with our cash balances, represents 20% of our total deposits. Our securities are classified as available for sale and had $59.9 million or 9.3% of unrealized losses associated with them. A few of the more significant non-recurring items during the quarter included the receipt of $1.8 million of net insurance proceeds related to last December's branch fire, which was recorded as other income. Separately, we sold approximately $8 million of 1.3%, recognizing a $1.6 million loss and purchased approximately $6.6 million of floating rate securities, currently yielding 4.6%. This is an example of the kind of opportunistic improvement in our securities portfolio that we think makes sense for Civista and our shareholders. As I mentioned, we purchased 82,075 shares of Treasury stock during the quarter at an average price of $26.96. We continue to believe our stock is of value and will continue to evaluate repurchase opportunities. Thus, this earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic growth and prudent investment into our company. We will continue to focus on earnings and will balance the payments of dividends and annual repurchases with building capital to support our growth. During the quarter, we made an $823,000 provision to our allowance for credit losses and a $472,000 provision for unfunded commitment and had net charge-offs of $139,000. Our ratio of the allowance for credit loss total loans is 1.29% at September 30, 2026, which is consistent with the 1.28% at December 31, 2025. Our ratio of allowance to non-performing loans of almost 153.3% and impaired improved when compared to the same period. This was largely the result of charging off a relationship that had been in workout for some time and had been fully reserved during 2025. Other than general concern over the impact of macroeconomic uncertainties, the economy across Ohio and Southeastern Indiana is showing no signs of deterioration. Overall, I would characterize our credit metrics as well managed and continuing to normalize. In summary, this was another solid, sophisticated quarter. We are pleased with the increase in our pre-provisioned net revenue, which was the result of continued expansion in our net interest margin, our ability to generate non-interest income from diversified revenue streams, and our continued control of non-interest expense. The growth in core funding allowed us to further reduce our reliance on broker 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 as we end 2026 and beyond. The first 3 quarters of 2026 have set us up for what should be another good year. I don't know what I could have asked for for a better start to my tenure as President and CEO. Civista will continue taking care of our customers, supporting our communities, investing in our people, and creating value for our shareholders. Thank you for your attention this afternoon and your investment, and now we will be happy to address any questions you may have.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] One moment please for your first question. Thank you. And your first question comes from the line of Brendan Nosal from Hovde Group. Please go ahead.

Hey, good afternoon, folks. Thanks for taking the questions.

Hi, Brendan.

Hey, maybe just starting off on fee income here. I think you folks restated some of your fee lines, and if I were to guess, you took the lease gain on sale income out of the gain on sale line and put it into the lease revenue. Is that the right way to interpret that change broadly?

Yes, we separated out the gain on sale into both the mortgage and the leasing lines.

Okay, perfect. And then just kind of on a related follow-up, you know, nice strong fee income result this quarter at almost $9.4 million. Any thoughts on kind of the major drivers for fee income as we kind of move through the next few quarters?

Yes, I think for the most part, you know, the fourth quarter will end up being a little bit stronger for interchange income just because of holiday spending. Interest rates can be a big driver on the mortgage side. The leasing side really had a strong third quarter as well as we're anticipating a strong fourth quarter from them also. Now, from a guidance standpoint, Q3 was strong. We came in a little bit above the guidance that we provided back in July. I think for the fourth quarter, we'd anticipate by $9 million to $9.5 million, the fourth quarter, with that being dependent on just really what interest rates do to the mortgage business.

Yep, that's helpful. I'm going to sneak one more in here. Just to the expense base. Just came in a lot lower than your outlook from last call for the, you know, what was the third and fourth quarter at the time. When we look forward to next quarter, does the cost run rate stay at this $28 million level, or does it revert back to the prior outlook, which I think was $29.6 million to $30 million?

Yes, it's, you know, the $28 million did come in better than expected as a result of good expense management, as well as we ended up with slightly better operating losses than what we anticipated. You know, some of the investments that we talked about back in July for colleagues, some marketing and some IT spend, those would have occurred late in the third quarter, even early in the fourth quarter. And so what we do anticipate is probably that expense being in the fourth quarter being closer to the $28.7 million to $29.5 million range.

Got it. Thanks so much for taking my questions. Thank you. Thanks.

Thank you. And your next question comes from the line of Jeff Rulis from DA-Davidson. Please go ahead.

Thanks. Appreciate it. On the non-interest bearing, the strength there, really a strong quarter. I guess... you outlined kind of both commercial and public funds. I gotta assume maybe some seasonal trends in there, but also just any other detail about the trend, that strength in the quarter.

