Civista Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2023

Introduction

The following discussion focuses on the consolidated financial condition of the Company at September 30, 2023 compared to December 31, 2022, and the consolidated results of operations for the three- and nine-month periods ended September 30, 2023, compared to the same periods in 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and footnotes included in this Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as the Company’s financial condition, anticipated operating results, cash flows, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “believe,” “belief,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results, performance or achievements to differ from those discussed in the forward-looking statements include, but are not limited to:

• current and future economic and financial market conditions, including the effects of inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling and/or possible future U.S. government shutdowns over budget disagreements, slowing gross domestic product, tariffs, a U.S. withdrawal from or renegotiation of trade agreements, trade wars, and other factors beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans made by Civista;
• recent and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational impact on the banking industry as a whole, and of which could adversely affect the Company’s business, financial condition and results of operations;
• adverse changes in the real estate market, which could cause increases in delinquencies and non-performing assets, including additional loan charge-offs, and could depress our income, earnings and capital;
• changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity;
• the transition away from LIBOR as a reference rate for financial contracts, which could negatively impact our income and expenses and the value of various financial contracts;
• continuing economic impacts and recovery from the COVID-19 pandemic, or the outbreak of another highly infectious or contagious disease, which could adversely affect our business, financial condition and results of operations;
• operational risks, reputational risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses or cyber-attacks;
• our ability to secure sensitive or confidential client information against unauthorized disclosure or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate;
• a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks;
• competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel;
• unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future;
• the lack of assurances regarding the future revenues of our tax refund program;
• risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past, pending and possible future acquisitions, including, without limitation, the recently completed acquisitions of Comunibanc Corp. and VFG;
• uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry;
• changes in federal, state and/or local tax laws;
• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (FASB), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect our reported financial condition or results of operations;
• litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries;
• continued availability of earnings and dividends from Civista and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements;
• our ability to raise additional capital in the future if and when needed and/or on terms acceptable to us;
• our ability to conform and comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulatory authorities, shareholders, investors and other stakeholders with regard to our environmental, social and governance (ESG) policies and practices, which could affect our reputation and business and operating results;
• our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry; and
• other risks identified from time-to-time in the Company’s other public documents on file with the SEC, including those risks identified in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as supplemented by “Item 1A. Risk Factors” of Part II of the Company's Quarterly Report on Form 10-Q

The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

Financial Condition

Total assets of the Company at September 30, 2023 were $3,732,916 compared to $3,537,830 at December 31, 2022, an increase of $195,086, or 5.5%. The increase in total assets was due to increases in net loans of $201,455, accompanied by other increases in cash, swap assets and deferred taxes of $6,955, $3,205, and $9,103, respectively. Total liabilities at September 30, 2023 were $3,400,171 compared to $3,202,995 at December 31, 2022, an increase of $197,176, or 6.2%. The increase in total liabilities was primarily attributable to an increase in total deposit accounts of $175,759 accompanied by an increase short term FHLB borrowings of $37,800, swap liabilities of $3,205 and accrued interest, taxes and other liabilities of $10,358, partially offset by decreases in long term FHLB borrowings, securities sold under agreements to repurchase, and other borrowings of $1,005, $25,143 and $4,552 respectively.

Loans outstanding as of September 30, 2023 and December 31, 2022 were as follows:

Included in Commercial & Agriculture loans above were $370 of PPP loans as of September 30, 2023 and $566 of PPP loans as of December 31, 2022.

Loans held for sale increased $906, or 132.7%, since December 31, 2022. The increase was due to increases in average loan balance held for sale. At September 30, 2023, 6 loans totaling $1,589 were held for sale as compared to 7 loans totaling $683 at December 31, 2022.

Net loans have increased $201,455, or 8.0%, since December 31, 2022. The increase at September 30, 2023 can be attributed to all categories, primarily Commercial Real Estate and Residential Real Estate.Farm Real Estate and Consumer and Other showed small decreases. At September 30, 2023, the net loan to deposit ratio was 97.3% compared to 96.1% at December 31, 2022. The increase in the net loan to deposit ratio is primarily the result of an increase in loans.

