Civista Bancshares, Inc. Stock

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.

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. This call will be recorded and made available on Civista Bancshares' website at www.civb.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 $0.69 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 linked quarter.

Net interest income for the quarter was $38.6 million, which represents an increase of $770,000 or 2% compared to the linked quarter. The increase was attributable to an increase in our earning asset 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 9 months at an average rate of 3.80%, representing a savings of 12 basis points.

Over the last 8 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 $424,000 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 have 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 $500,000 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 have 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 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 to 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 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 6 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 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 2-story offices located outside of central business districts.

We remain mindful of our nonowner-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 6 of the last 8 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 rate 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 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.

Civista's strong earnings continue to create capital, and our overall goal remains to maintain our capital level -- 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 a value and we'll 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 30, 2026, which is consistent with 1.28% at December 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 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 cannot 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.

[Operator Instructions] Your first question comes from Jeff Rulis of D.A. Davidson.

Maybe just on the expense side, it looks like a pretty encouraging level. I guess your thoughts on maintaining that level or maybe growth from here? Any expectation on the expense side?

Yes. So on the noninterest expense -- this is Ian, by the way. On the noninterest expense side, so we had expense of $28.7 million, a little bit better than the guidance we gave of $29.2 million to $29.7 million. Remainder of the year, we're going to do some reinvestments back into the company for revenue-producing colleagues and marketing spend and technology investments. I think we expect our expenses to be in that $29.6 million to $30 million in Q3 and probably Q4 about the same.

Okay. Appreciate it. And then maybe if I were to hop to the margin. I just want to kind of check in on any further room for growth. I think you laid out the kind of the funding side and the push and pull. But just wanted to see if there's any other opportunities to support any further expansion? Or do you see sort of a flattish outlook on the margin front?

Yes. So 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 we could end up in the upper 380s to low 3.90s.

And that would be more on the expansion leading to the -- on the earning asset side of the book or loan repricing opportunities. Is that what's the positive?

Correct. Yes, it's going to be that side of it, partially offset by the higher funding costs.

Got it. Dennis, always great energy for the business. All the best in the career transition.

Thank you, Jeff.

Your next question comes from Brendan Nosal of Hovde Group.

Dennis, congratulations on this being your final earnings call. I hope you're all doing well. Maybe starting off here on capital. I've got to go pretty far back in my model to find a quarter with a TCE ratio that's got a 10 handle. It just -- it feels like organic growth is probably never going to be enough to fully absorb the level you have today and the generation you'll have in the future. So maybe just update us on how you think about putting this level of capital to work outside of just kind of natural growth in the business.

Yes. Yes, sure. And right now, we have been deploying most of our capital into technology and people and infrastructure. We have filled some open positions and added some producers, particularly on the lending side and treasury management and private banking. We are looking also at some existing areas in some of our growth markets to add a few more branches, and we've been looking at some technology investments that we believe can help us continue to grow revenue and profitability. So although as it pertains like stock repurchases, we do think our stock is a value. And we haven't -- with the price being -- the stock price being up, we haven't bought any shares back. We do believe investment into our people and technology and the infrastructure generates a higher, I think, long-term return for us and does help us scale efficiency and lower some of our deposit and operating costs.

And I think just having that robust capital stack does provide us a lot of strategic flexibility and helps us just to absorb risk as the economy shifts as it does. But everything is on the table, and we continue to evaluate and determine dividend increases the best use of the capital, share repurchases. Obviously, we continue to have dialogue as it relates to M&A, just to keep good relations. It's been awful quiet here in Ohio. But those are other good ways to deploy our capital. But right now, the focus has really been in investing back into the company because we think that does generate a little bit of a higher long-term return for us.

And I would add -- this is Chuck. I would add that the other thing that we're analyzing with some of that excess capital is we've got the sub debt coming due in December, and how we're going to handle that piece of it as well besides all the other items that Dennis listed.

Okay. Maybe pivoting to funding. Can you just update us on the competitive landscape for core funding and maybe speak to how it's evolved over the past couple of months?

Yes. It's been very competitive, I think. For us, we still think if we can raise deposits at a cheaper cost because we still have some brokered deposits. We brought those down substantially. And if we can still raise deposits that are cheaper than some of the brokered funds, it does make sense for us. But it is more competitive today, both on the commercial and retail side. We see it in all aspects, even on the public fund side, people looking for yield. And many of the projects that we have working on at the bank, and we have a big focus on trying to drive in core operating accounts, the accounts that are a little bit less costly and stuff. But the competitive landscape is -- and it has been very competitive.

So Chuck, I don't know if you have anything to add?

No, I would just say that it's equally competitive in all of our markets. I wouldn't say there's any one market that's any more competitive than any other market. We're seeing I don't want to say irrational rates, but we're seeing some irrational rates in almost every market.

And Brendan, we've added -- as I mentioned, we are adding producers and some of those producers -- we've added on the treasury management side, the private banking side. Those people have some experience and have books of business that hopefully, we can -- they can move over some deposits as well. So we are investing some of that capital into the people that can bring us deposits, not just loans because we've got to -- we want to kind of mirror those 2 as we move forward.

Your next question comes from Adam Kroll of Piper Sandler.

So maybe starting on the mid-single-digit loan growth guide for the back half. It seems like payoff levels have remained elevated for you guys while production seems to be accelerating. So I guess I'd be curious if you could expand on the growth guide. Do you expect a pickup in growth to be more a function of less payoffs or greater loan production? And more broadly, just what segments do you expect to kind of drive the growth?

I would think it's really both, I guess, is the right way to say it, Adam. We don't feel like our back half payoffs are going to be at the same level that our first half was. And based on our pipeline and the growth of what we've got right now in unused construction funds that will get drawn down here over the construction season, and we feel pretty confident in that mid-single-digit number.

And our commercial lenders, they know their customers. So we kind of know when payoffs -- the payoffs aren't surprises to us. So we're able to kind of track. We know if a company is going to sell or we know if a loan is going to go to the permanent market. And based on what we know, we do think payoffs will subside a little bit in the second half of the year. And then as I mentioned in my earlier comments, the pipelines are pretty robust and even our construction pipeline is up. So we do feel pretty good where we're headed with our -- with loan growth.

Got it. I appreciate the color there. And just a question on loan pricing. It sounds like from your comments on a blended basis, it's still coming on above the portfolio. But I'd just be curious to hear from a competitive landscape, how pricing has been in your markets?

It's definitely competitive, just like the deposit pricing. Obviously, if this 5-year holds and continues to push up a few more basis points, a lot of the new loans are going to have to have a high 6, low 7 handle for it to make sense for us to put on the books. So -- but we feel like we're not losing a ton of stuff to rate just because of our relationships with our customers, but it's definitely been a little bit more of a struggle as that 5-year pushed up to get the increased yield with that increase in 5-year.

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 I was just curious how you're thinking about core fee income run rate in the back half.

Yes. So it becomes really dependent on interest rates and how that mortgage business ends up with originations. So we came in a little bit below the guidance we had last time at $9 million. We're expecting for Q3 between $9 million to $9.3 million and then probably flat in Q4.

Got it. And Dennis, wish you best of luck in retirement.

Thank you, Adam.

Your next question comes from Tyler Cacciatori of Stephens Inc.

This is Tyler on for Matt Breese. Could you just update us on the percentage of the loan portfolio that's pure floating rate today? And then maybe if 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's purely floating, $900 million, that Rich is looking for the exact number today. But I think we have $900 million, maybe close to $1 billion that just is 30 days or less.

Yes. So $880 million reprices in the next 30 days. Now that's not all floating daily, but most of that is. And like Dennis said, right at $1 billion will reprice in the next 6 months and then another $140 million in the next year. So again, that's about 50% of the portfolio that will reprice in the next 12 months. That's the commercial portfolio.

And everything we put on the books is generally most of it is 5 years or less for the most part, even if we're a portfolio in a residential loan, it would be 5 years or less.

Okay. Great. That's helpful. And then just headed back to funding. I think the brokered runoff has been about $20 million or $25 million to $30 million a quarter. Is that how you're thinking about it going forward?

Yes. We're planning on reducing brokered $25 million into the next 2 quarters.

Great. And then just lastly, I don't think it's been touched on yet. Could you just give us an update on M&A and maybe how discussions have transitioned from last quarter to this one?

Yes, still very quiet in Ohio and Indiana on the M&A front as far as some of our targets and continue to maintain very good relations with them, continue to reach out just to some of our targets and people that we think would make good partners. But very quiet right now on the M&A front. So again, we think that could potentially, if the numbers work out, would be a good way to deploy some of the excess capital. But right now, we've really been focused on organically growing the bank. And that's what we've kind of stated when we raised the capital, we want to kind of organically grow the bank, really drive our EPS up and the tangible book value. And I think in my earlier comments, you've seen that we've been successful in growing both of those things. So we'll just continue to evaluate how we deploy capital as we move forward.

Great. And then, Dennis, I'd be remiss if I didn't echo the congratulations on the career step. Wish you the best of luck, and that will be it for me.

Thank you, Tyler.

Next question comes from Emily Lee of KBW.

This is Emily stepping in for Tim Switzer today. My question is related to credit. Credit came in really solid this quarter. But are there any larger commercial credits that maybe you're keeping an eye on currently? Or any areas that you guys want to pull back at all or any areas or levels of concern?

This is Mike. There certainly aren't any areas that we're really pulling back from. There's some areas that we have some higher underwriting standards for if we're going to do them, but we don't have any lending types that we've said no to that we're not just not going to do any. And we have a few credits that we are working through, but they're appropriately reserved for. And so we're managing those and working through them.

