Civista Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2020

Introduction

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2020 compared to December 31, 2019, and the consolidated results of operations for the three- and six-month periods ended June 30, 2020, compared to the same periods in 2019. 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, changes in financial markets or national or local economic conditions, including impacts from the COVID-19 pandemic on local, national and global economic conditions; higher default rates on loans made to our customers related to the impact of COVID-19 on our customers’ operations and financial conditions; the effects of various governmental responses to the COVID-19 pandemic, including stimulus packages and programs; potential litigation or other risks related to participating in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), sustained weakness or deterioration in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and assessments; changes in tax laws; failure of or breach in our information and data processing systems; unforeseen litigation; 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, 2019, as supplemented by “Item 1A. Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 and by “Item 1A. Risk Factors” of Part II of this Quarterly Report on From 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 June 30, 2020 were $2,812,153 compared to $2,309,557 at December 31, 2019, an increase of $502,596, or 21.8%. The increase in total assets was due to increases in cash and due from financial institutions of $147,985, accompanied by other increases in securities available for sale, loans held for sale, loans, accrued interest receivable and other assets of $9,884, $16,238, $308,342, $3,954 and $15,877, respectively. Total liabilities at June 30, 2020 were $2,475,540 compared to $1,979,431 at December 31, 2019, an increase of $496,109, or 25.1%. The increase in total liabilities was primarily attributable to increases in noninterest-bearing demand accounts, interest-bearing demand accounts, other borrowings and accrued expenses and other liabilities of $181,295, $209,202, $183,695 and $18,483, respectively, partially offset by a decrease in short-term FHLB advances of $101,500.

Loans outstanding as of June 30, 2020 and December 31, 2019 were as follows:

Included in Commercial & Agriculture is $257,568 of PPP loans.

Loans held for sale increased $16,238 or 710.6% since December 31, 2019. The increase is due to an increase in volume due to refinances as rates have declined. At June 30, 2020, 82 loans totaling $18,523 were held for sale as compared to 15 loans totaling $2,285 at December 31, 2019.

Net loans have increased $308,342 or 18.2% since December 31, 2019. The Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Real Estate Construction and Farm Real Estate loan portfolios increased $239,334, $7,308, $54,570, $22,493 and $1,327, respectively, since December 31, 2019, while the Residential Real Estate and Consumer and Other loan portfolios decreased $9,965 and $1,072, respectively, since December 31, 2019. The increase in Commercial & Agriculture loans is the result of PPP loans totaling $257,568 at June 30, 2020. At June 30, 2020, the net loan to deposit ratio was 96.8% compared to 100.9% at December 31, 2019. The decrease in the net loan to deposit ratio is the result of an increase in deposits.

During the first six months of 2020, provisions made to the allowance for loan losses from earnings totaled $5,612, compared to a provision of $0 during the same period in 2019. The increase in provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Net recoveries for the first six months of 2020 totaled $41, compared to net recoveries of $107 in the first six months of 2019. For the first six months of 2020, the Company charged off a total of 15 loans. One Commercial and Agriculture loan totaling $15, one Commercial Real Estate – Owner Occupied totaling $1, seven Residential Real Estate loans totaling $97 and six Consumer and Other loans totaling $27 were charged off in the first six months of the year. In addition, during the first six months of 2020, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $4, Commercial Real Estate – Owner Occupied loans of $14, Commercial Real Estate – Non-Owner Occupied loans of $41, Residential Real Estate loans of $79, Real Estate Construction loans of $2, Farm Real Estate loans of $7 and Consumer and Other loans of $34. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans decreased by $636 since December 31, 2019, which was due to a decrease in loans on nonaccrual status of $638 and an increase in loans past due 90 days and accruing of $2. 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 are impaired for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the 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 impaired Commercial and Commercial Real Estate loan relationship with a balance of $350 or larger, on an individual basis and designates a loan as impaired 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. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for loan losses as a percent of total loans was 1.01% at June 30, 2020 and 0.86% December 31, 2019.

The available for sale security portfolio increased by $9,884, from $358,499 at December 31, 2019 to $368,383 at June 30, 2020. 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 June 30, 2020, the Company was in compliance with all pledging requirements.

Accrued interest receivable increased $3,954, from $7,093 at December 31, 2019 to $11,047 at June 30, 2020. The increase is the result of loan modifications consisting of the deferral of principal and/or interest payments, which are the result of the COVID-19 pandemic.

Premises and equipment, net, increased $266 from December 31, 2019 to June 30, 2020. The increase is the result of new purchases of $1,395, offset by depreciation of $1,119 and proceeds from the sale of premises and equipment of $10.

Bank owned life insurance (BOLI) increased $490 from December 31, 2019 to June 30, 2020. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets increased $16,801 from December 31, 2019 to June 30, 2020. The increase of $16,801 is primarily the result of an increase in volume of swap activity related to our Commercial Real Estate loan growth.