Upon adoption of CECL on January 1, 2023 we recorded an increase in the allowance for credit losses of $5,193. During the first six months of 2023 we recorded a provision for credit losses of $2,111, an increase of $1,111, from $1,000 during the same period of 2022. The increase in the reserves was principally related to loan growth during the first nine months of the year. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified.

Net chargeoffs for the first nine months of 2023 totaled $535, compared to net recoveries of $133 in the first nine months of 2022. For the first nine months of 2023, the Company charged off a total of 52 loans. Fourteen Commercial and Agriculture loans totaling $754, three Residential Real Estate loans totaling $12 and thirty five Consumer and Other loans totaling $89 were charged off in the first nine months of the year. In addition, during the first nine months of 2023, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $129, Commercial Real Estate – Non-Owner Occupied loans of $24, Residential Real Estate loans of $119, Real Estate Construction loans of $13 and Consumer and Other loans of $35. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance.

Management specifically evaluates loans that do not share common risk characteristics for estimates of loss. To evaluate the adequacy of the allowance for credit losses to cover probable losses in the loan portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve.

Management analyzes each individually evaluated Commercial & Agriculture and Commercial Real Estate loan relationship with a balance of $350 or larger, on an individual basis and designates a loan as individually evaluated when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for credit losses as a percent of total loans was 1.28% at September 30, 2023 and 1.12% at December 31, 2022.

The available-for-sale security portfolio decreased by $21,915, from $615,402 at December 31, 2022 to $593,487 at September 30, 2023. Management continually evaluates our securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which the Company is exposed. These evaluations may cause the Company to change the level of funds it deploys into investment securities and change the composition of its investment securities portfolio. As of September 30, 2023, the Company was in compliance with all pledging requirements.

Premises and equipment, net, decreased $5,029 from December 31, 2022 to September 30, 2023. The decrease is primarily the result of equipment depreciation associated with CLF of $4,757.

Goodwill decreased by $617, from $125,695 at December 31, 2022 to $125,078 at September 30, 2023. The decrease is due to adjustments to estimated fair values of the assets acquired and liabilities assumed since the date of acquisition.

Bank owned life insurance (BOLI) increased $510 from December 31, 2022 to September 30, 2023. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets increased $3,205 from December 31, 2022 to September 30, 2023. The increase is primarily the result of an increase in market value.

Total deposits as of September 30, 2023 and December 31, 2022 were as follows:

The Company had approximately $494,799 and $563,092 of uninsured deposits as of September 30, 2023 and December 31, 2022, respectively. Uninsured deposit amounts are estimated based on the portions of customer account balances that exceed the FDIC insurance limit of $250,000.

Total deposits at September 30, 2023 increased $175,759 from year-end 2022. Noninterest-bearing deposits decreased $93,719 from year-end 2022, while interest-bearing deposits, including savings and time deposits, increased $269,478 from December 31, 2022. This increase was partially offset by a $71,547 decrease in noninterest-bearing business accounts and a $32,283 decrease in noninterest-bearing personal accounts. The $63,541 decrease in interest-bearing demand accounts was spread across personal, business, and public fund accounts. The decrease in money market and savings accounts was primarily due to a $62,521 decrease in statement savings, partially offset by a $22,593 increase in money market accounts. The increase in time certificates was primarily due to a $202,500 increase in brokered time deposits. Jumbo time certificates also increased $61,382 while retail time certificates increased $28,763. The year-to-date average balance of total deposits increased $198,861, compared to the average balance for the same period in 2022, mainly due to a $247,228 increase in the average balance of time deposits.

Short-term FHLB advances increased $37,800 from December 31, 2022 to September 30, 2023. The increase is due to funding needs to support loan growth.