Yes. And the nice part is, Emily, we don't see any really systemic issues in the book at all.

And Emily, we have no nondepository financial institution financing. We have very little office that we mentioned in the earlier comments. So those are areas, although we don't really say we're not going, we don't have any really much or any exposure in some of those areas.

Great. Great to hear. And then just on your commentary regarding strong pipelines, are there any particular geographies or categories that have been looking stronger than others at the moment?

It's really well spread out through all our different regions. So I would say, no, we don't have anything that sticks out from one major geographic location.

I mean the Ohio economy and Southeastern Indiana, which is just right across the river in Southwestern Ohio remains strong, very strong. We are adding jobs. And I think that's fueling some of that demand. The whole state is really -- there are companies moving into Ohio and creating employment. And I think that's helping drive some of that loan demand.

That's great. And then just one more for me. You touched on some investments you're making on the technology front. Are you making any investments in AI? Or have you kind of realized any use cases or efficiencies related to that?

Yes. This is Ian. I would say that we're -- we've made minor investments into AI. We're doing it more of a human in the loop, colleague-based approach to AI, looking at it from a data standpoint, using it from a prospecting standpoint. No real efficiencies gained at this time. In addition to the AI, we have some Robotics Process Automation that we're seeing some good results on. But really, we think of it as building some bandwidth that allows us to grow without having to hire additional people as the company grows.

[Operator Instructions] There are no further questions at this time. I will now turn the call over to Mr. Shaffer. Please continue.

Thank you. Well, in closing, I just want to thank everyone for your first year 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 just the disciplined approach we take to managing Civista, and I remain confident that we are well positioned for future long-term success. And I just look forward to listening in, in a few months as Chuck and the team share next quarter's results.

So thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

[Audio Gap] 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.

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. This call will be recorded and made available on Civista Bancshares' website at www.civb.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. Please go ahead.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our first quarter 2026 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President of the bank; Rich Dutton, SVP of the company and Chief Operating Officer; Ian Whinnem, SVP of the company and Chief Financial Officer; and other members of our executive team.

This morning, we reported net income for the first quarter of $15 million or $0.72 per diluted share, which represents a $4.8 million or 47% increase over our first quarter of 2025 and a $2.7 million or 22% increase over our linked quarter. This also represented an increase in pre-provision net revenue of $3.8 million or 29% over our first quarter in 2025 and a $3.2 million or 3.8% increase over our linked quarter.

Our first quarter highlights include the successful completion of the core system conversion of the Farmers Savings Bank that we acquired during the fourth quarter of 2025. As a result, our first quarter earnings include what should be the last expenses associated with the acquisition. These onetime expenses impacted our first quarter net income by approximately $400,000 or $0.02 per common share.

For the quarter, core deposit funding increased organically by over $60 million. This allowed us to reduce brokered deposits by $25 million. This represents the sixth consecutive quarter in which we reduced the brokered funding. Our net interest margin expanded by 16 basis points to 3.85% as we continued our disciplined approach to managing our asset pricing and funding costs.

Our earning asset yield for the quarter increased by 5 basis points over our linked quarter to 5.66%. Our cost of funds was 1.96% for the quarter, down 35 basis points from the first quarter of 2025 and 12 basis points from the linked quarter, while our cost of deposits was 1.81%, down 19 basis points year-over-year and 11 basis points sequentially. Our decline in funding cost was largely attributable to $125 million of brokered CDs that matured in late December that carried a weighted average rate of 4.23%. And we were able to replace and reduce these mature and brokered CDs with $100 million in brokered CDs with a weighted average rate of 3.87%, representing a savings of 36 basis points in addition to reducing the amount of brokered funding.

Net interest income for the quarter was $37.8 million, which represents an increase of $5.1 million or 15% compared to the first quarter of 2025 and an increase of $1.4 million or 4% compared to our linked quarter. Despite loan balances being down, we had strong loan production across our footprint during the quarter that was offset by significant payoffs. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in early payoffs in addition to normal principal pay down. Our ROA for the quarter was 1.41%. Our ROE for the quarter improved to 10.97%, and our tangible book value per share improved to $19.70.

Our continued strong financial performance and ability to consistently create capital gives us options as we think about the best ways to deploy our capital. Earlier this week, we announced a quarterly dividend of $0.18 per share, which is consistent with our prior dividend and the renewal of our stock repurchase program authorizing management to repurchase up to $25 million in outstanding common shares.

During the quarter, noninterest income declined by $453,000 or 4.6% from our linked quarter and increased $1.6 million or 20% over the first quarter of 2025. The primary driver of the decline from our linked quarter was a $336,000 decline in card fees due to the typical elevated spending that comes during the holiday. The primary drivers of the increase in noninterest income over the prior year were a $190,000 increase in service charges, a $1 million increase in net gains on loan and lease sales and a $444,000 increase in other income related to reserves that have been established at our insurance subsidiary for claims that subsequently never materialized.

Noninterest expense declined by $1.1 million or 3.6% from our linked quarter and decreased -- or increased $2.7 million or 10% over the prior year. The decline from our linked quarter was a result of a commission accrual adjustment in the fourth quarter of 2025. Our actual commission expense was $1.4 million lower than what had been accrued and was adjusted in the fourth quarter. We are now adjusting all accruals at least quarterly. The primary driver of the increase in noninterest expense over the prior year was a $2.2 million increase in compensation expense associated with increased salaries, commissions and medical expenses.

In addition to annual increases, our average FTE employees increased from 520 in the first quarter of last year to 535 in the first quarter of 2026. Much of the increase in FTEs came from the employees that joined us through our recent Farmers acquisition. We also had $400,000 in other expenses that we believe will be the last significant expenses related to the acquisition. Our efficiency ratio for the quarter improved to 60.1% compared to 64.9% for the prior year first quarter. Our effective tax rate was 16.8% for the quarter.

Turning our focus to the balance sheet. Strong loan production across our footprint was offset by significant payoffs during the quarter. Our lending teams generated $214 million of new loan production during the quarter that was offset by $83 million in payoffs in addition to normal principal pay down. This compares to the prior year's first quarter, when we originated $181 million in new loans and we experienced $21 million in loan payoffs. We consider these 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 sold during the quarter and paid off their loans.

Loan production grew with each month's production during the quarter from $49 million in January to $59 million in February to $106 million in March. During the quarter, new and renewed commercial loans were originated at an average rate of 6.52%, and leases were originated at an average rate of 9.03%. Additionally, our undrawn construction lines were $175 million at quarter-end compared to $161 million at year-end.

We ended the quarter with a loan-to-deposit ratio of 92%. Loans secured by office buildings make up only 4.7% of our total loan portfolio. As we have stated previously, these loans are not secured by high rise metro office buildings, rather, they are predominantly secured by single or 2-story offices located outside of central business districts. We also have very little exposure to non-deposit financial institutions.

As a commercial real estate lending bank, we are mindful of our non-owner occupied CRE concentration and continue to diversify our loan portfolio. At March 31, 2026, our CRE to risk-based capital ratio was 261%. While we experienced a reduction in total loans during the quarter, loan demand remains solid in each of our markets, and our pipelines continue to grow. At March 31, 2026, our residential mortgage loan pipeline was up 25%, and our commercial loan pipeline was up 102% 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 increased $35.4 million or an annualized growth rate of 4%. However, if we back out the brokered deposits, our core deposit balances grew by $60.4 million or 8% for the quarter. This represents 6 of the last 7 quarters in which we have grown our core deposit balances while reducing our cost of funds. Much of this growth came in interest-bearing demand accounts and in our savings and money market accounts. This increase in lower rate deposits, combined with our continued shift from brokered deposits to more core deposit funding, contributed to an 11 basis point decline in our cost of deposits from the linked quarter.

Our deposit base remains fairly granular, with our average deposit count, excluding CDs, approximately $28,000. Other than the $523 million of public funds, which are primarily operating accounts with various municipalities across our footprint, we had no deposit concentrations at quarter-end.

Our commercial bankers, treasury management officers, private bankers and retail staff continue to have success gathering additional deposits from our commercial, small business and retail customers, as evidenced by our organic deposit growth. 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 $682 million, which represented 16% of our balance sheet, and when combined with our cash balances, represents 22% of our total deposits. Our securities are classified as available for sale and had $49 million or approximately 7% 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 an $0.18 per share dividend based on the quarter-end market close of $22.79. This represents an annualized yield of 3.16% and a payout ratio of 25%. We view this as a sign of confidence management and our Board of Directors have in Civista's ability to continue generating strong earnings.

Additionally, Civista's Board of Directors increased and renewed a $25 million common share repurchase authorization earlier this week. 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. We continue to believe our stock is a value, and we'll continue to evaluate repurchase opportunities.

During the quarter, we made a $768,000 credit to our provision and had net charge-offs of $716,000. The credit to our provision was attributable to lower expected losses due to lower outstanding loans and our continued strong credit metrics. Our ratio of the allowance for credit losses to total loans is 1.26% at March 31, 2026, which is consistent with the 1.28% at December 31, 2025. Similarly, our ratio of allowance to nonperforming loans of 135% was virtually unchanged 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 sign of deterioration, and our credit quality remains strong.

In summary, we are very pleased with the continued expansion in our net interest margin, our ability to generate noninterest income from diversified revenue streams and to control our noninterest expense. We're also very pleased with our team's success in attracting more lower cost funding, which allowed us to continue reducing our dependency on brokered funding and anticipate mid-single-digit deposit and loan growth for the balance of 2026. Overall, 2026 is off to a good start, and our focus continues to be on creating shareholder value.

