Good afternoon. 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. The 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'll turn the call over to Mr. Shaffer.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, Inc., and I would like to thank you for joining us for our second quarter 2023 earnings call. I'm joined today by: Richard Dutton, SVP of the company and Chief Operating Officer of the Bank; Chuck Parcher, SVP of the company and Chief Lending Officer of the Bank; and other members of our executive team. This morning, we reported net income for the second quarter of $10 million or $0.64 per diluted share, which represents a 20.8% increase over our second quarter in 2022, and net income of $22.9 million or $1.45 per diluted share for the six months ended June 30, 2023, which represents a 41.8% increase over the first half of 2022's performance. Our margin, which was 3.99% year-to-date and 3.86% for the quarter continues to drive our earnings. However, like the rest of the industry, our margin is under some pressure. Our yield on earning assets decreased by 9 basis points during the quarter to 5.31% and was 5.27% year-to-date. The cost of funding our balance sheet increased by 36 basis points during the quarter to 1.51% and was 1.33% year-to-date. Let me provide some additional color around our deposit strategy. Late in the first quarter, with the uncertainty surrounding the bank failures, we went out and locked up funding to fortify our balance sheet. We filled an order for $141.5 million of nine-month brokered CDs, paying 5.2% and $151 million of 12-month brokered CDs, paying 5%. This replaced $92 million of maturing brokered CDs and provided additional liquidity to preserve our overnight borrowing capacity at the Federal Home Loan Bank. We felt this was extremely important given the bank failures in March. Beginning in the first quarter, we also began raising interest rates primarily to our larger balance money market and time deposit customers to maintain balances. Excluding the increase in brokered deposits and increases in deposits related to our tax refund processing program, our deposit balances have declined just 2.3% from December. As a result, while our cost of deposits during the quarter increased from 49 basis points to 107 basis points, our cost of deposits, excluding broker deposits, only increased 10 basis points during the quarter from 39 basis points to 49 basis points. Our cost of deposits, excluding brokered deposits, year-to-date was 46 basis points. Our deposit beta, excluding brokered CDs, was 7 basis points over the last 12 months and our cost of overall funding beta was 22 basis points over the last 12 months. Our loan beta has been consistent over the 12-month cycle at 30 basis points. We will continue to monitor deposit flows and react accordingly, but we do not anticipate a similar increase in our funding costs going forward. Our earnings were also impacted by lower gains on sales of leases. This was primarily the result of internal changes made to our lease sales process in May, which were not fully implemented until the quarter-end. We anticipate resuming the sale of our originations in the third quarter. For the quarter, we originated $36.6 million of loans and leases through VFG and sold $10.8 million for a gain of $256,800. We typically target the sale of 50% of our lease production. Yesterday, we also announced a $0.01 per share increase in our quarterly dividend to $0.16 per share. This is a 6.7% increase in our dividend and represents a 25% dividend payout ratio based on our second quarter earnings. This is our second consecutive quarterly increase and reflects our confidence in our earnings. Our year-to-date earnings per share have increased 32.3% when compared to the same period a year ago. Our return on average assets was 1.12% for the quarter compared to 1.47% for the linked quarter, and our return on average equity was 11.58% for the quarter compared to 15.32% for the linked quarter. Year-to-date, our return on assets was 1.29% and our return on equity was 13.42%. During the quarter, non-interest income declined $1.9 million or 17.3% in comparison to the linked quarter, and increased $3.5 million year-over-year. The primary driver of the decrease from our linked quarter was the timing of fees from our income tax refund processing program. Consistent with prior years, income from our tax program during the first quarter was $1.9 million, compared to $475,000 in the second quarter. We also received a $1.5 million bonus as part of the newly negotiated debit brand agreement we are into during the first quarter, which was also included in other non-interest income. Year-to-date, non-interest income increased $6.9 million or 52.3% in comparison to the prior year. The primary driver was $4.2 million in lease revenue and residual fees from the addition of VFG late in 2022. These fees are primarily made up of operating lease payments and gains on the sale of equipment at the end of the lease term. Also included was the previously mentioned $1.5 million bonus we received as part of the debit brand agreement. Second quarter gains on the sale of mortgage loans were $615,000, which was consistent with our linked quarter. And the year-to-date gain on the sale of mortgage loans was $1.2 million and represented a 17.4% decline from the previous year. Wealth Management revenues for the quarter were consistent with the linked quarter and declined slightly year-to-date, compared to the prior year. While we anticipate that market uncertainty will continue for some time, we