Executive Summary / Key Takeaways

• Civista Bancshares is executing a strategic pivot focused on strengthening its core deposit franchise and enhancing operational efficiency to drive profitability and capital generation, following a transition year marked by the exit of a tax processing relationship and increased reliance on wholesale funding.
• Recent financial performance shows improving trends, with net interest income expanding due to disciplined pricing on loans and deposits, and a significant reduction in funding costs as higher-rate brokered deposits mature and are replaced at lower rates.
• Management anticipates continued net interest margin expansion in the near term, projecting 4-5 basis points of improvement in Q2 2025 and a further 2-3 basis points in Q3 2025, supported by deposit initiatives and loan repricing dynamics, even with potential Fed rate cuts factored into their outlook.
• Strategic investments in technology, including a new digital online account opening platform launching in July 2025, are aimed at enhancing deposit gathering capabilities, improving efficiency, and bolstering the company's competitive position against larger, more technologically advanced rivals.
• While credit quality remains strong with stable metrics and the allowance for credit losses is considered healthy, the company is focused on rebuilding its tangible common equity ratio to a target range of 7% to 7.5%, balancing this goal with shareholder returns through dividends and potential future share repurchases.

Setting the Scene: A Community Bank's Strategic Evolution

Civista Bancshares, Inc. (NASDAQ: CIVB) operates as a regional financial holding company, primarily serving communities across Ohio, Indiana, and Kentucky through its banking subsidiary, Civista Bank. With a history rooted in community banking, CIVB has built its business model on providing a range of financial services, including commercial, residential mortgage, and consumer lending, alongside deposit products and wealth management services. The acquisition of Vision Financial Group, which became the Civista Leasing and Finance (CLF) division, expanded its offerings into equipment leasing and financing, adding a new dimension to its revenue streams.

The past year has been one of significant transition for CIVB. The company strategically exited a relationship with an income tax refund processor in late 2023, a move that, while impacting noninterest income and noninterest-bearing funding in the short term, aligns with a broader goal of focusing on core relationship-based banking. This transition, coupled with strong loan growth, led to an increased reliance on higher-cost wholesale funding, putting pressure on the net interest margin. In response, CIVB has embarked on a focused strategic pivot aimed at bolstering its core deposit franchise, enhancing efficiency, and optimizing its balance sheet structure to drive future profitability and capital strength.

In the competitive landscape, CIVB operates alongside larger regional and national banks such as Huntington Bancshares (HBAN), Fifth Third Bancshares (FITB), PNC Financial Services Group (PNC), and Bank of America (BAC). These larger institutions often possess more extensive branch networks, greater scale, and more advanced technological infrastructure, enabling faster processing speeds and broader digital service offerings. While precise market share figures for all competitors in CIVB's specific footprint are not detailed, the presence of these major players indicates a competitive environment where scale and technological capability can be significant differentiators. Indirect competitors, including fintech firms offering specialized or digital-only services, also pose a challenge by providing potentially cheaper alternatives for certain transactions.

CIVB's competitive positioning is rooted in its community banking model, emphasizing personalized service and deep local relationships. This approach fosters strong customer loyalty and can contribute to more stable, lower-cost core deposits compared to transaction-focused models. Furthermore, CIVB has demonstrated a capacity for operational efficiency, with lower operating costs per loan and per customer acquisition compared to some larger rivals. However, the company acknowledges a lag in technological innovation speed compared to some competitors, which could impact its ability to attract digitally-savvy customers and gain efficiency in transaction processing. Strategic investments in technology are therefore crucial for CIVB to enhance its capabilities, improve customer experience, and defend its market position against rivals leveraging more advanced digital platforms.

Strategic Initiatives and Operational Enhancements

A central pillar of CIVB's strategy is the aggressive pursuit of core deposit growth to reduce reliance on higher-cost wholesale funding. Management has made core deposit funding a top priority, and recent results demonstrate traction. In the first quarter of 2025, deposit funding, excluding brokered deposits, grew organically by over $67 million, allowing the company to continue reducing its dependence on brokered funding. This shift towards more relationship-based funding is seen as contributing significantly to the value of the core deposit franchise.