Thank you for your attention this afternoon and in your investment. And now we'll be happy to address any questions you may have.

[Operator Instructions] Our first question comes from the line of Brendan Nosal from Hovde Group.

Maybe just starting off here on the loan growth outlook. I totally get the moving pieces this quarter. I mean, it sounds like origination activity is quite strong, but the payoffs were a significant headwind for this quarter. I guess just as you look ahead, what gives you confidence that payoff levels will decline such that you can get back to that mid-single-digit pace of growth?

We watch those closely. This is Chuck. We watch those closely. We've got a couple of other large ones we know that we're going to look at here in the second quarter, but we still think we're going to see some growth in the second quarter. And we feel like that mid-single-digit outlook is pretty good looking forward.

I've got confidence in -- as Dennis mentioned in his comments, our pipeline today is twice as large as it was in the pipeline at the same time last year. And we just got to get those to the closing table. And our -- just based on the production we had in the first quarter, as Dennis also alluded to, our undrawn construction funds are $14 million higher at the end of this quarter than they were at the end of the year. So we feel good about kind of [ prognosticating ] out that mid-single digits.

And first quarter typically is slower for us, too, Brendan, just because we do some construction-type commercial construction loans and stuff. And as Chuck alluded to, I think we put on a lot of balances there towards the end of the first quarter, and some of those were construction projects that we think those funds will draw up.

Okay. Okay. Maybe pivoting to the net interest margin. Heck of a lot of margin expansion this quarter, certainly more than I was expecting. Just as we look ahead, if we're in an environment where we don't get any more Fed rate cuts this year, how do you see the margin trending from this quarter's 3.85% level?

Brendan, this is Ian. So second quarter, we expect flat to maybe a little bit of expansion, 1 to 2 basis points. And then likely putting that in the mid- to upper 3.80s and then leveling out in the high 3.80s in Q3 and beyond. That's with no rate cuts being planned. If there is a rate cut, we expect that to be maybe 1 to 2 basis points lower. If there's a rate increase at the end of the year, it could be 1 to 2 basis points higher.

And Brendan, we do have about $60 million of loans repricing in the second quarter and I think about $140 million after that for the remainder of the year. So a couple of hundred million dollars of loans will reprice from the 4.75% range to -- reprice today in the 6s.

Our next question comes from the line of Jeff Rulis from D.A. Davidson.

Late last year, we had discussions of kind of the bank putting up $0.75 in quarterly earnings towards the end of '26, implying a $3 annual run rate. It kind of seems like you pulled that forward 9 to 12 months, you're basically at that -- at the core level. I guess as you think about where you reorient with kind of the outlook from here, not to put you on the spot of earnings, but I guess, how do you met that opportunity with also as you talked about the buyback?

I would say, Jeff, the part of the earnings lift this time was that provision. We didn't have to fund any loan growth. That's going to cost us a couple of cents every quarter, on top of the couple of cents reduction that we got this quarter. So from a normalized basis, that $0.72 is probably more in the mid-60s. So not quite into that run rate of $0.75 yet, but we do still anticipate getting there towards the end of this year, maybe into the first quarter next year.

Got it. Appreciate that. And then I guess on the expense run rate, I think we talked previously that as merit increases kind of kick in, in the second quarter, offset by maybe some -- the conversions complete. So just trying to walk through the quarterly progression, do you see sort of flat linked quarter on a core basis and then maybe in -- a little -- some savings? Or how do you see the outlook on run rate?

So excluding the nonrecurring items, we're at $29.4 million for the first quarter. So that would include some of the, I'll call them, duplicative operating expenses, pre-conversion, having 2 cores and some staff that's no longer with Civista. So we've also done reinvestment back into the company by hiring some revenue-generating colleagues, some marketing spend and some tech improvements.

So with that, we're anticipating second quarter being $29.5 million to $30 million, and then probably a little bit of an expansion maybe to $30 million, $30.7 million in the third quarter and fourth quarter.

But we have merit increases that took effect in the -- took effect April 1. So that's in those expense numbers that Ian's [indiscernible].

Okay. And so any sort of cost saves kind of offset by investment kind of getting to that run rate that you outlined?

Yes, that's correct. Yes. It's helping to fund some of those cost investments or spend investments that were just mentioned.

Your next question comes from the line of Adam Kroll from Piper Sandler.

Yes. Maybe just starting on deposits, some really impressive core deposit growth during the quarter. And just given some of the recent investments you made on the tech side, I was just curious, how large of a contributor was the digital channel to that growth and maybe just overall prospects within that segment?

Well, we think it's helping some. Most of our investments are aimed at making it easier to do business with us. So it is helping that some. We have all set up to do online account opening now with our digital apps and stuff. So we are getting that.

The bigger thing that's helping us in some of the deposit growth, at least the organic stuff, is just some of the recent disruption within our marketplace. Ohio has had quite a bit of disruption. And we think by one of the investments we made in the technology and making it easier to do business with us. And then just that disruption, it -- we think we're very well positioned, I think, to attract new clients to the bank and to expand existing relationships.

So our teams are doing a fantastic job with their calling efforts. We're being really collaborative, and we're going to market as a team. And I think through their efforts and making -- just making it easier to do business with us and that disruption, that's the reason behind a lot of that deposit growth.

Got it. I really appreciate the color there. Sticking on the funding side, deposit costs came down quite nicely during the quarter. I was just curious, are you still seeing opportunities to reduce funding costs on both the maturity and non-maturity side if the Fed were to remain on hold?

So right now -- this is Ian -- if rates stay flat on the CDs that are maturing, we're renewing those or picking up these fees at about the same. Staying with those brokers, we're not going to see that significant increase that we saw from the Q4 maturities into Q1. So we have some wiggle room on some of our non-maturities. For the most part, I think most of that's passed and we will be staying about the same.

Got it. And last one for me. Ian, I was wondering if you had the purchase accounting accretion number for the quarter?

I will have to follow up with you on that.

Your next question comes from the line of Tim Switzer from KBW.

Well, first off, congrats on the retirement announcement, Dennis, and for Chuck on becoming CEO on the exciting news.

Thank you.

Thank you.

Most of my questions have been asked already, but the first one I had is on deposit competition. There's been some chatter about it picking up a little bit. Can you talk about what you guys are seeing in your markets and if there's any specific geographies or deposit categories where it's been a little bit more intense?

I would tell you -- this is Chuck. I think it's almost equally intense across almost all of our -- at least our major metro markets. Obviously, the most banked of all the cities is Columbus, so we're probably seeing a little bit more pressure there from the rate side.

But we've held our own pretty well, as you can tell by the deposit growth that we've had. And we feel like we're priced properly to continue to retain our clients and grow at that mid-single-digit pace. So it is very competitive. We're still seeing some banks with some 4 handles, and we're kind of in the high 3s right now, but we feel good about where we're positioned.

We're really just focused on relationships, growing relationships and providing value and providing solutions for our clients. And again, I think attacking the market from a team perspective by bringing different business lines into meeting a lot of our business customers, I think it's been working for us, and that's really going to be our focus. And with that disruption, I think it gives us opportunity there.

Yes. To Dennis' point, the disruption, some of the bigger players in our market, Huntington's, Fifth Third's, Park's, First Financial's are all working on acquisitions, not just in Ohio, but in other regions. I feel like their eye is off the ball a little bit on Ohio. Our biggest competition is coming from really, some of the smaller institutions. From a rate perspective, not from a, I guess, competitive perspective, but from a rate perspective.

Got it. Very helpful. And then the last question I had was in terms of credit. Any areas that have caused you guys to want to pull back at all, or any levels of concern? And do you have exposure to any end market that could maybe be exposed by the higher oil prices?

Go ahead, Mike.

This is Mike. No, we're not seeing anything that's market-specific or industry-specific right now that's causing us any concerns, especially to pull back on any areas.

Your next question comes from the line of Matthew Breese from Stephens.

I wanted to just touch on the NIM a little bit. I know you didn't have a accretable yield at your fingertips, but maybe you could help me out. To what extent the prepayment fees play a role this quarter in loan yields and the NIM? Was that a factor? And is that a factor in kind of your more stable guide in the back half of the year?

This is Ian. No, the payoffs really didn't impact the NIM that way. We got a little bit of fee income on those, just breakage fees, but nothing in the NIM. And as Dennis mentioned earlier, we have a lot of loans that are just going to be repricing in the remainder of the year. So they're going to be moving from these mid 4s into the low 6s. So that's the stuff that we saw come across the first quarter. And we'll continue to see for the remainder of the year, just some NIM lift coming from that.

Yes. The biggest NIM lift again, was the repricing of that brokered CD and the reduction of it. So we reduced to $25 million, then we repriced $100 million and picked up 36 basis points. That was -- that contributed more.

And then on the fee income side, it was just really -- most of those fees were generated by our residential mortgage teams and our leasing group, who both had much better production results than we had a year ago. So that's where a lot of the fees came from.

Understood. You had mentioned just some of the fixed asset repricing. So outside of loans that are pure floating priced off of prime or SOFR, what is kind of the cash flow schedule and maturity schedule for fixed rate and adjustable rate loans for the rest of the year? And new origination yields I'm assuming are kind of in the mid- to high 6s. Is that accurate there?

That's correct. On what's -- the repricing, we're somewhere in that 6.5% range as far as new loans going on and things that would adjust. Most of them are -- the real estate loans are written on 5-year adjustables, and the average margin on those are probably 2.75% over a 5-year treasury or so. Which will take us a little bit, maybe 6.5%, 6.6% today. And we're looking for your -- what was your other question?