view the expansion of these services across our footprint as an opportunity to diversify and grow non-interest income. Non-interest expense for the quarter of $27.9 million was comparable to our linked quarter as increases in FDIC assessments and software maintenance were mitigated by declines in compensation and professional fees. Year-to-date, non-interest expense increased $14.9 million or 36.7% over the prior year. Much of the increase is attributable to our acquisitions of Comunibanc and VFG in the third and fourth quarters of 2022. Our compensation expense increased $5.9 million or 24.5% over the prior year. The bulk of the increase is due to $4.4 million in additional salaries, commissions and benefits attributable to our new Comunibanc and VFG employees. The increase in depreciation is primarily due to our new leasing company. Equipment that is under an operating lease is owned and depreciated by Civista until the end of the lease term. Included in this year's professional fees is a $400,000 payment to a consultant that assisted in the negotiation of our new debit card agreement. The increase in amortization of our deposit-based intangible and marketing was also due to our 2022 acquisitions. The increase in other non-interest expense was primarily due to growth in unfunded loan commitments in the related $264,000 provision required by our adoption of CECL during the first quarter. Our efficiency ratio was 67.9% compared to 62.4% for the linked quarter, and 65.1% year-to-date. Turning to the balance sheet. Year-to-date, our total loans have grown by $89.6 million, which includes $24.8 million of loans and leases originated by VFG. This represents an annualized rate of 7%. While non-owner-occupied CRE loans led the way, lease financing receivables were up due to lighter than anticipated sales. Residential real estate loans increased as we originate more of our on-balance sheet mortgage products, including our CRA, ARM and Construction products. Commercial revolving lines of credit currently at a 35% utilization rate have not readvanced and are well below pre-pandemic balances. Along with our year-to-date loan production, our undrawn construction lines were $211.3 million at June 30, adding to our confidence that we will grow our loan portfolio at a mid-single-digit rate over the balance of 2023. At June 30, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program was 98%. On the funding side, total deposits increased $322.8 million or 12.3% since the beginning of the year. If we adjust for increases in brokered deposits and tax program funding, our deposits declined just 2.3% year-to-date. We believe this illustrates the strong relationships we have with our commercial and retail customers. Noninterest-bearing demand accounts continue to be a focus, making up 34.1% of our total deposits at June 30. If we exclude Civista's own deposit accounts and those related to our tax program, 13.2% or $30.7 million of our deposits were uninsured by the FDIC at June 30. Our cash and unpledged securities were $415.5 million at quarter end, which more than covered our uninsured deposits at June 30. Other of the $378.2 million of public funds with various municipalities across our footprint, we had no concentration in deposits at June 30. We continue to believe our low-cost deposit franchise is one of Civista's most-valuable characteristics and contribute significantly to our peer-leading net interest margin and profitability. We ended the quarter with our Tier-1 leverage ratio at 8.86%, which is deemed well capitalized for regulatory purposes. At June 30, all of our $619.2 million in securities were classified as available for sale. It had $63.1 million of unrealized losses associated with them. Our tangible common equity ratio improved to 6.16% at June 30, 2023, compared to 5.83% at December 31, 2022. Given the turmoil in the banking industry, as we entered the quarter and our good fortune of being the Federal Reserve Bank of Cleveland's first safety and soundness exam after the failure of Silicon Valley and Signature Bank, we thought it's prudent to hold off on the resumption of our stock repurchase program during the quarter. I am happy to report that we received our exam report earlier this month, and we were very pleased with the results. We continue to believe our stock is a value and anticipate resuming our repurchase program now that we have released earnings. Despite the uncertainties associated with the economy and the expense pressures our borrowers face, our credit quality is strong and our credit metrics remain stable. We did make an $861,000 provision during the quarter, which was primarily attributable to loan and lease growth. Our ratio of our allowance for loan losses to loans improved from 1.12% at December 31, 2022 to 1.33% at June 30, reflecting growth in our adoption of CECL during the first quarter. In addition, our allowance for loan losses to nonperforming loans increased from 261.45% at December 31, 2022 to 327.05% at June 30. In summary, although our margin compressed more than anticipated, we continue to generate strong earnings and our margin remains healthy. We continue to see quality loan growth, solid opportunities across our footprint and no material deterioration in our credit quality. Our focus continues to be on creating shareholder value, which is evidenced by the year-over-year increase in our earnings per share and the two increases in our quarterly dividend. Thank you for your attention this afternoon. And now we'll be happy to address any questions that you may have.