Securities sold under agreements to repurchase, which tend to fluctuate based on the liquidity needs of customers and short-term nature of the instrument, decreased $25,143 from December 31, 2022 to September 30, 2023.

Securities purchased payable increased $417 from December 31, 2022 to September 30, 2023. The increase is the result of an increase in accounts payable related to securities purchased but not yet funded.

Swap liabilities increased $3,205 from December 31, 2022 to September 30, 2023. The increase of $147 is the result of an increase in fair value of swap liabilities.

Accrued expenses and other liabilities increased $10,358 from December 31, 2022 to September 30, 2023. The increase is primarily the result of an increase in allowance for credit losses on unfunded commitments of $3,851 as a result of the Company's adoption of ASU 2013-16.

Shareholders’ equity at September 30, 2023 was $332,745, or 8.9% of total assets, compared to $334,835, or 9.5% of total assets, at December 31, 2022. The decrease was the result of a decrease in the fair value of securities available-for-sale, net of tax, of $21,417. Net income of $33,309, partially offset by dividends on common shares of $7,088, the purchase of treasury shares of $1,497 and the one-time cumulative effect of adopting ASU 2016-13 of $8,774.

Total outstanding common shares at September 30, 2023 were 15,695,997, which increased from 15,728,234 common shares outstanding at December 31, 2022. Common shares outstanding increased due to the grant of 47,536 restricted common shares to certain officers under the Company’s 2014 Incentive Plan, offset by 5,620 common shares surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 1,740 restricted common shares forfeited.

Results of Operations

Three Months Ended September 30, 2023 and 2022

The Company had net income of $10,387 for the three months ended September 30, 2023, an decrease of $725 from net income of $11,112 for the same three months of 2022. Basic earnings per common share were $0.66 for the quarter ended September 30, 2023, compared to $0.72 for the same period in 2022. Diluted earnings per common share were $0.66 for the quarter ended September 30, 2023, compared to $0.72 for the same period in 2022. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended September 30, 2023 was $31,504, an increase of $1,065 from $30,439 for the same three months of 2022. This increase is the result of an increase of $13,253 in total interest income, offset by an increase of $12,188 in interest expense. Interest-earning assets averaged $3,380,169 during the three months ended September 30, 2023, an increase of $377,913 from $3,002,256 for the same period of 2022. The Company’s average interest-bearing liabilities increased from $1,893,092 during the three months ended September 30, 2022 to $2,315,118 during the three months ended September 30, 2023. The Company’s fully tax equivalent net interest margin for the three months ended September 30, 2023 and 2022 was 3.69% and 4.03%, respectively.

Total interest and dividend income was $45,786 for the three months ended September 30, 2023, an increase of $13,253 from $32,533 of total interest and dividend income for the same period in 2022. The increase in interest and dividend income is attributable to a $12,556 increase in interest and fees on loans, a $63 increase in interest income on taxable securities and a $338 increase in tax-exempt securities. The $12,556 increase in interest and fees on loans is attributable to average balances as well as loan yield. The average balance of loans increased by $390,091, or 17.0%, to $2,679,679 for the three months ended September 30, 2023 as compared to $2,289,588 for the same period in 2022. The loan yield increased to 5.88% for the three months ended September 30, 2023, from 4.71% for the same period in 2022.

Interest on taxable securities increased to $2.999 for the three months ended September 30, 2023, compared to $2,936 for the same period in 2022. The average balance of taxable securities was $359,154 for the three months ended September 30, 2023, as compared to $354,597 for the same period in 2022. The yield on taxable securities decreased 11 basis points to 2.95% for 2023, compared to 3.06% for 2022. Interest on tax-exempt securities increased $338 to $2,336 for the three months ended September 30, 2023, compared to $1,998 for the same period in 2022. The average balance of tax-exempt securities increased $17,721 to $286,048 for the three months ended September 30, 2023, as compared to $268,327 for the same period in 2022. The yield on tax-exempt securities increased 30 basis points to 3.77% for 2023, compared to 3.47% for 2022 .