Just the loans that are either fixed rate or adjustable, kind of quarterly maturities or quarterly cash flows. You had mentioned that what's maturing is going from a 4 handle to a 6 handle. I just want to get some sense for how much is going to mature this year.

I would tell you, over the next 12 months, we got a little over $200 million.

Yes. $60 million of that -- this is Rich. $60 million of that will happen in the next quarter, in Q2. The balance of it is the rest of the year.

Right.

Got it. Okay. And then you had mentioned brokered being a big area of deposit cost pickup. How much of that is maturing over the next 3 quarters? And what are the rates -- or what is the estimated rate on the stuff that's maturing?

Yes. So we have some that's maturing in April or is maturing this month. That was at 3.70%, repricing a little bit under 4%. Then we have about another [ $125 million ] maturing still this quarter outside of April. That's in that 3.80% range. And then a little bit in September.

We would stay relatively short on all of that. So it's going to reprice pretty close to where it's at, maybe a little bit higher. But again, our plan is to continue to gather deposits and reduce brokered. That helps offset some of that, too.

Got it. Okay. Last one for me is just on [ Reg E ] production that you keep for yourselves and put on the balance sheet versus pursue the secondary market and gain on sale. What is kind of the breakdown of that? And did it shift more towards gain on sale this quarter? Just seasonality-wise, I would expect gain on sale to be down this quarter, but you were up modestly. I'm just curious, how that breakdown was?

Our breakdown by number is usually -- or has been here for the last couple of quarters is about 60% sold, 40% portfolio. And I would tell you that from a balance perspective, that probably runs close to 50-50, just because the stuff that we have to hold on the balance sheet is usually some of our private banking, what I call physician loans and some of the higher balance things, higher balance construction. So dollar volume, 50-50, number, 60-40. And we feel like it's going to probably continue to trend that way.

If we get any kind of blip downward in interest rates, we'll see a little bit more refinance action. And that refinance action is normally much more 80-20-ish that would be sold versus held. But that's kind of the run rate we've had here over the last couple of quarters.

Your next question comes from the line of Adam Kroll from Piper Sandler.

Just a follow-up for me. A pretty strong start to the year on the core fee income side. And I know leasing can kind of jump around, but I'm just curious, how you're thinking about core fee income growth for the remainder of the year?

Yes. So for the noninterest income, so as you mentioned, strong first quarter, had a good recovery on the mortgage and CLF when compared to this time last year. We did have a captive reinsurance reserve release that occurred in the first quarter that would be nonrecurring and only a small amount of security gains. So when we adjust for the seasonality of gain on sale, thinking that Q2 comes in between $9.1 million and $9.5 million and then maybe increasing another $0.25 million in the third quarter just due to seasonality on gain on sale.

Your next question comes from the line of Daniel Cardenas from Brean Capital.

Just a quick question. Given the market disruption that we've seen in Ohio, what kind of opportunities is that presenting for you on the talent addition side?

It's been really good for us, to be honest with you, Dan. I mean, we've had a lot of -- not moving as far as lenders moving out, but we've reassigned some people, people got promoted, et cetera. And we've done a really good job of picking up talent from those institutions that have had some M&A activities with them. The one we still benefit from, even though it's probably the farthest one away, is the whole WesBanco/Premier piece. We've continued to get some talent from that area, but it's probably the one that we've probably got the most talent from in our entire organization.

But it's been good. And everybody is sitting around our table right now is continuing to get calls from some of those institutions to see if they got -- if we've got opportunities here. Probably our most recent acquisition came from the Westfield deal that got sold. We just -- our new Treasurer just came over and started a month ago from their institution. So it's been really good for us to be able to upgrade talent.

Excellent. And then I know you just completed the FSB deal, but as you look at future acquisitions, I mean geographically, where do you see yourself targeting?

You want to take -- I mean, I think we're going to be very similar. Our thoughts are still very similar to what they always have been. Ohio and the adjoining states is probably as far as we would look right now. And obviously, if it's fill in, it would be a little bit more preferable than to an add-on in some of those locations. But I think that we're not going to jump to Tennessee or to South Carolina or whatever. We're going to kind of stick to our knitting and stay within our marketplace right now in Ohio and the adjoining states.

Yes. And I would just say, Dan, that our first priority really is on organic initiatives that create sustainable value for the company. We made -- as I mentioned, those -- we've made a lot of investments in technology that makes it easier to do business with us. And with all that disruption, we think we're really well positioned to attract new clients and deepen those relationships.

We continue to maintain pretty good dialogue with a lot of the banks within our footprint here. But anything we would do, I think will need to create great strategic value for us and be financially compelling. But the first -- our main focus really right now is on building capacity from within and prioritizing just some of that organic development.

There are no further questions at this time. I will now turn the call over to Mr. Shaffer. Please continue.

Okay. Well, in closing, I just want to thank everyone for their investment in Civista and for joining today's call. Our first quarter results, I think, were due in large part to the hard work and discipline of our team. I'm very pleased with this quarter's accomplishments, our strong financial results and just the disciplined approach that we have here in managing Civista. And I remain very confident that we are well positioned for long-term future success.

So I look forward to talking to you all again in a few months to share our second quarter 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.

Good afternoon, ladies and gentlemen. 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. 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. 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.

This call will be recorded and made available on Civista Bancshares' website at www. civb.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 welcome you to our fourth quarter and year-end 2025 earnings call. I'm joined today by Chuck Parcher, EVP of the company and President 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 fourth quarter of 2025 of $12.3 million or $0.61 per diluted share, which is consistent with our linked quarter and represents a $2.4 million or 24% increase over the fourth quarter in 2024. Included in the fourth quarter of 2025 results were nonrecurring expenses related to our acquisition of Farmers Savings Bank that negatively impacted net income by $3.4 million on a pretax basis and $2.9 million on an after-tax basis, equating to $0.14 per common share.

Going forward, we expect any additional expenses related to this transaction to be minimal. For the year, we reported net income of $46.2 million or $2.64 per diluted share which compares to $31.7 million or $2.01 per diluted share for 2024. This is particularly impressive given that there are approximately 2 million average additional shares outstanding as a result of our capital offering in July and our acquisition of Farmers Savings Bank in November.

Taking into consideration the nonrecurring adjustments that occurred during 2025, our earnings per share for the year were reduced by $0.15. Backing out the nonrecurring fourth quarter expenses, our pre-provision net revenue increased by $6.7 million or 55% over the previous year's fourth quarter and by $2.2 million over our linked quarter. Our ROA for the quarter was 1.14% and excluding onetime expenses, was 1.42%, continuing our string of improving our ROA for each quarter of 2025. For the year, our ROA was 1.11%.

For the quarter, we were pleased to announce the closing of our transaction with Farmers Savings Bank, adding $106 million in loans and $236 million in low-cost deposits to our balance sheet and are looking forward to a successful system conversion over the weekend of February 7 and 8. Our teams continue to work together towards the successful integration of our organization.

Net interest income for the quarter totaled $36.5 million which is $1.9 million or a 5.5% increase over the linked quarter and a $5.1 million or 16% increase over our fourth quarter and the previous year. During the quarter, our earning asset yield declined 8 basis points, while our funding costs declined 19 basis points. This resulted in the expansion of our net interest margin by 11 basis points to 3.69%.

As we have discussed on previous calls, during the first 3 quarters of 2025, we were focused on increasing our tangible common equity reducing our CRE to risk-based capital ratio and reducing our reliance on wholesale funding. To that end, we muted loan growth by keeping CRE loan rates somewhat elevated. The success of our July capital offering and the acquisition of Farmers Savings Bank have allowed us to become a little bit more aggressive in lending across our footprint.

Excluding the newly acquired Farmers loans, our loan and lease portfolio grew $68.7 million, which represents an annualized growth rate of 8.7% during the fourth quarter. we anticipate mid-single-digit loan growth in 2026. Core deposit funding continues to be a focus, and we were pleased that our nonbroker deposit funding, excluding deposits acquired through the Farmers Savings Bank transaction grew organically by nearly $30 million during the quarter which allowed us to continue reducing our brokered funding. We believe this reduction in wholesale funding enhances the value of our core deposit franchise.

Earlier this week, we announced an increase in our quarterly dividend to $0.18 per share, which represents a $0.01 increase over the prior quarter. based on the December 31 closing market price of $22.22, this represents an annualized yield of 3.2% and a dividend payout ratio of nearly 30%. During the quarter, noninterest income increased $251,000 or 2.6% from our linked quarter and increased $869,000 or 9.6% from the fourth quarter of 2024. The primary drivers of the increase from our linked quarter were $287,000 increase in interchange fees due to the typical elevated spending that comes during the holidays and a $380,000 increase in other fees related to leasing activity.

These increases were partially offset by proceeds on an BOLI policy we received in the prior quarter and a $416,000 reduction of residual income from our leasing activity. As we have noted, leasing fees, particularly residual income are less predictable than more traditional banking fees. For the year, noninterest income decreased by $3.8 million or 10% from 2024. This decline was primarily attributable to lease revenue and residual income, you will recall that we recognized a $1 million nonrecurring adjustment as part of our conversion to our new leasing system during the quarter.

That, coupled with the overall decline in lease production this year led to a reduction in lease-related revenues in 2025. We are confident the investments we have made in our leasing infrastructure this year will allow our leasing team to operate at a higher level in 2026.