We will now begin the question-and-answer session. Our first question will come from Terry McEvoy with Stephens. You may now go ahead.

Hi, thanks. Good afternoon, everyone. Dennis, you mentioned the deposit strategy from late in the first quarter, and we definitely noticed an increase in deposit costs during the second quarter. Can you walk us through your expectations for funding costs and deposit costs in the second half of this year? Additionally, how should we anticipate the trends in net interest margins over the upcoming quarters?

Yes. I don’t anticipate a significant increase in deposits like we saw with the brokered deposits in the late first quarter. That level will remain consistent through the end of the year. I also believe the net interest margin contracted by about 25 basis points this quarter, but we do not expect such a drastic decline moving forward. While there may still be some contraction, it shouldn't be as pronounced. Our main miss this quarter was due to that influx of deposits. We believe a more reasonable estimate would be around 10 to 12 basis points of margin compression as we progress through the year.

Thanks for that. And then last week, the larger Ohio-based banks on their calls talked about just optimizing their balance sheet and being more selective on lending given new capital rules. I guess I'm wondering, are you seeing a change in behavior in some of your larger competitors? And how are you positioned to take advantage of market share gains should that continue?

Yes. Chuck, do you want to give some color around competition and stuff?

Yes. We're definitely noticing that some of the large regional banks are stepping back from certain deals. The competitive landscape remains intense, particularly among community banks. Markets like Columbus, Cincinnati, and Cleveland are currently very competitive. However, we believe we still have the edge by being actively involved in lending. Our position in the lending business allows us to attract deposits, particularly from those larger regional banks.

And then Terry, we are adding new relationships. So as we look to fund new loans, that will be one way we fund them with these new deposits that we're getting in. We do have some of our securities portfolio turning over and can fund loans there. But I do think from the lending side, we have also tried to push loan yields, and we're seeing that as loans renew and new loans would come on our books. We are pushing our loan spreads. We are just thinking we can do that in this environment, and our teams have been pretty effective at pushing those spreads. And quite frankly, with the yield curve so inverted, we have to push those spreads. I'm surprised that although we still see some outliers from some of the banks out there. And I'm surprised that not everyone is doing that at this point. But definitely, some of the bigger players, I think, have pulled back a little bit.

Great. Thanks for taking my questions.

Our next question will come from Nick Cucharale with Hovde. You may now go ahead.

Good afternoon, everyone. How are you today.

Hey, David.

Hi, there.

Good. Just a question on expenses. Can you help us think about your expectations in the near term? And if you have any sizable initiatives on the horizon?