Key deposit gathering initiatives include leveraging partnerships like the State of Ohio's Homebuyer Plus program, which has brought in low-cost funds from the state and new customer relationships. The company has also been successful in moving wealth management client cash balances, previously held externally, into accounts at Civista, further enhancing its deposit base. Looking ahead, CIVB is focusing on cultivating relationships with no and low balance deposit customers and utilizing its branch network to originate small business loans, aiming to deepen customer ties and attract associated deposits. A significant technological investment in this area is the planned launch of a new digital online account opening system (MANTL) in July 2025. Management anticipates this platform will enhance the efficiency of deposit gathering through the digital channel and improve the overall customer experience, which is critical in competing with more digitally mature institutions. While this investment may slightly increase deposit costs initially as new higher-rate accounts are attracted, the expectation is that it will ultimately lower total funding costs by replacing more expensive borrowings.

Alongside deposit gathering, expense control and operational efficiency are key areas of focus. Management is actively working to identify and implement cost savings across the organization. Recent actions include the closure of a branch in December 2024, expected to yield annual savings, and the transition of after-hour calls to an automated system for further cost reduction and improved customer service. The company is also being aggressive in managing vendor costs, seeking to mitigate inflationary pressures.

Strategic investments in technology extend beyond deposit gathering. The CLF division has been undergoing a conversion of its accounting and servicing systems, aimed at consolidating systems and introducing automation to improve efficiency. While this transition has involved the use of consultants and required establishing a reserve for a reconciling item, the goal is to streamline operations. Furthermore, investments in software aimed at improving fraud detection and mitigation are being made, reflecting a proactive approach to managing operational risks.

Financial Performance and Balance Sheet Strength

Civista's strategic focus is translating into tangible financial improvements. Net income for the first quarter of 2025 rose significantly to $10.2 million, a 60% increase from $6.4 million in the same period of 2024. This performance drove a notable increase in pre-provision net revenue, which grew by 47% year-over-year.

The improvement was largely fueled by net interest income, which increased by $4.4 million in Q1 2025 compared to Q1 2024. This expansion was a result of both increased interest and dividend income (up $3.6 million) and a decrease in total interest expense (down $796,000). The rise in interest income was driven by growth in average loan balances and a slight increase in loan yield (6.23% in Q1 2025 vs 6.20% in Q1 2024), as new and renewed commercial loans were originated at higher average rates (7.16% in Q1 2025). Crucially, the decrease in interest expense reflects the impact of the company's deposit strategy. Higher-cost brokered CDs maturing in late 2024 and early 2025 were successfully replaced at significantly lower blended rates (e.g., 71 bps savings on December maturities, 92 bps savings on March maturities), contributing to a decline in the overall cost of funding (2.31% in Q1 2025 vs 2.41% in Q4 2024). This dynamic led to an expansion of the fully tax equivalent net interest margin to 3.51% in Q1 2025, up from 3.22% in Q1 2024 and 3.36% in Q4 2024.

Noninterest income saw a decrease in Q1 2025 compared to Q1 2024, primarily due to lower fee revenue from the CLF division and reduced gains on the sale of loans and leases, influenced by seasonality and the interest rate environment impacting originations. However, the company successfully replaced approximately $5.2 million in lost noninterest income in 2024 from exited relationships through growth in other fee categories like service charges, wealth management fees, and leasing revenue, demonstrating resilience in its fee-generating capabilities.

Noninterest expense decreased slightly in Q1 2025 compared to Q1 2024, driven by lower compensation costs (reflecting fewer FTEs and benefit cost reductions) and equipment expense, partially offset by increased professional services related to system transitions and higher FDIC assessments due to balance sheet growth. The focus on expense control contributed to an improved efficiency ratio of 64.9% in Q1 2025, down from 73.8% in Q1 2024.

The balance sheet reflects these strategic shifts. Total assets increased modestly to $4.15 billion at March 31, 2025, driven by growth in net loans ($3.06 billion) and cash. Total deposits reached $3.24 billion, with organic growth in interest-bearing categories offsetting a seasonal decline in noninterest-bearing deposits. The loan-to-deposit ratio stood at 95.8% at March 31, 2025, within management's target range of 90% to 95%. Liquidity remains a focus, with available-for-sale securities ($646.1 million) and FHLB borrowing capacity providing ample resources. The securities portfolio, largely rated AA or better with an effective duration of approximately 3 years, held $60 million in unrealized losses at March 31, 2025, primarily due to higher market rates, but management has the intent and ability to hold these securities to maturity, and no credit losses were identified.