For the quarter, after adjusting for the $3.4 million in nonrecurring expenses related to the acquisition, non-interest expense was $27.6 million, which is consistent with the $27.7 million in our linked quarter after backing out $664,000 and nonrecurring Farmers expenses incurred in the third quarter. Year-to-date, after adjusting for the $3.8 million in nonrecurring expenses, noninterest expense decreased $2.4 million or 2.1% from our prior year.

The primary drivers of this decline were a $3.1 million decline in compensation expense and a $1.4 million decline in equipment expense, which were partially offset by slight increases in a number of other expense categories. The decline in compensation expense was due to a slight reduction in FTEs controlling overtime and an increase in the amount of salaries and wages we defer related to loan origination.

The decline in equipment expense was primarily the result of a decline in depreciation expense on leased equipment, this is the result of using residual value insurance to reduce depreciation expense related to operating leases. Our efficiency ratio for the quarter improved to 57.7% compared to 61.4% for the linked quarter and 68.3% from the prior year fourth quarter.

Our effective tax rate was 16.8% for the quarter and 16.3% for the full year. Turning our focus to the balance sheet. As I mentioned, even after backing out the loans we acquired from Farmers Savings Bank, our lending team generated $68.7 million of organic net flow growth during the quarter, which is an annualized rate of 8.7%. While loans grew in nearly every category during the quarter, our most significant increase was a $90 million increase in residential real estate, which included the addition of $56 million in residential loans from Farmers.

The loans we originate for our portfolio continue to be virtually all adjustable rate and our leases all have the maturities of 5 years or less. Although we were pleased with our success in bringing our CRE concentrations more in line with investor expectations, we will remain mindful of making sure we have the funding and capital to support future CRE growth.

At December 31, our CRE to risk-based capital ratio was 275%. During the quarter, new and renewed commercial loans were originated at an average rate of 6.74%. Residential real estate loans were originated at 6.13% and loans and leases originated by our leasing division were at an average rate of 8.77%.

Loans secured by office buildings make up only 4.5% of our total loan portfolio, as we have stated previously, these loans are not secured by high-rise metro office buildings, rather they are predominantly secured by single or 2-story offices located outside of central business districts. Along with year-to-date loan production, our pipelines are strong and our undrawn construction lines were $162 million at December 31. As previously mentioned, we anticipate our organic loan growth to be in the mid-single digits in 2026 as we leverage Farmers' excess deposits and our loan pipelines continue to build.

On the funding side, we added $236.1 million in low-cost deposits from the Farmers transaction. In addition, we were able to continue our pattern of reducing broker deposits for the fourth consecutive quarter by nearly $30 million. Our continued focus on attracting and retaining lower-cost funding helped us lower our overall cost of funding by 19 basis points during the quarter to 2.08%.

While we continue to see some migration from lower rate demand accounts into higher rate time deposits during the quarter, the addition of Farmers' lower rate deposits allowed us to reduce our cost of deposits by 4 basis points to 1.59%.

As shared during our last call, we launched our new digital deposit account opening platforms during the third quarter, limiting online account opening to CDs. In the fourth quarter, we began offering online account opening for checking money market accounts. In addition, we rolled out our deposit product redesign initiative, the goal of this initiative is to align our deposit product set with our new digital channels. We are seeing some success and look forward to launching a more comprehensive digital marketing campaign for online deposits once we get past the Farmers' system conversion. Our deposit base continues to be fairly granular with our average deposit account, excluding CDs, approximately $28,000.

At quarter end, our loan-to-deposit ratio was 94.3%, which is down slightly from our linked quarter. We anticipate maintaining this ratio within our targeted range of 90% to 95%. Other than the $464.4 million of public funds with various municipalities across our footprint, we had no deposit concentrations at year ahead.

We believe our low-cost deposit franchise is 1 of Civista's most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our security portfolio as a source of liquidity. At December 31, our security portfolio totaled $685 million, which represented 15.8% of our balance sheet and when combined with our cash balances represents 22% of our total deposits. At December 31, 100% of our securities were classified as available for sale and had $45 million of unrealized losses associated with them.

This represents a decline in unrealized losses of $6 million for our linked quarter and a $17 million decline from December 31, 2024. 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.

We were happy to announce an $0.18 per share dividend earlier this week, which represents a $0.01 per share increase in our quarterly dividend. We view this as a sign of confidence, management and our Board has in Civista's ability to continue generating strong earnings.

We continue to operate with a $13.5 million repurchase authorization and a 10b5 share repurchase plan in place. While we have not repurchased any shares during the year, we believe our stock is a value, and we will continue to evaluate repurchase opportunity. We ended the year with our Tier 1 leverage ratio at 11.32%, which is deemed well capitalized for regulatory purposes.

Our tangible common equity ratio increased from 9.21% at September 30 to 9.54% at year-end on strong earnings. We feel this gives us capital to support organic growth and to invest in technology, people and infrastructure. While economic conditions across the country remain mixed, the economy across Ohio and Southeastern Indiana is showing no systemic signs of deterioration.

Our credit quality remains solid and our credit metrics remain stable. Delinquencies remain low and are consistent with the prior year-end, while our net charge-offs were slightly lower in 2025 than the prior year. Our past due loans did increase $7 million during the quarter, and our nonperforming loans increased by $8.5 million to $31.3 million. Total nonperforming loans to total loans were 0.95%, up slightly from the linked quarter, but down from the 1.06% at the end of 2024.

The continued strong performance of our credits, coupled with moderate loan growth, resulted in a $585,000 provision for the quarter. Our ratio of allowance for credit losses to total loans is 1.28% at December 31, which is consistent with the 1.29% at December 31, 2024. And our allowance for credit losses to nonperforming loans is 135% at year end compared to 122% at December 31, 2024.

In summary, our fourth quarter was an extension of what was a very productive and good year. Among the many initiatives we accomplished, we're a successful capital offering, the acquisition of Farmers Savings Bank, rolling out our new digital banking solution and migrating to a new core lease system, all of which contributed to our 2 long-standing goals, we were able to increase our tangible common equity ratio from 6.43% a year ago to 9.54% at December 31, 2025, and reduced our CRE to risk-based capital ratio from 366% at the beginning of the year to 275% at year-end.

These investment and efforts coupled with our expanding net interest margin and controlling expenses produced exceptional results as our full year net income was $14.5 million or 46% higher than a year ago. Civista remains focused on creating shareholder value, serving our customers and being a good corporate citizen in each of the communities that we serve.

Thank you for your attention this afternoon and your investment, and now we'll be happy to address any questions you may have.

[Operator Instructions] Your question is from the line of Justin Crowley from Piper Sandler.

Wanted to start out on the loan growth side of things, some decent growth in the quarter when you set aside Farmers, and you mentioned the guidance for mid-single-digit growth looking out here. Just curious if you could talk a little more on how you think the complexion of that growth will take shape in terms of the split between commercial where you talked about being a little bit more aggressive? And then on the residential side, where you've seen some growth recently?

Yes. Justin, this is Chuck. I think we'll see kind of go back to more normalized growth in '26, meaning that the commercial area will leave that growth, both C&I and commercial real estate. We did have quite a bit of growth in '25 in the residential side. A lot of that due to -- we didn't really have a good outlet for our construction product and our CRE products. So we held most of those on the book.

If we get a little bit of a blip downward in interest rates, we feel like we'll probably move some of that to the secondary market and will come off our balance sheet. So I would focus more so on commercial and C&I growth as we normally do. And hopefully, a little bit of -- a little bit more leasing growth as well, but that will be in the C&I bucket.

And Justin, I might just add that we don't want -- we want our funding to kind of keep pace with our loan growth. So -- and we've been pretty successful in raising deposits over the last 6, 7 quarters. I think we've grown deposits 6 of the last 7 quarters. But we kind of want to -- those 2 things will kind of go hand in hand and we made some significant investments in some technology, particularly on the digital front that we think will help us continue to raise deposits so that we can continue to fuel loan growth.

And then I guess you mentioned it, but on that digital channel, depending on the success you see there and how much you can grow that platform, could that potentially get you beyond mid-single-digit growth? Or would it be that, that digital channel is just going to come at -- obviously, it's going to be higher cost there. So you, of course, got to think about the spread on new business. Just curious there.

Right. I don't think it's substantially -- we'll jump at above that right now. I think, again, we want to be mindful of our margin as well. So there's a number of factors that kind of play into that, but we just -- we'll be a little bit mindful of that. But we do think we have opportunities within our markets and stuff.

And we are excited. I mean, I think we'll see accelerated growth through the digital side in '26. It's just -- it's going to be hard to quantify until we get all of our products up and running on there and to see the success that we have.

Okay. Where is that digital channel now? I don't know if you have the balances handy? And what kind of yields are we talking about there?

Well, we don't have the balances handy, right off the top. We just -- we're kind of in the infancy stages of that. But we are seeing some success. I think we've shifted from just offering CDs online, which what we recently rolled it out. We wanted to make sure that we had things working and all our fraud prevention in place and stuff.

And then -- now we've added checking and savings and money market accounts. And just last month, I mean just adding -- just we were surprised that we opened 28 new checking accounts last month through the digital front and stuff. So we just think there's opportunity, but we'll try to give updates on balances as we go, maybe get further along in the year and stuff.

Okay. Got it. And then maybe 1 on the NIM. The past few rate cuts that will continue to work their way through here. But can you give us a sense for how the margin could trend through the year? Number one, I guess, if we get more of a pause out of the Fed over the near or medium term? And then maybe square that to a scenario where we do eventually get a couple more cuts.

Justin, this is Ian. So right now, I'd say for the first quarter, we'd expect that margin to expand 2 to 3 basis points and then into the second quarter and beyond, maybe another 3 to 4 and capping out around there.