Total deposits as of June 30, 2020 and December 31, 2019 were as follows:

Total deposits at June 30, 2020 increased $390,497 from year-end 2019. Noninterest-bearing deposits increased $181,295 from year-end 2019, while interest-bearing deposits, including savings and time deposits, increased $209,202 from December 31, 2019. The increase in noninterest-bearing deposits was partially due to increases in cash balances related to the Company’s participation in a tax refund processing program, which added noninterest-bearing deposits of $30,799. This increase is temporary as transactions are processed and is expected to return to levels more consistent with December 31, 2019 over the next two quarters. In addition, personal demand and business demand deposit accounts increased $21,364 and $134,055, respectively. Much of the increase in business demand deposit accounts is due to the PPP loan proceeds. The increase in interest-bearing deposits was primarily due to an increase in non-public interest-bearing demand, savings and money markets and brokered money market accounts of $37,731, $61,399 and $29,745, respectively. Public fund interest-bearing demand and public fund time deposit accounts increased $69,575 and $17,411, respectively. The year-to-date average balance of total deposits increased $303,335 compared to the average balance for the same period in 2019 mainly due to increases in noninterest-bearing business demand and tax refund processing program accounts of $96,754 and $133,376, respectively, accompanied by increases in non-public interest-bearing demand, savings and money markets and public funds interest-bearing demand of $21,564, $33,665 and $27,893, respectively. In addition, the average balance of time deposits increased $14,332 as compared to the same period in 2019.

Short-term FHLB advances decreased $101,500 from December 31, 2019 to June 30, 2020. The decrease is due to a decrease in overnight borrowings. Securities sold under agreements to repurchase, which tend to fluctuate, have increased $4,934 from December 31, 2019 to June 30, 2020.

Other borrowings increased $183,695 from December 31, 2019 to June 30, 2020. The increase is the result of borrowings by Civista under the Paycheck Protection Program Lending Facility (“PPPLF”) to provide funding for PPP loans.

Swap liabilities increased $16,801 from December 31, 2019 to June 30, 2020. The increase of $16,801 is primarily the result of an increase in volume of swap activity related to our Commercial Real Estate loan growth.

Accrued expenses and other liabilities increased $1,682 from December 31, 2019 to June 30, 2020. The increase is the result of an increase in a clearing account related to the tax refund processing program of $1,072.

Shareholders’ equity at June 30, 2020 was $336,613, or 12.0% of total assets, compared to $330,126, or 14.3% of total assets, at December 31, 2019. The increase was the result of net income of $14,337, a decrease in the Company’s pension liability, net of tax, of $114, and an increase in the fair value of securities available for sale, net of tax, of $6,666, offset by dividends on common shares of $3,599 and the purchase of treasury shares of $11,450.

Total outstanding common shares at June 30, 2020 were 16,052,979, which decreased from 16,687,542 common shares outstanding at December 31, 2019. Common shares outstanding decreased as a result of 675,808 common shares being repurchased by the Company at an average repurchase price of $16.94. The Company repurchased 672,000 common shares pursuant to a stock repurchase program announced on December 17, 2019 and 3,808 common shares surrendered to pay taxes upon vesting of restricted shares. The publicly-announced repurchase plan authorized the Company to repurchase up to 672,000 shares of the Company’s common shares until December 17, 2020. The decrease in common shares outstanding was offset by the grant of 26,979 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. In addition, 14,266 common shares were issued to Civista directors as a retainer payment for service on the Civista Board of Directors.

Results of Operations

Three Months Ended June 30, 2020 and 2019

The Company had net income of $6,504 for the three months ended June 30, 2020, a decrease of $2,157 from net income of $8,661 for the same three months of 2019. Basic earnings per common share were $0.41 for the quarter ended June 30, 2020, compared to $0.54 for the same period in 2019. Diluted earnings per common share were $0.41 for the quarter ended June 30, 2020, compared to $0.51 for the same period in 2019. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended June 30, 2020 was $22,075, an increase of $333 from $21,742 in the same three months of 2019. This increase is the result of a decrease of $342 in total interest income with a decrease of $675 in interest expense. Interest-earning assets averaged $2,528,006 during the three months ended June 30, 2020, an increase of $541,165 from $1,986,841 for the same period of 2019. The Company’s average interest-bearing liabilities increased from $1,316,104 during the three months ended June 30, 2019 to $1,619,603 during the three months ended June 30, 2020. The Company’s fully tax equivalent net interest margin for the three months ended June 30, 2020 and 2019 was 3.61% and 4.49%, respectively.