Yes, this is Ian again. I think from a deposit standpoint, we do seasonality hit our kind of low point in deposits at the end of second quarter. And so that's primarily kind of a rundown in those public funds as maybe some consumer spending that occurs around that too. So in that third quarter, we end up with a rebound and an additional in the fourth quarter. We've done a nice investment over the last year within treasury management colleagues, as well as private banking. And that's done a nice contributor into building up those non-interest-bearing and non-maturity deposits.

That's great. And I guess I'll kind of roll the deposit strength into the next question on the margin. You've got some pieces there where running down the brokerage, you talked about the asset repricing tailwinds. Maybe I'd step back, the securities repositioning is timing of when that occurred in the quarter and is there a tail of maybe benefit that you didn't fully capture in the third quarter from that piece alone.

Yes, there is a tail to that. It happened towards the end of the quarter.

Okay, so Ian, if I package a lot of these sort of tailwinds of into the fourth quarter. Sounds like a nice margin uptick late quarter in the third quarter, but safe to assume there's still some upward trajectory here.

Yes, I think that the headwind that we're going to have, or at least for one item, is going to be that subordinated debt that reprices. It moves from a 3 and a quarter fixed rate on December 1st to a variable rate of 3 months SOFR plus 219. And so that's going to cost us on a quarterly basis is between 5 and 6 basis points is what we're anticipating now. In the fourth quarter alone, it's only there for 1 month. So it's really only a 2 basis point impact for that. So we think that for the fourth quarter, we came in in line with the guidance we had for July. Going forward, we anticipate probably plus or minus 1 to 2 basis points above where we came in for third quarter, including that offset for the subject. And then as with any kind of a rate increase that happens in December, heading into 2027, probably another 1 to 2 basis points improvement there.

Okay, and then, Ian, I guess the full sub-debt impact is maybe an offset for the full quarter in the first quarter then? Is that right?

That's correct. Yeah, that's the right way to think of that.

Okay. And Jeff, we do feel we have some tailwinds too on the repricing of some of our commercial portfolio. Bob can speak to it, but I mean, I think we've got about $270 million over the next 12 months, 930 to 930. They're going to reprice off of a roughly 5% rate into something 250 to 300 over the 5-year Treasury.

No, that's great. Sounds positive. Thank you.

Thank you.

Thank you. And your next question comes from the line of Adam Kroll from Piper Sandler. Please go ahead.

Hope you're doing well. Thank you. Maybe starting out for Ian on funding costs. 50% interest rate and deposit beta. But I'd be curious to hear just sort of expectations for deposit betas, with this hike and potentially additional hikes, just given some of the optimization you've had within your funding base over the past several quarters.

Yeah, from a beta standpoint, we've put into place our playbook, which anticipates both a lag as well as a beta approach. I think 50% is probably about right, with a lag associated with that. We have had some customers that are asking for some exceptions or rate increases, but for the most part, we haven't had to move our RAC rates. Our best rates are still on the 15 to 36 month at 4% and less than 1 year at 375 for our CDs.

Got it. And maybe moving to loan growth on the mid-single-digit loan growth guide, I'd just be curious to hear which segments you kind of expect to drive that over the next several quarters and just how the pipelines are shaking out today.

Yes, this is Papi Titus. And, you know, I think from a general perspective, we are, um, there's not really any specific lines. I mean, you know, you have office and, you know, you have some categories that we're definitely more bearish in, but overall, it's really more about the relationship for us. So I'm not sure there's any segments that we truly shy away from per se. As far as the pipelines, the pipelines are actually quite strong. Feel really good about where we're at there, including the residential pipeline, which we expect some headwinds with increased rates. So, so far, so good from that perspective.

We do feel good about what we talked about with the amount of unfunded construction loans that are out there right now. It's built back up to $270 million on our balance sheet at quarter end. That's funds that will go out the door, some through the balance of the year. It'll be winter pretty soon, and the construction will slow down a little bit. It'll give us a nice jump start into the end of the first quarter, second quarter of next year.

Got it. I appreciate the color there. And maybe just one last one for me, follow up on expenses. You know, you've had another quarter of really strong cost controls. But I was just curious how you're thinking about expenses in 2027. If there's any significant investments within tech or talent additions planned within that?

Yes, I think that's the plan. You know, we are looking at revenue generating investments. So whether that be colleagues, marketing, or in technology investments that drive revenue. So some of those do have a little bit of a period where it takes time to get to that break-even point. We do anticipate the continuation of those investments.