Okay. And that forecast, does that sort of assume a flat rate scenario? Or what does that -- what's embedded there?

Right now, we're assuming a cut in June and then again in the fourth quarter. And if it is flat, it will be a little bit higher at the end of the year.

And then maybe just 1 last one on expenses. Obviously, some noise with a partial quarter of Farmers, but what's the best way to think about run rate certainly in the first quarter, but even just beyond that, considering the cost saves that will come out of the acquisition once you get through conversion?

Yes. So we have -- the expenses that we have in the first quarter we're still going to have the higher expenses for Farmers running their core as well as the personnel until the conversion occurs in the first week of February. Following that, we'll have a reduction of expenses, but that won't occur until that third month of the first quarter. So what we're anticipating is first quarter expenses to be similar to where we are maybe in that 29% range, 29% to 29.5% for the first quarter expenses.

In the second quarter, we're going to have the merit increases that come in once per year for our colleagues, and that will offset those reductions I mentioned a little bit ago. We're making some good investments into our company.

We're using some of that capital we raised to invest back in the company, too. So that's -- we are buying -- investing in some technology, investing in some people and some resources to continue to grow the franchise.

Your next question comes from the line of Jeff Rulis from D.A. Davidson.

Just a question on the credit side. It sounds like pretty steady state, you don't seem to, I guess, tracking some of the linked quarter. The question being, was a lot of that acquired on the Farmers side from the linked quarter increase.

Jeff, this is Mike Mulford. No, the credit quality we brought over from FSB was very good. So that was not the reason for the increase.

What was that? If you could just...

We had 1 credit that we had a participation with another bank that we put on nonaccrual in the fourth quarter, it was about $8 million. And so we're working with that lead bank to resolve that. It was a case of -- it had been current, it matured in November, so it did hit 30 days at year end, but again, we put it on nonaccrual until we get the situation resolved.

That was $8 million as Mike mentioned, of the $8.5 million increase in nonperforming So it really was just that 1 credit. So we think it's somewhat an isolated instance. I think the nonperformance actually were down for the year [indiscernible] .

Okay. Sounds like that credit might have some potential for a more expedited resolution, or I don't want to your mouth, but you feel good about that moving through?

I mean, it's in early stages. Again, we're working with lead bank and while not originated by us, we participated in it. It was a borrower that we had been familiar with, and we had made loans to before in the past.

So again, we're working through it. I expect it will take a better part of the '26 to work that out.

And even though we knew the borrower, we have no other levels on the books with that borrower. So -- and then again, just -- Jeff, we typically don't buy a lot of participations. We participate in loans out, but we typically have not been a bank that's bought a lot of participation just because we have such strong organic -- just strong demand within our market. So most of what -- how we grow our portfolio is organically.

Got it. And just a follow-on the margin 3.69%. Just trying to get -- what proportion of accretion assumptions, if we're looking at kind of inching up from here, any unpacking the core versus accretion?

Yes. The so within the fourth quarter, the accretion is going to be in there for 2 full months of the 3-month quarter. When we think in terms of the dollar impact, it's pretty minimal. It's an immaterial acquisition for the most part.

Okay. All right. Last one, I apologize. The tax rate is something in the mid-16s, is that a level you subscribe to?

Correct. Yes, we're anticipating 16.5% for 2027 -- 16.5% for 2026, my apologies.

[Operator Instructions] Your next question comes from the line of Terry McEevy from Stephens.

Could you just talk about new commercial loan yields and maybe just comment on loan spreads and overall competition there?

I mean, Ohio is still pretty competitive -- Ohio and Indiana, I should say, it's still a relatively competitive work. I think we put last December new and renew came on at 6.7% I would tell you some of the larger deals are coming a little bit less than that. I would say the good deals are probably coming in at 6.25%, 6.5% right now.

But it's been relatively consistent. The 5-year treasury has been relatively constant here over the last 60 to 90 days and that margin is still coming in relatively 2.75%, give or take over the 5-year.

We do have some loans repricing in the first quarter and throughout the remainder of the year. Chuck, do you want to share that one?

Yes, we just bring that based on 12/31, year-end, we've got about $225 million of credit that we put on 3- or 5-year adjustables, and they will reprice throughout 2026. And those rates, give or take, I would tell you are coming off 4.75%, and probably will come back in -- probably take 1.5 points on most of those.

That's helpful. And then you've got a large -- a couple of large Ohio banks focused elsewhere, Detroit. I'm going to guess about 100 miles from Sandusky, which is another market going through some disruption. So how are you thinking about maybe playing some offense in 2026, given that backdrop? And could it impact your expenses if hiring picks up?

We feel good about it, Terry. I mean we've already -- we've hired -- I think we've got 3 new lenders coming on here at the beginning of the year. Now there were replacements or filling slots of people that got elevated within our organization. We've got another couple of people coming on in -- at the end of the first quarter, waiting to get their bonuses at their shops.

So we feel good about where the talent is coming from. We're picking them up from banks that, to be honest, they have either been -- that are either being acquired or already have been obviously, the WesBanco, PremierOne and was a big 1 that was last year, and we've got some talent from there in -- most of in treasury area, finance area came from Premier. And we feel really good about the disruptions we're not only getting calls from employees at those institutions, but we're also getting calls from the clients of those institutions as they go -- start to go through the changes. So we feel like we've got a lot of opportunity just because of the disruption.

Yes. That expense rate we mentioned earlier does include some of those additions, Terry, that some of the investments we're making back into the company. on the people side.

Your last question is from the line of Tim Switzer from KBW.

I apologize if any of this has already been covered but the first question I have is with regards to capital stack, you guys are pretty healthy capital levels close to Farmers'. Are there any -- is there any like optimization you need to make now that you've closed that deal? And then what are your thoughts on share repurchases going forward? I know historically, you guys have said you think it's a good value at these prices.

Yes. Yes. We still think we're a value. So we continue to -- we didn't repurchase anything last year, but we do have our $13.5 million authorization in place. We're set up there. And as long as we feel there's value there, certainly will consider. We think that's a good way to deploy capital. But we kind of evaluate -- we've been in blackout where we weren't able to purchase that through the acquisition. So we continue to evaluate that. And as long as we continue to have strong earnings, that's definitely part of our capital stack. So we're always looking for ways to maximize our capital.

Got it. Okay. And I assume most everything on guidance has been covered by this point, but -- can you maybe discuss what you guys are seeing for leasing revenue next year? It's just always kind of a tougher item to model.

Yes. So I can speak that, Tim, are you talking about the noninterest income side of it there?

Exactly.

Correct. Yes. So it is a little lumpy. And so within the fourth quarter, we did have a lease disposal gain that came in, it was about $0.5 million, about $500,000. So when we think in terms of the guidance, within the fourth quarter, we have a MasterCard annual volume bonus that we get of about $250,000 that comes in each year.

We had those security gains, which is about $120,000, and then that first quarter, usually, we see a little bit of a slowdown on the mortgage gain on sale as well as the leasing gain on sale. So we expect that leasing revenue to drop off on the gain on sale and maybe a little bit slower on the traditional leasing revenue. But total noninterest income, we probably guide you towards maybe $7.8 million to $8.2 million for the first quarter and then increasing from there to the second quarter, maybe another $0.5 million.

There are no further questions at this time. I would like to turn the call back to Mr. Dennis Shaffer for closing comments. Sir, please go ahead.

Thank you. Well, in closing, I just want to thank everyone for joining today's call and for your investment in Civista. Our quarter and our year-end results were due in large part to the hard work and discipline of our team. I remain confident that this quarter and this year -- this quarter and the year's list of accomplishes our strong financial results, our disciplined approach to managing Civista, positions us very well for long-term future success.

And just look forward to talking to everyone in a few months to share our first quarter results. So thank you for your time today.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.

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. 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.

Additionally, the 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 on Civista Bancshares' website at www.civb.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.

Thank you. Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our third quarter 2025 earnings call. I'm 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 third quarter of $12.8 million or $0.68 per diluted share, which represents a $4.4 million or 53% increase over the third quarter in 2024 and a $1.8 million or 16% increase over our linked quarter. This also represents an increase in pre-provision net revenue of $4.9 million or 45% over our third quarter in 2024 and a $1.9 million or a 14% increase over our linked quarter.

Net interest income for the quarter totaled $34.5 million, which is in line with the linked quarter. As a reminder, last quarter included a onetime $1.6 million adjustment stemming from the conversion of our core lease accounting system. This nonrecurring item boosted net interest income and contributed to our second quarter reported margin of 3.64%. As a result, our net interest margin declined by 6 basis points to 3.58%. However, excluding the prior quarter's adjustment, our margin would have been 3.47%, resulting in an 11 basis point expansion in our margin.

Our funding cost for the quarter declined by 5 basis points to 2.27%, which is 34 basis points lower than the previous year's third quarter.

In July, we successfully completed our follow-on common stock offering, issuing approximately 3.78 million new shares and raising $80.5 million of new capital. This additional capital will allow us to continue growing our franchise by accelerating organic growth, investing in technology, people and infrastructure. More immediately, we used our new capital to reduce overnight borrowings and to strengthen our tangible common equity that we thought might have weighed on our stock.

Earlier this month, we also announced that we have received regulatory approval from both the Federal Reserve and the Ohio Department of Financial Institutions to complete our previously announced merger of Farmers Savings Bank into our bank. Farmers will hold their shareholder meeting to formally approve the merger agreement on November 4, and we plan to close the transaction shortly thereafter. Our teams have already begun preparations for a successful system conversion in early February of 2026. We look forward to welcoming Farmers' employees and customers into the Civista family.