Total interest income was $24,584 for the three months ended June 30, 2020, a decrease of $342 from $24,926 of total interest income for the same period in 2019. The decrease in interest income is attributable to a decrease of $44 in interest and fees on loans, which resulted from a lower yield on the portfolio, partially offset by an increase in the average balance of loans. The average balance of loans increased by $389,436 or 24.6% to $1,972,969 for the three months ended June 30, 2020 as compared to $1,583,533 for the same period in 2019. The loan yield decreased to 4.41% for 2020, from 5.49% in 2019 mainly due to the impact of lower interest rates during the first three months of 2020 as compared to the same period of 2019. During the quarter, the average balance of PPP loans was $189,405. These loans had an average yield of 3.46% including the amortization of PPP fees.

Interest on taxable securities decreased $335 to $1,359 for the three months ended June 30, 2020, compared to $1,694 for the same period in 2019. The average balance of taxable securities decreased $17,039 to $185,956 for the three months ended June 30, 2020 as compared to $202,995 for the same period in 2019. The yield on taxable securities decreased 33 basis points to 3.06% for 2020, compared to 3.39% for 2019. Interest on tax-exempt securities increased $133 to $1,541 for the three months ended June 30, 2020, compared to $1,408 for the same period in 2019. The average balance of tax-exempt securities increased $29,878 to $200,882 for the three months ended June 30, 2020 as compared to $171,004 for the same period in 2019. The yield on tax-exempt securities decreased 20 basis points to 4.19% for 2020, compared to 4.39% for 2019 due to the impact of lower interest rates during the first three months of 2020 as compared to the same period of 2019.

Interest expense decreased $675 or 21.2% to $2,509 for the three months ended June 30, 2020, compared with $3,184 for the same period in 2019. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, offset by a decrease in rates on demand and savings accounts, FHLB borrowings and subordinated debentures. For the three months ended June 30, 2020, the average balance of interest-bearing liabilities increased $303,499 to $1,619,603, as compared to $1,316,104 for the same period in 2019. Interest incurred on deposits decreased by $174 to $1,802 for the three months ended June 30, 2020, compared to $1,976 for the same period in 2019. Although the average balance of interest-bearing deposits increased to $187,372 for the three months ended June 30, 2020 as compared to the same period in 2019, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.34% in 2019 to 0.17% in 2020. The rate paid on time deposits increased from 1.86% to 1.89% in 2020 mainly due to special rates offered on time deposits during 2019 and through 2020. Interest expense incurred on FHLB advances and subordinated debentures decreased 42.1% from 2019. The average balance on FHLB balances decreased $13,237 for the three months ended June 30, 2020 as compared to the same period in 2019, while the rate paid decreased 97 basis points. In addition, the rate paid on subordinated debentures decreased 165 basis points for the three months ended June 30, 2020 as compared to the same period in 2019. The average balance of other borrowings increased $124,819 for the three months ended June 30, 2020 as compared to the same period in 2019 as a result of the Company’s borrowings under the Paycheck Protection Program Liquidity Facility to fund PPP loans.

The following table presents the condensed average balance sheets for the three months ended June 30, 2020 and 2019. 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 $413 and $378 for the periods ended June 30, 202 and 2019, 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 June 30, 2020 and 2019.

(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. Provisions for loan losses totaled $3,486 and $0 during the quarters ended June 30, 2020 and 2019. The increase in the provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts relating to the COVID-19 pandemic include the loss of revenue being experience by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Our Commercial, Commercial Real Estate and Consumer portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the three-month periods ended June 30, 2020 and 2019 are as follows:

Page 44

Noninterest income for the three months ended June 30, 2020 was $6,854, an increase of $1,750 or 34.3% from $5,104 for the same period of 2019. The increase was primarily due to increases in net gain on sale of loans, ATM/Interchange fees and swap fees, offset by decreases in service charges, tax refund processing fees and other. Net loss on equity securities decreased as a result of market value decreases. Net gain on sale of loans increased primarily as a result of an increase in volume of loans sold. During the three-months ended June 30, 2020, 444 loans were sold, totaling $91,460. During the three-months ended June 30, 2019, 149 loans were sold, totaling $27,941. ATM/Interchange fees increased as a result of increased transaction fees and the receipt of member support fees. Swap fees increased due to the volume of swaps performed during the quarter ended June 30, 2020 as compared to the same period of 2019. Service charges decreased as a result of Civista waiving $93 of service fees on deposits accounts related to the COVID-19 pandemic. In addition, overdraft fees have decreased by $477. Other income decreased due to the amortization of mortgage servicing rights as a result of higher loan payoffs.

Additionally, the Company processes state and federal income tax refund payments for customers of third-party income tax preparation vendors for which we receive a fee for processing the refund payments. Tax refund processing fees were $475 for the three months ended June 30, 2019, a decrease of $75 from $550 for the same period of 2019. The decrease is the result of a decrease in volume of transactions processed during the period. This fee income is seasonal in nature, the majority of which is earned in the first quarter of the year.