Interest expense increased $12,188, or 582.0%, to $14,282 for the three months ended September 30, 2023, compared with $2,094 for the same period in 2022. The change in interest expense can be attributed primarily to increases in rates on interest-bearing liabililities accompanies by an increase in the average balance of interest-bearing liabilities. For the three months ended September 30, 2023, the average balance of interest-bearing liabilities increased $422,026 to $2,315,118 as compared to $1,893,092 for the same period in 2022. Interest incurred on deposits increased by $8,648 to $9,584 for the three months ended September 30, 2023, compared to $936 for the same period in 2022. The average balance of interest-bearing deposits increased by $227,999, as compared to the same period in 2022. Additionally, the rate paid on demand and savings and time deposit accounts increased from 0.21% in 2022 to 1.93% in 2023. The average balance on long-term FHLB balances decreased $22,692 as a result of a prepayment, while the rate paid increased 17 basis points. In addition, the average balance of short-term FHLB balances increased $226,834, compared to the same period in 2022. The rate paid on subordinated debentures increased 100 basis points for the three-month period ended September 30, 2023, as compared to the same period in 2022.

The following table presents the condensed average balance sheets for the three months ended September 30, 2023 and 2022. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

* —Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $621 and $532 for the periods ended September 30, 2023 and 2022, respectively.

** —Average balance includes nonaccrual loans.

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the three months ended September 30, 2023 and 2022.

(Dollars in thousands)

(1) The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

The Company provides for loan losses through regular provisions to the allowance for credit losses. Upon adoption of CECL on January 1, 2023, we recorded an increase in the allowance for credit losses of $5,193. During the third quarter of 2023 we recorded a provision for credit losses of $630, an increase of $330, from $300 during the three months ended September 30, 2022. The increase in the reserves was principally related to loan growth during the quarter. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified.

Noninterest income for the three-month periods ended September 30, 2023 and 2022 are as follows:

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Noninterest income for the three months ended September 30, 2023 was $8,125, an increase of $2,391, or 41.7%, from $5,734 for the same period of 2022. The increase was primarily due to the addition of Lease revenue and residual income of $1,913 for the three months ended September 30, 2023, as a result of the acquisition of Vision Financial Group, Inc. (VFG) in October 2022. As of August 31, 2023, VFG was merged into Civista and now operates as a division of Civista and has been rebranded as Civista Leasing and Finance (CLF). Net gain/loss on equity securities increased $202 thousand as the result of a market valuation adjustment. The net gain on sale of loans and leases increased by $150 thousand compared to the same period last year. CLF generated a $466 thousand gain on the sale of $10.9 million in commercial loans and leases. The sale of mortgage loans generated a $321 thousand gain on the sale of $16.2 million, a decrease in the gain of $316 thousand and a $17.7 million decrease in volume in 2023, compared to 2022.

Noninterest expense for the three-month periods ended September 30, 2023 and 2022 are as follows:

Noninterest expense for the three months ended September 30, 2023 was $26,752, an increase of $4,197, or 18.6%, from $22,555 reported for the same period of 2022. Compensation expense increased primarily due to the acquisition of VFG resulting in an additional $1,300. The quarter-to-date average full time equivalent (FTE) employees were 528 at September 30, 2023, an increase of 85 FTEs over the same period in 2022. The increase in occupancy and equipment expense is primarily due to a $2,000 increase in equipment depreciation and expense related to the acquisition of VFG. The decrease in professional services of $325 is attributable to higher consulting expense in 2022 related to the acquisition of Comunibanc Corp. ("Comunibanc") on July 1, 2022. The increase in other operating expense is primarily due to a $130 thousand provision for credit losses on unfunded commitments as well as an increase in bad check loss of $255 thousand compared to the same period in 2022. Additional increases related to the acquisition of VFG are also attributable to the increase in 2023.