Earlier this week, we announced a quarterly dividend of $0.17 per share, which is consistent with the prior quarter. Based on September 30 closing market price of $20.31, this represents a 3.3% yield and a dividend payout ratio of nearly 25%.

During the quarter, noninterest income increased $3 million or 46.2% over the linked quarter and was consistent with the third quarter of 2024. The primary driver of the increase from our linked quarter was a $1.4 million increase in fees related to leasing operations. This increase was attributable to a $1 million reduction in fee income resulting from a nonrecurring adjustment in the second quarter of 2025 related to the Civista Leasing and Finance core system conversion, coupled with increased leasing activity in the third quarter of 2025, resulting in a $300,000 increase in revenues.

Noninterest income for the quarter was $9.6 million, which was consistent with the prior year's third quarter. We did experience a $494,000 decline in leasing fees on fewer originations. However, this decline was offset by increases in nearly every other noninterest income category.

We continue to focus on controlling expenses. For the quarter, noninterest expense was $28.3 million, which represents an increase of $845,000 or 3.1% over the linked quarter. However, the primary driver of the increase was $700,000 in nonrecurring acquisition expenses related to the merger with Farmers Savings.

In looking at our noninterest expense compared to the prior year's third quarter, while some of the line items fluctuated, total noninterest expense was virtually unchanged. The main category fluctuations for the third quarter comparisons were compensation expense decreased $700,000 for the third quarter of 2025 compared to the prior year's third quarter due to an increase in the deferral of salaries and wages related to the loan originations in 2025.

Marketing expense decreased $300,000 for the third quarter of 2025 compared to the prior year's third quarter, mainly due to a shift to lower cost digital marketing and lower promotional expenses related to advertising and product marketing. These decreases were offset by the aforementioned acquisition expenses that increased noninterest expense by $700,000.

Our efficiency ratio for the quarter improved to 61.5% compared to 64.5% for the linked quarter and 70.5% for the prior year third quarter. Our effective tax rate was 18.5% for the quarter and 16.2% year-to-date.

Turning our focus to the balance sheet. For the quarter, total loans and leases declined by $55.1 million. Loan demand remained strong across our footprint. However, we experienced over $120 million of payoffs during the quarter. Most of these payoffs were the result of businesses being sold and real estate projects leasing up and moving on to the CMBS permanent market. While we view most of these payoffs as good due to their successful nature, it does present some headwinds when a significant number of loan payoffs pay off in one quarter.

While loans were flat or declined in nearly every category, our most significant declines were a $36 million decline in commercial and ag loans and a $48 million decline in nonowner-occupied CRE, both were primarily the result of the previously mentioned payoffs.

We did have a $27 million increase in residential loans. The loans we originate for our portfolio continue to be virtually all adjustable rate and our leases all have maturities of 5 years or less.

Year-to-date, we have grown our loan portfolio by $14 million. As we have shared on previous calls, we've been pricing commercial and ag opportunities aggressively. It had been more conservative in how we price commercial real estate opportunities, attempting to manage our concentration in the CRE portfolio.

Post capital raise, we have become more aggressive in pricing CRE opportunities, which has contributed to substantially increasing our pipelines going into the fourth quarter. That said, we are mindful of making sure we have the funding and capital to support our CRE growth. At September 30, our CRE to risk-based capital ratio was 288%. We have established an internal CRE limit of approximately 325% of our risk-based capital going forward.

During the quarter, new and renewed commercial loans were originated at an average rate of 7.25%, residential real estate loans were originated at 6.59%, and loans and leases originated by our leasing division were at an average rate of 9.36%.

Loans secured by office buildings make up 4.8% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings rather they are predominantly secured by single or 2-story offices located outside of our central business districts.

Along with year-to-date loan production, our pipelines are strong and our undrawn construction lines were $173 million at September 30. This should allow our organic loan growth to return to an annualized mid-single-digit range for the fourth quarter and increase into the mid to high single digits in 2026, as we leverage Farmers' excess deposits and our loan pipelines continue to build.

On the funding side, total deposits grew by $33.4 million, which is meaningful given that we were able to reduce our dependence on brokered deposits by $23 million during the quarter. This represents a $56.4 million increase in core deposit funding during the quarter as we continue to focus on our deposit-generating initiatives. This helped us lower our overall cost of funding by 5 basis points during the quarter to 2.27%.

We continue to see migration from interest-bearing demand accounts into higher rate deposit accounts during the quarter, which caused our cost of funds to increase 15 basis points. However, as we previously mentioned, our total funding costs declined by 5 basis points as we executed the funding approach that we messaged on last quarter's call.

We continue to focus on growing core funding. In July, we launched our new digital deposit account opening platform. We started slowly limiting online account opening to CDs in markets near our current branch locations where we felt we had some name recognition.

We plan to begin offering checking and money market accounts during the fourth quarter. We are also preparing to roll out our deposit product redesign initiative during the fourth quarter. The goal of this initiative will be to streamline deposit accounts that we acquired through various acquisitions and align our product set with our new digital channels.

Our deposit base continues to be fairly granular with our average deposit account, excluding CDs, approximately $27,500. Noninterest-bearing deposit and business operating accounts continue to be a focus. In addition to those already mentioned, we have several initiatives underway to gather these type of deposits, including monthly marketing glitches and marketing to low to no deposit balance loan customers, which are yielding some success. At quarter end, our loan-to-deposit ratio was 95.8%, which is down from the linked quarter. We anticipate further reducing this ratio into our targeted range of 90% to 95% once the Farmers acquisition closes.

Other than the $509.5 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30. 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 and look forward to adding Farmers' low-cost deposit base to our franchise.

The declining interest rate environment reduced some of the pressure on bond portfolios. At September 30, our securities were all classified as available for sale and had $44.5 million of unrealized losses associated with them. This represented a reduction in unrealized losses of $8.9 million since December 31, 2024. At September 30, our security portfolio was $657 million, which represented 16% of our balance sheet. And when combined with cash balances, it represents 22.3% of our deposits.

We ended the quarter with our Tier 1 leverage ratio at 11%, which is deemed well capitalized for regulatory purposes. Our tangible common equity ratio increased from 6.7% at June 30 to 9.21% at September 30 on our strong earnings and successful capital raise. However, post-closing on our Farmers acquisition, we anticipate our tangible common equity ratio declining to 8.6%, which we feel gives us capital to support organic growth, invest in technology, people and infrastructure.

Civista's 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 payment of dividends and any repurchases with building capital to support our growth.

Although we did not repurchase any shares during the quarter, we continue to believe our stock is a value. Despite comments made during some of the large bank earning calls, the economy across our footprint continues to show no real signs of concern. For the most part, our borrowers plan for and continue to successfully navigate tariff and other economic issues specific to their industries.

Our credit quality remain strong and our credit metrics remain stable. Civista, like most community banks, has no exposure to shared national credits nor we have significant exposure to floor plans, indirect auto lending or loans to non-depository financial institutions, which seems to be the types of credit that have caused much of the recent concern.

For the quarter, criticized credits were virtually unchanged at $93.3 million. The continued strong performance of our credits, coupled with significant loan payoffs resulting in a minimal $200,000 provision for the quarter. Our ratio of our allowance for credit losses to loans is 1.30% at September 30, which is consistent with the 1.29% at December 31, 2024. In addition, our allowance for credit losses to nonperforming loans is 177% at September 30, an improvement when compared to 122% at December 31, 2024.

In summary, it's been a very busy and productive quarter. We reported strong earnings that were 53% higher than the previous year's quarter. We grew pre-provision net revenue by 45% over the previous year's quarter. After adjusting for onetime items, we expanded our margin by 11 basis points over our linked quarter. We continue to gather new customers, increasing core deposits by $87 million year-to-date.

We had a very successful capital raise and our teams are working towards the successful integration of our new Farmers team members and customers. That's a pretty productive quarter and one that I believe sets us up for a strong finish to the year and one that should get us off to a strong start in 2026. I cannot be more bullish for Civista and our shareholders.

So thank you for attention -- your attention this afternoon and your investment. And now we will be happy to address any questions you may have.

[Operator Instructions] Our first question comes from the line of Ryan Payne from D.A. Davidson.

Maybe starting with the margin. How do you see that shaking out on a rate sensitivity basis, if we do see a few more cuts before the end of the year? And any expected impact from further cuts if we kind of think into 2026?

Ryan, it's Ian. So the way that we're really looking at it right now is just a cut in October, another cut in December. And then we're still working through kind of that 2026 guidance. At least from a baseline of -- if there's a cut in October and December, also with the addition of Farmers coming in, we are anticipating the margin to expand about another 5 basis points in the fourth quarter from where the third quarter was.

Got it. Helpful. And moving to capital. So on capital priorities post close of Farmers, it sounds like that will be reserved for organic growth, and you will remain opportunistic on repurchases. But maybe on M&A, how conversations are going? And has the deal kind of brought in more inbounds or interest?

No, I wouldn't say it has. I mean, I think really, we're really focused right now on growing organically, first off, and we want to increase our tangible book value. We want to continue to see our earnings per share grow. M&A can be tough at times. For instance, last year, we took -- looked at 6 deals, and we passed on all 6 of those deals because they just didn't meet our criteria. So we feel we're pretty disciplined when we evaluate an M&A transaction, and we're going to continue to stay disciplined as opportunities present themselves.