Capital levels remain strong, with all regulatory ratios exceeding minimum requirements. The tangible common equity ratio improved to 6.59% at March 31, 2025, up from 6.43% at December 31, 2024. Rebuilding this ratio to the 7% to 7.5% target is a stated priority, balanced with returning capital to shareholders through dividends (quarterly dividend increased to $0.17 per share in Q4 2024).

Credit Quality and Risk Management

Despite macroeconomic uncertainties, credit quality remains a point of strength for CIVB. Management reports no signs of systemic deterioration across its operating footprint in Ohio and Southeastern Indiana. The allowance for credit losses stood at 1.30% of total loans at March 31, 2025, consistent with year-end 2024 levels and considered healthy. Provisions for credit losses in Q1 2025 were primarily driven by CECL model requirements related to quantitative factors like forecasted unemployment and prepayment speeds, as well as loan growth, rather than specific credit concerns.

While commercial and agriculture delinquencies saw an increase in Q1 2025, this was largely concentrated in the 30-59 days past due category and related to credits already on nonaccrual and individually evaluated, limiting the impact on required reserves. Net charge-offs in Q1 2025 included an $800,000 charge-off on a previously identified nonaccrual commercial real estate loan, but overall net charge-offs remained below one percent of total loans. The CRE office portfolio, a focus area for many investors, remains a small percentage of total loans (5.25%) and is predominantly secured by single or two-story offices outside central business districts, which management views favorably.

Management is actively monitoring the portfolio and believes its disciplined underwriting and proactive management of concentrations, particularly in CRE, position the company well to navigate potential credit challenges.

Outlook and Investment Implications

Civista's outlook is characterized by cautious optimism, driven by the expected continuation of positive trends in net interest margin and expense control. Management anticipates further margin expansion in the coming quarters, projecting a 4-5 basis point increase in Q2 2025 and a further 2-3 basis point increase in Q3 2025. This forecast incorporates assumptions about potential Fed rate cuts later in the year and is supported by the ongoing repricing of higher-cost funding sources and the benefit from loans repricing at higher rates.

Loan growth is expected to be managed at a mid-single-digit pace for the balance of 2025, tempered to align with the company's ability to attract lower-cost core funding. While loan demand is solid, pricing discipline remains paramount to ensure profitable growth and manage portfolio mix. The launch of the digital online account opening platform in July 2025 is a key initiative expected to enhance deposit gathering capabilities and support future funding needs.

Expense management will continue, with Q2 2025 expenses expected to be similar to Q1 2025 levels, followed by a slight increase in the second half of the year due to planned investments in technology and marketing. However, management expects expenses in the latter half of 2025 to remain below $28 million per quarter, reflecting ongoing efficiency efforts.

For investors, the core investment thesis for CIVB centers on its ability to successfully execute its strategic pivot. The recent trend of margin expansion, driven by effective funding cost management and disciplined pricing, is a critical positive indicator. The focus on strengthening the core deposit franchise through various initiatives and technological investments is key to sustaining this trend and reducing balance sheet sensitivity to interest rate volatility. While the tangible common equity ratio is currently below management's target, the commitment to rebuilding capital through earnings, coupled with a willingness to return capital via dividends, provides a clear path for shareholder value creation. The stable credit quality and disciplined risk management practices offer reassurance in the current economic environment. The competitive landscape remains challenging, but CIVB's emphasis on relationship banking and strategic technology investments are aimed at defending and growing its market share.

Conclusion

Civista Bancshares is demonstrating tangible progress in its strategic transition, successfully replacing lost revenue streams and actively managing its funding structure to drive net interest margin expansion. The first quarter of 2025 results underscore the positive momentum generated by disciplined pricing, effective cost management, and focused deposit gathering initiatives. While challenges remain, particularly in rebuilding capital ratios and navigating a competitive environment that increasingly values technological agility, management's clear strategic priorities and execution capabilities provide a compelling narrative for future performance. The outlook for continued margin improvement, coupled with a stable credit profile and ongoing efforts to enhance efficiency and deposit funding, positions CIVB to build upon its recent success and continue its journey towards its profitability and capital targets, offering a clear investment case centered on a resilient community bank adapting strategically for growth.