Hey Nick, this is Rich. I don't really get any sizable initiatives on the horizon. I think the run rate that we're kind of projecting for the balance of the year is probably $28 million each of the next two quarters. So I don't think there's anything new in there. I'm trying to think what the big things in expense were this quarter. I don't know if there's any significant, Nick.

Yes, the FDIC assessment has increased significantly, possibly by around 200 to 400. Software expenses have also risen slightly due to additional investments in data analytics for evaluating CRA and fair lending, which has resulted in higher costs. However, as Rich mentioned, we do not anticipate any major initiatives that will affect expenses for the remainder of the year.

And I don't know if we talked about it on the last call, Nick, but we did, and it wasn't as significant move, but we've made some reductions in loan operating staff, common reaction to the kind of fall-off in mortgage lending. Again, not a big number. But certainly, I guess, the point is that we're continuing to look at everything that makes sense to look at going forward.

Yes. And absorb some of those increases that we see.

That's very helpful. And then at the halfway point of the year, pretty solid loan growth so far. Can you help us think about the size of your pipelines and how that may translate into a full year growth rate?

Nick, it's Chuck. Pipelines still are pretty consistent. I would say that they may be down slightly from last year, but really feel good about where we're sitting at midyear. Dennis mentioned in his comments that we've got $211 million of construction availability looking into the second year. A little over $50 million of that is the increase in our single-family construction program. That may seem like we're doing a lot more real estate construction, but the other $150 million is out there on the commercial side. We feel like we've got some good tailwinds coming into the second half, and I still would say we're in that mid-single digit growth range, looking forward.

Just a follow-up on the construction. Is most of that in Columbus?

I don't have specific details about all the different metropolitan areas, but I can say that a significant portion of it is related to construction. We've seen a strong demand, particularly in the multifamily sector. They are unable to build enough units quickly to accommodate all the people moving into the area or preparing to work on major projects like Intel and other large developments in that city.

Great. Thank you for the color and thank you for taking my questions.

You bet. Thanks, Nick.

Our next question will come from Tim Switzer with KBW. You may now go ahead.

Hey, good afternoon. Thanks for taking my questions.

Good afternoon. Tim.

The first one I had, just real quick. Do you guys have the purchase accounting accretion impact of NII or the NIM?

I do, we do. It was 8 basis points, I think from memory. And my memory was correct, 8 basis points.

Great. Thank you.

Tim.

I had a follow-up on the talk about some of the larger banks pulling back from lending. Has that opened you to maybe any opportunities to finding some new talent at all? Or do you think that's something that could happen down the road if the banks continue in this position?

Yes, during the great recession, we brought in new talent to the organization. Disruptions and when larger banks retreat often create opportunities for us to expand our team, both in production and support roles. We are actively looking for chances to add talent if we believe it will increase revenue. Currently, it is a bit more challenging since we are quite leveraged, so we need to consider funding solutions. The inverted yield curve adds to the difficulty, but we see this as an opportunity, especially when it comes to hiring new staff.

And we're also seeing, Tim, this is Chuck. Some talent start to float our direction at least make some inquiries on the residential mortgage side. As you know, as the market gets tighter a little bit, a lot of times the mortgage brokers don't have the same array of products to be able to sell. And so, we're starting to see that service. We've got a few openings that we're trying to fill. It looks like we'll be able to do that with some larger producers than what we had in our staff previously.

And that really doesn't cost us anything because those are commission-based positions. So generally, when they add originations, they're generally paying for themselves.

Right. Yes, that makes a lot of sense. And then can you guys give us a quick update on the credit outlook? I think last quarter, you guys were talking about everything seems in your major metro areas. But any updates you can provide like the CRE and Office exposure, I think you said it's like 4% to 5% of loans?