Income tax expense for the three months ended September 30, 2023 totaled $1,860, down $346 compared to the same period in 2022. The effective tax rates for the three-month periods ended September 30, 2023 and 2022 were 15.2% and 16.6%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits, tax-deductible captive insurance premiums and bank owned life insurance income.

Nine Months Ended September 30, 2023 and 2022

The Company had net income of $33,309 for the nine months ended September 30, 2023, an increase of $6,030 from net income of $27,279 for the same nine months of 2022. Basic earnings per common share were $2.12 for the period ended September 30, 2023, compared to $1.82 for the same period in 2022. Diluted earnings per common share were $2.12 for the period ended September 30, 2023, compared to $1.82 for the same period in 2022. The primary reasons for the changes in net income are explained below.

Net interest income for the nine months ended September 30, 2023 was $95,444, an increase of $17,805, from $77,639 in the same nine months of 2022. This increase is the result of an increase of $47,397 in total interest income, partially offset by an increase of $29,592 in total interest expense. Interest-earning assets averaged $3,284,210 during the nine months ended September 30, 2023, an increase of $389,120 from $2,895,090 for the same period of 2022. The Company’s average interest-bearing liabilities increased from $1,850,724 for the first nine months of 2022 to $2,270,844 for the same period in 2023. The Company’s fully tax equivalent net interest margin for the nine months ended September 30, 2023 and 2022 was 3.88% and 3.62%, respectively.

Total interest and dividend income increased $47,397 to $130,660 for the period ended September 30, 2023 This change was the result of an increase in the average balance of loans, accompanied by a higher yield on the portfolio. The average balance of loans increased by $496,613, or 23.5%, to $2,607,632 for the period ended September 30, 2023, as compared to $2,111,019 for the period ended September 30, 2022. The loan yield increased to 5.85% for 2023, from 4.44% in 2022.

Interest on taxable securities increased $2,386 to $8,817 for the period ended September 30, 2023, compared to $6,431 for the same period in 2022. The average balance of taxable securities increased $45,864 to $367,946 for the period ended September 30, 2023, as compared to $322,262 for the period ended September 30, 2022. The yield on taxable securities increased 36 basis points to 2.89% for 2023, compared to 2.53% for 2022. Interest on tax-exempt securities increased $1,248 to $6,917 for the period ended September 30, 2023, compared to $5,669 for the same period in 2022. The average balance of tax-exempt securities increased $22,460 to $285,250 for the period ended September 30, 2023, as compared to $262,790 for the period ended September 30, 2022. The yield on tax-exempt securities increased 24 basis points to 3.79% for 2023, compared to 3.55%for 2022.

Interest on interest-bearing deposits in other banks decreased $280 to $818 for the period ended September 30, 2023, compared to $1,098 for the same period in 2022. The average balance of interest-bearing deposits in other banks decreased $175,637 to $23,382 for the period ended September 30, 2023, as compared to $199,019 for the period ended September 30, 2022. The yield on interest-bearing deposits in other banks increased 393 basis points to 4.67% for 2023, compared to 0.74% for 2022.

Interest expense increased $29,592, or 526%, to $35,216 for the period ended September 30, 2023, compared with $5,624 for the same period in 2022. The change in interest expense can be attributed to an increase in rate and an increase in the average balance of interest-bearing liabilities. For the period ended September 30, 2023, the average balance of interest-bearing liabilities increased $420,120 to $2,270,844, compared to $1,850,724 for the period ended September 30, 2022. Interest incurred on deposits increased by $17,999 to $20,350 for the period ended September 30, 2023, compared to $2,351 for the same period in 2022. The average balance of interest-bearing deposits increased by $193,705 during the period and the rate paid on demand and savings accounts increased from 0.19% in 2022 to 1.46%in 2023. The rate paid on time deposits increased from 0.80% in 2022 to 4.17% in 2023. The average balance on long-term FHLB balances decreased $55,201 as a result of prepayment, while the rate paid increased 105 basis points. In addition, the average balance of short-term FHLB balances increased to $282,214, compared to the same period in 2022. The rate paid on subordinated debentures increased 119 basis points for the period ended September 30, 2023, as compared to the same period in 2022.