The Farmers deal checked a lot of boxes for us and gave us some much needed liquidity. So that's why we went ahead and did that deal. There's been other deals announced here even this week in Ohio. That certainly probably does spur some interest. But really, the main reason we raised the capital was to help support our organic growth and allow us to make the necessary investments, like I mentioned, in technology and people and infrastructure.

Our real focus is really on deepening our relationships and growing fee income, expanding our digital services and bringing new products and verticals because we want to gain just a greater share of our customers' wallet, and we want to focus on attracting new customers to the bank.

So our data tells us that customers with strong relationships bring in about 4x the revenue compared to other customers. So in order to deepen those relationships and bring in those customers, we have to make capital investments in things like artificial intelligence and profitability tools. And I think these investments will enable us to precisely target our best opportunities, improve the effectiveness of our cross-selling efforts improve retention and just optimize profitability by putting these pricing tools in the hands of our sales team.

So that's just one example of how we plan to use the capital. I think another example that we've talked about on previous calls is how we've been using it to make investments in the robotic process automation. So we'll continue to focus on just leveraging that type of automation to help us grow the bank while just improving our operating leverage. We've had some success with that, and we're going to continue to make improvements because I think that just makes us a more efficient organization.

So again, we will look at M&A if it meets our criteria, but our main focus is really to organically grow the bank and just increase our earnings. There's just a lot of disruption right now in our markets, and we feel there's really a lot of organic opportunity for us as we continue to make the necessary capital investments to take advantage of those opportunities.

Great. Got it. Last one for me, just a housekeeping item. The effective tax rate coming in higher than historical, anything impacting that this quarter? And would you expect to stay in kind of this range going forward?

Yes. We ended up increasing our expected earnings for the remainder of the year. So to balance that out, it did increase in the third quarter. On a year-to-date basis, we're at that 16% to 16.5% range. We anticipate that for the fourth quarter.

Our next question comes from the line of Brendan Nosal from Hovde Group.

Maybe just starting off here on the outlook for loan growth. Hear you loud and clear on the mid-single-digit pace for the fourth quarter and then mid- to high across 2026. Can you just kind of talk about your confidence in achieving that given that year-to-date loan balances are pretty flat. So that's a pretty meaningful ramp. Just talk about why you have confidence in your ability to achieve that.

Sure, Brendan. This is Chuck. If you look historically, we've always been a great loan generating operation. And with our -- where our real estate concentrations were earlier in the year, we really weren't -- I don't want to say we weren't competitive, but we weren't very aggressive in trying to bring new business into the bank. And it kind of caught up with us a little bit here in the third quarter where we had a bunch of expected payoffs. As Dennis mentioned, most of them what I would call good payoffs, a couple of companies selling and a few projects going out to the permanent market.

But our pipeline right now is sitting higher than it was last year, significantly higher than it was earlier in the year. So we feel good with the momentum going into the fourth quarter. We know we've got a few more payoffs that we're kind of staring out in the fourth quarter, but not to the same level that we had in the third. So we feel good about looking out to that mid-single-digit growth going forward.

And Brendan, I would mention that I think it's important to note on the payoffs, that we had several of our business clients that we were really successful in maintaining some of those deposits, both at the bank and at the wealth management level in areas of the bank. So even though we lost some of the interest income from the payoffs of loan, we maintain that relationship, and we're making money in other areas of the bank. So I think that's important to note that kind of -- I sat in our wealth and trust and wealth meeting yesterday and a couple of those loan payoffs, we've got significant wealth related. We're now managing that money that the business owner received. So we are making some money from that. So I just think it's important to note that we didn't include that in our earlier comments.

Yes. That's helpful color. I appreciate it. Maybe moving over to the fee income. Gain on sale of loans was up significantly for the quarter. Can you just kind of decompose that into 1-to-4 family gains versus lease gain on sale and how we should think about that line item going forward?

Yes, absolutely. So in the third quarter, roughly $1.1 million gain on sale. It's about $850,000 of it was mortgage, $300,000 of it was CLF or our leasing side of things. Of the -- there was an additional $300,000 on that for gain on disposal of equipment on the leasing side. So that's kind of that lumpy stuff that we end up seeing as opposed to the more traditional gain on sale.

And Brendan, I will say, I think probably like almost every other community bank in the country, we really do feel like we'll see a major uptick in gain on sale if we see the 30-year mortgage refinance rates go under 6%. We've got a -- I think we've got a backlog of what we would consider a lot of refinance opportunity if we do see those rates dip down for a while.

Okay. Okay. Good. And then while I have you, just maybe on fee income overall. I know that it tends to be volatile quarter-to-quarter. And this felt like a particularly strong quarter versus earlier in the year. Any thoughts on the overall level of fee income to wrap up the year?

Yes. So if we take that $9.6 million that we had in the third quarter, if we back out the BOLI and the security gains, getting us down to about $9 million, we anticipate being about $9.2 million in the fourth quarter, and that would include about $50,000 from Farmers.

Our next question comes from the line of Terry McEvoy from Stephens.

Maybe a question on the decline in loan yields in the third quarter relative to the second quarter. Could you just talk about, is that just a mix shift you're building the residential portfolio, some pricing competition? And then looking out into the fourth quarter, do you see an opportunity to expand loan yields kind of on a core basis before the merger just on some fixed asset repricing?

Yes. So just a reminder, Terry, this is Ian, in the first quarter -- or sorry, in the second quarter, we had a nonrecurring item that was in the interest income, which is about $1 billion. And so if that gets excluded, then we end up being much more normalized on the yields on loans.

And Terry, to your point, we just got the 9/30 report. We're watching very closely the amount of loans that will reprice over the next 12 months, and we've got about $225 million that will reprice here over the next 12 months in those adjustable rate most of them 5- and 3-year mortgages. So we do feel we'll see a pickup in yield on that $225 million as we fight a little bit of the probably floating rate stuff going down during the same time period.

Great. Thanks for the reminder and the update there. Much appreciated. And then I believe you said the systems conversion early February, could you maybe talk about the timing of the cost saves? And in the back half of next year, do you expect that to be fully in the run rate?

Yes. So we anticipate, as you mentioned, the system conversion occurring, that reduces a lot of the contract expenses for processing as well as some of the staffing reductions will take place following that deal.

Our next question comes from the line of Tim Switzer from KBW.

Most might have been answered already, but could you -- are you able to tie down at all when in November, you guys are expecting to close Farmers? Is it beginning of the quarter, towards the end? Just to kind of help us with the modeling.

Yes. We hope -- they have their shareholders' meeting on November 4, and we hope to close it shortly thereafter, definitely probably before the middle of the month. So if you're modeling, you're going to have at least 45 days for the quarter. We'll have both banks together. That would probably be fairly conservative. We hope to be a few days ahead of that, but to be safe on your modeling.

Got you. Okay. And then the NIM guidance has been very helpful. Are you able to quantify at all what maybe the purchase accounting impact is on the NIM and what you guys expect from like a full quarter basis?

Yes. Let me see if I have that handy. I do not have that in front of me actually.

We'll shoot that out to all of the analysts on the call today.

Okay. And then I was wondering what you guys are seeing in terms of like loan competition on pricing in your markets, any kind of changes there recently?

Tim, I think everybody has gotten a little bit more aggressive. We're seeing that the rates kind of fall down below that 6.5% level, probably somewhere between the 6% and 6.5% level on the better deals. So it's pretty competitive across -- I wouldn't tell you there's any one market here in Ohio or Indiana that's any less or more competitive. They're all very competitive right now, both on the deposit and on the loan side.

And I would say, Tim, the disruption in the marketplace is obviously, I think, going to help us. You've got some of the bigger players like Huntington and Fifth Third, who have announced some deals out of state. And their focus is probably -- their attention is elsewhere. And then we still -- the premier WesBanco thing is less than a year old, and we just saw the Middlefield announcement yesterday. All that disruption really helps us, so in that change. So we think that will benefit us both from a loan and deposit standpoint.

Okay. Yes, that's helpful. And outside of the disruption that you mentioned, do you have a sense for the loan pricing specifically, how much of that the competition is being driven by either slowing demand from borrowers versus simply the lower rates from the Fed?

I think the demand has been pretty consistent. I mean, as I said earlier, we weren't quite as aggressive in the first half of the year just based on where we're sitting out on the balance sheet. But I would tell you demand has been pretty consistent in Ohio all year. And we -- knock on wood, the economy here, especially in the 3Cs in Ohio has been really good, and we don't see that changing anytime soon.

Yes. We feel the economy and our customers have really adapted to some of the conditions, as I stated during earlier comments. I think it's probably more driven by rate than anything else. I mean the lower rates by the Fed and stuff, that's going to hopefully spur a little bit more activity as well.

And I think there's -- I do think -- especially some of our competition, I think there's a lot more confidence around commercial real estate than there was 12 to 18 months ago. I think everybody was a little bit leery of it, which helped us keep rates up on certain things. But now I think that's started to subside, obviously, and rates are starting to shoot back down.

Tim, this is Ian. On the accretion question that you had, it would be about $150,000 in the fourth quarter.

Okay. So then when we get into the full quarter in Q1, that would be $300,000.

Yes, in that range, maybe $280,000.

There are no further questions at this time. I would now like to turn the conference back to Mr. Shaffer. Please go ahead.

Thank you. And in closing, I just want to thank everyone for joining us for today's call and for your investment in Civista. I remain really confident that this quarter's list of accomplishments and strong financial results and just our disciplined approach to managing the company positions us really well for long-term future success. I look forward to talking to you all again in a few months to share our year-end results. So thank you for your time today.

This concludes today's conference call. Thank you for participating. You may now disconnect.