Yes, this is Paul Stark. I would say that the outlook hasn't changed significantly. We are monitoring the Office market and examining its composition. Most of our office space is located in outlying communities rather than urban centers. We have only a few properties in the central areas, like Cleveland. Overall, these properties are performing well, with high occupancy rates. The uncertainty lies in what will happen in a few years when the leases expire. Only about 15% of our properties will have lease maturities in the next two years, so we haven't observed any major changes in the landscape. The residential sector remains solid. Although there is stress in the market, our numbers are stable and consistent from quarter to quarter. Currently, there are no significant concerns that would alter our outlook. It's challenging to stay on top of it, but at this moment, I'm not noticing anything alarming.

And Tim, moreover our portfolio is pretty diversified. So when you look at the CRE buckets between multifamily, industrial, retail, office, it's pretty diversified. So no real concentration in those areas.

Okay. Yes, nothing too surprising there. Do you have what percentage of total loans there is in the office book?

We do. This is Rich. Right now, pure office, I guess, is just under 6%, 5.8% and then we've got another less than 1% of healthcare, medical offices, yes.

Less than 1% in healthcare?

Yes. I might be looking at the wrong number. It's 1.2%, highlighting growth numbers.

That's great. Thank you, guys. That’s all from me.

Thanks, Tim.

Our next question will come from Manuel Navas with D.A. Davidson. You may now go ahead.

Hey, good afternoon. With your NIM outlook, just to clarify, do you think that it kind of trough in the fourth quarter? Can you kind of just add a little color there?

This is Rich, Manuel. Yes, I think it depends on what the Fed does, but similar to what Dennis mentioned, the significant funding actions we took in the first quarter are established and will remain effective. Regarding our deposit funding, although we believe we were aggressive in the first and second quarters, the non-brokered cost of our deposits only increased by 10 basis points this quarter. If we anticipate similar movements from the Fed in the second, third, or fourth quarters, that would reflect the kinds of changes we might see with deposits. Additionally, our loan betas have been quite stable throughout this cycle, showing an expansion of approximately 30 basis points over those quarters. Unless something unusual occurs, I believe that's a reasonable assertion, but it might be a low point by the end of the year.

It's interesting you mentioned loan yields. I was curious why they didn't change significantly this past quarter. I would have assumed that more of the production occurred at the end of the quarter. We are considering keeping leases, which typically yield higher returns. I'm just wondering why the loan yield didn't increase even more.

I believe there are a couple of reasons for that, Manuel. First, we experienced several large payoffs at the end of April and in May, which resulted in a decrease in balances. A significant portion of our production occurred in the latter half of the quarter, particularly in mid to late June. Additionally, regarding mortgage lending, we focused more on balance sheet loans compared to salable products. Consumer mortgage rates are slightly lower than commercial rates, so we've seen some growth in that segment, though it may decline somewhat. Overall, we are pleased with our direction, and our production continues to trend positively. We anticipate that rates will keep rising as we move into the next quarter. While I can't predict the exact figures, we have been increasing new originations by about 10 to 15 basis points each month recently.

Well, I think Chuck hit it right on the head. The payoffs early in the quarter and then the portfolio residential loans, those yields are not as high, and that mix is where portfolio a little bit more right now because people are buying the ARM products as opposed to the fixed rate products, and those ARM residential rates are a little bit lower.

And I don't even think the payoffs were not negative. The payoffs were both positive. We have one of our really good customers sold his business for a nice piece of change. And then, we also had a large industrial building that went to the CNBC market.

What are you like in your new commercial yields?

Everything begins with a move up to seven and progresses from there. New production over a three to five-year period is likely in the range of 7.25 to 7.75. Some clients are leaning towards a declining rate around SOFR-plus 2.75 for new floating originations.

If I jump over to the deposit side. I understand that the brokered came on early in the quarter. You gave some nice stats of deposit costs ex-brokered. From here, what are your thoughts on just deposit cost increases from here?