The following table presents the condensed average balance sheets for the nine months ended September 30, 2023 and 2022. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

* —Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $1,839 and $1,509 for the periods ended September 30, 2023 and 2022, respectively.

** —Average balance includes nonaccrual loans.

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the nine months ended September 30, 2023 and 2022. The table is presented on a fully tax-equivalent basis.

(Dollars in thousands)

(1) The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

The Company provides for loan losses through regular provisions to the allowance for loan losses. Upon adoption of CECL on January 1, 2023, we recorded an increase in the allowance for credit losses of $5,193. During the nine months ended September 30, 2023 we recorded a provision for credit losses of $2,111, an increase of $1,111, from $1,000 during the nine months ended September 30, 2022. The increase in the reserves was principally related to loan growth during the year. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified.

The components of noninterest income for the nine-month periods ended September 30, 2023 and 2022 were as follows:

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Noninterest income for the nine months ended September 30, 2023 was $28,342, an increase of $9,330, or 49.1%, from $19,012 for the same period of 2022. The increase was primarily due to increases in lease revenue and residual income of $6,160 due to the acquisition of VFG during the fourth quarter of 2022. The increase in service charge income is split between $115 in personal service charges and $149 in business service charges. Overdraft fees also increased by $188. The net gain/loss on equity securities decrease was the result of a market valuation adjustment. The net gain on sale of loans and leases decreased by $113 thousand compared to the same period last year. CLF generated a $1.1 million gain on the sale of $32.9 million in commercial loans and leases. The sale of mortgage loans generated a $911 thousand gain on the sale of $42.2 million, a decrease in the gain of $1.2 million and a $65.4 million decrease in volume in 2023, compared to 2022.

Other income increased as result of a $1.5 million fee collected associated with the renewal of the company's contract with MasterCard. Other income also increased as result of $707 thousand in interim rent at CLF, and $198 thousand increase in swap fee income.

Tax refund processing fees were $2,375 for each of the nine months ended September 30, 2023 and 2022. These fees are received for processing state and federal income tax refund payments for customers of third party income tax preparation vendors. This fee income is seasonal in nature, the majority of which is earned in the first quarter of the year.

The components of noninterest expense for the nine-month periods ended September 30, 2023 and 2022 are as follows:

Noninterest expense for the nine months ended September 30, 2023 was $82,298, an increase of $19,106, or 30.2%, from $63,192 reported for the same period of 2022. The primary reasons for the increase were increases in compensation expense, equipment expense, FDIC assessment, professional fees, amortization expense, software maintenance expense and other operating expense. Compensation expense increased primarily due to $4.6 million of salaries related to the acquisition of VFG. Other increases related to salaries were a result of annual merit increases and add-to-staff positions as well as increases in employee insurance. The year-to-date average full time equivalent (FTE) employees were 531 at September 30, 2023, an increase of 67 FTEs over the same period in 2022. The increase in occupancy and equipment expense is primarily due to a $6.1 million increase in equipment depreciation related to the acquisition of VFG. The $305 increase in amortization of intangible assets is related to the core deposit intangible associated with the acquisition of Comunibanc. Marketing expense increased due to an increase in marketing efforts in newly acquired markets related to the Comunibanc and VFG acquisitions totaling $1,542 for the first nine months of 2023 compared to $1,069 for the same period in 2022. The increase in software maintenance is due to increases in maintenance contracts related to the digital banking platform. Other operating expenses increased from 2022 by $2,342 primarily due to a $595 thousand provision for credit losses on unfunded commitments, a $353 increase in bad check loss expense and additional expenses related to CLF of $608 thousand. Business promotion, travel and lodging, donations and education and training all increased as well.

Income tax expense for the nine months ended September 30, 2023 totaled $6,068, up $888 compared to the same period in 2022. The effective tax rate for the nine-month period ended September 30, 2023 was 15.4% compared to 16% for the same period in 2022. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits, tax-deductible captive insurance premiums and bank owned life insurance income.