I believe deposit levels will stabilize somewhat, and I don’t anticipate the significant net interest margin contraction we experienced in the second quarter. Although pressurized, we are retaining more deposits now. Currently, we do not have any deposit rates starting at five, unlike many banks, while our top rate is 4.5. We noticed that in the early months of the year, we had some deposit outflow as we initially aimed to keep rates in the 3s. To address this, we became slightly more competitive, and now that we're at 4.5, we're not observing deposit runoff. We have a robust core deposit base and our customers tend to be quite loyal. We have never focused on attracting rate shoppers; our clients come to us seeking alternatives. We inform them about our 4.5-month and seven-month CD specials, and they are transferring funds from lower-interest and noninterest-bearing accounts to take advantage of these options, but they aren’t leaving for competitors offering rates of 5.25 or 5.5. We believe maintaining proximity to the competition is essential. Ultimately, the situation depends on what our competitors are doing, but we see significant value in our corporate deposit franchise, which allows us to retain our customers.

I appreciate that. In terms of fees, you mentioned that you have continued leases this quarter. Do you anticipate an increase in lease sales backlog for the next quarter?

No, probably not. As rates move, it makes it harder to sell those loans because being on sale decreases. So it makes it challenging. We're likely not going to try to recapture some of those loans going forward. We'll just keep those additional loans on the balance sheet since their interest rate yields are good. I think we can just pick that back up this quarter.

Okay. I appreciate. Is there like just a ballpark fee run rate then?

I'm not quite sure at the moment. I'm considering it. I would like to build on what Dennis mentioned. We've had some personnel changes at the leasing company, and as we integrate new team members, that may have contributed to a slowdown in sales for the second quarter. I'm trying to calculate a figure for you but I'm hesitant to provide an estimate. Let me take some time to think it over, and I will follow up with all of you.

Okay. Thank you very much. I’ll just go back into the queue.

Our next question will come from Daniel Cardenas with Janney. You may go ahead.

Hey, good afternoon, guys.

Hi, David.

Just a couple of questions here. The run-off that we saw on the securities portfolio, was that anticipated and planned? I mean, we've seen some run-off here in the last couple of quarters in a row. And should we expect to see a continued reduction in your overall securities book throughout the second half of the year?

Yes, that was anticipated. If you remember, early last year, we used some of our excess liquidity to purchase short-term securities, which were kept at the bank. As those securities mature, we are allowing them to run off to support loan growth. This will continue through the middle of next year, after which we won't have that strategy in place. Most of our securities are held in our investment subsidiary, and there are tax considerations that prevent us from bringing them back unless necessary. Therefore, those will be the last ones we bring back, and we will continue to reinvest in them. You're correct that the recent changes were simply a redeployment of the liquidity we had from early last year into the market.

Excellent. And then with some of the noise that we've kind of seen in the leasing side, are you still kind of sticking to your guidance in terms of where this book of business could be by the end of the year? Or does that get truncated somewhat?

I think we're still adhering to the guidance. The leasing business is new to us, but we've been informed that it tends to pick up, particularly in the fourth quarter and the second half of the year. So I believe we are on track and sticking to the guidance we shared earlier.

Yes. And they had about $27 million of originations in Q1 and they had $37 million of production in Q2, and that's in line with kind of what we thought. But like Dennis said, we're new to this. But I think also like Dennis said, I think what we guided to earlier on is kind of what we think is going to happen. That's our best guess. How about that?

Sounds good. And then last question for me. How should I be thinking about your tax rate here in the second half of the year?

I think our effective tax rate for the quarter was around 14%. I estimated it would be about 15% or 16%. Although those figures aren't visible, they seem to be accurate.

Great. That's it for me. I'll step back. Thanks, guys.

Thanks, Dan.

There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.

Well, in closing, I just want to thank everyone for joining and those that participated in today's call. The interest rate environment continues to be a challenge. However, our earnings remain strong and our margins remain healthy. I remain optimistic that our low-cost core deposit franchise will continue to produce superior results, and I look forward to talking to you all, in a few months to share our third quarter results. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.