Capital Resources

Shareholders’ equity totaled $332,745 at September 30, 2023, compared to $334,835 at December 31, 2022. Shareholders’ equity decreased during the first nine months of 2023 as a result of a decrease in the fair value of securities available-for-sale, net of tax, of $21,417, dividends on common shares of $7,088, the purchase of treasury shares of $1,618 and the cumulative effect of adopting ASU 2016-13 of $6,069, partially offset by net income of $33,309.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of September 30, 2023 and December 31, 2022 as identified in the following table:

Liquidity

The Company maintains a conservative liquidity position. All securities, with the exception of equity securities, are classified as available-for-sale. Securities, with maturities of one year or less, totaled $6,149, or 1.04% of the total security portfolio at September 30, 2023. The available-for-sale portfolio helps to provide the Company with the ability to meet its funding needs. The Condensed Consolidated Statements of Cash Flows (Unaudited) contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings.

As reported in the Condensed Consolidated Statements of Cash Flows (Unaudited), our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $60,593 and $27,421 for the nine months ended September 30, 2023 and 2022, respectively.Net cash used by investing activities was $216,826 and $207,756 for the nine months ended September 30, 2023 and 2022, respectively, principally reflecting our loan and investment security activities. Cash provided by deposits comprised most of our financing activities, which resulted in net cash provided by of $163,188 and used of $42,990 for the nine months ended September 30, 2023 and 2022, respectively.

Future loan demand of Civista may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, and the sale of securities classified as available-for-sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. Through its correspondent banks, Civista maintains federal funds borrowing lines totaling $50,000. As of September 30, 2023, Civista had total credit availability with the FHLB of $771,067 with standby letters of credit totaling $33,400 and a remaining borrowing capacity of approximately $303,594. In addition, CBI maintains a credit line with a third party lender totaling $15,000. No borrowings were outstanding by CBI under this credit line as of September 30, 2023.

Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure.

Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality.

The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issue policy statements and guidance on sound practices for managing interest-rate risk, which form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The guidance also outlines fundamental elements of sound management and discusses the importance of these elements in the context of managing interest-rate risk. The guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk.

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company’s primary asset/liability management technique is the measurement of the Company’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities.

Quantitative and Qualitative Disclosures About Market Risk

Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. The Company has not purchased derivative financial instruments to hedge interest rate risk in the past and does not currently intend to purchase such instruments in the near future. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refinance its obligations at new, lower rates. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short-term or due on demand, while most of its assets may be invested in long-term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Company.

The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2022 and September 30, 2023, based on certain prepayment and account decay assumptions that management believes are reasonable. The table shows the changes in the Company’s net portfolio value (in amount and percent) that would result from hypothetical interest rate increases of 200 basis points and 100 basis points and interest rate decreases of 100 basis points and 200 basis points at September 30, 2023 and December 31, 2022.

Net Portfolio Value

The change in net portfolio value from December 31, 2022 to September 30, 2023, can be attributed to a couple of factors. The yield remains inverted but has shifted upward since the end of the year. Additionally, both the volume and mix of assets and funding sources has changed. The volume of loans has increased, and the asset mix remains centered on loans. The volume of certificates of deposit has increased and both deposits and borrowed money have decreased. The volume and mix shifts from the end of the year contributed to an increase in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a slightly larger decrease in the market value of liabilities than assets. Accordingly, we see a slight increase in the net portfolio value. The change in the rates down scenario for 200 basis point movements would lead to a larger increase in the market value of liabilities than in assets, leading to a decrease in the net portfolio value.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive and our principal financial officers, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive and our principal financial officers concluded that our disclosure controls and procedures as of September 30, 2023, were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Other Information

The following information updates our risk factors and should be read in conjunction with the risk factors disclosed in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by “Item IA. Risk Factors” of Part II of the Company’s Quarterly Reports on Form 10-Q.