Noninterest expense for the three-month periods ended June 30, 2020 and 2019 are as follows:

Noninterest expense for the three months ended June 30, 2020 was $18,114, an increase of $1,475, or 8.9%, from $16,639 reported for the same period of 2019. The primary reasons for the increase were increases in compensation expense, net occupancy expense, FDIC assessment, professional services, software maintenance expense and other, offset by a decrease in ATM/Interchange expense. The increase in compensation expense was due to increased payroll, payroll taxes and commission and incentive based costs. The quarter-to-date average full time equivalent (FTE) employees were 456.0 at June 30, 2020, an increase of 19.9 FTEs over 2019, which increased payroll and payroll related expenses. Payroll and payroll related expenses also increased due to annual pay increases and increases in commission based costs as the result of increased loan activity. The increase in net occupancy is the result of increased COVID-19 pandemic related expenses to janitorial services and supplies of $123. The quarter-over-quarter increase in FDIC assessments was attributable to an increase in the assessment base. The increase in professional services costs is the result of increased consulting services to implement cost savings and customer services. The decrease in ATM/Interchange expense is primarily due to a settlement received in the second quarter of 2020 and savings realized by a vendor change. The increase in software maintenance expense is due to a general increase in software maintenance contracts. The increase in other operating expense is primarily due to increases in communications expense, education and training, amortization on low income housing investment, other loan expense and MSR valuation expense.

Income tax expense for the three months ended June 30, 2020 totaled $825, down $721 compared to the same period in 2019. The effective tax rates for the three-month periods ended June 30, 2020 and 2019 were 11.3% and 15.2%, 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 and bank owned life insurance income. The decrease in the effective tax rate is due to higher non-taxable income and lower taxable income for the three months ended June 30, 2020, as compared to the same period in 2019.

Six Months Ended June 30, 2020 and 2019

The Company had net income of $14,337 for the six months ended June 30, 2020, a decrease of $3,993 from net income of $18,330 for the same six months of 2019. Basic earnings per common share were $0.88 for the period ended June 30, 2020, compared to $1.15 for the same period in 2019. Diluted earnings per common share were $0.88 for the period ended June 30, 2020, compared to $1.08 for the same period in 2019. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2020 was $44,190, an increase of $730 from $43,460 in the same six months of 2019. This increase is the result of an increase of $76 in total interest income with a decrease of $654 in interest expense. Interest-earning assets averaged $2,380,088 during the six months ended June 30, 2020, an increase of $377,989 from $2,002,099 for the same period of 2019. The Company’s average interest-bearing liabilities increased from $1,295,697 in 2019 to $1,502,552 in 2020. The Company’s fully tax equivalent net interest margin for the six months ended June 30, 2020 and 2019 was 3.84% and 4.47%, respectively.

Total interest income increased $76 to $49,586 for the period ended June 30, 2020, which is attributable to an increase of $667 in interest and fees on loans. This change was the result of an increase in the average balance of loans, accompanied by a lower yield on the portfolio. The average balance of loans increased by $275,403 or 17.5% to $1,849,327 for the period ended June 30, 2020, as compared to $1,573,924 for the period ended June 30, 2019. The loan yield decreased to 4.71% for 2020, from 5.46% in 2019.

Interest on taxable securities decreased $667 to $2,775 for the period ended June 30, 2020, compared to $3,442 for the same period in 2019. The average balance of taxable securities decreased $18,505 to $186,780 for the period ended June 30, 2020 as compared to $205,285 for the period ended June 30, 2019. The yield on taxable securities decreased 31 basis points to 3.10% for 2020, compared to 3.41% for 2019. Interest on tax-exempt securities increased $293 to $3,053 for the period ended June 30, 2020, compared to $2,760 for the same period in 2019. The average balance of tax-exempt securities increased $34,884 to $199,233 for the period ended June 30, 2020 as compared to $164,349 for the period ended June 30, 2019. The yield on tax-exempt securities decreased 23 basis points to 4.21% for 2020, compared to 4.44% for 2019.

Interest on interest-bearing deposits in other banks decreased $217 to $472 for the period ended June 30, 2020, compared to $689 for the same period in 2019. The average balance of interest-bearing deposits in other banks increased $86,207 to $144,748 for the period ended June 30, 2020 as compared to $58,541 for the period ended June 30, 2019. The yield on interest-bearing deposits in other banks decreased 171 basis points to 0.66% for 2020, compared to 2.37% for 2019.

Interest expense decreased $654 or 10.8% to $5,396 for the period ended June 30, 2020, compared with $6,050 for the same period in 2019. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities accompanied by a decrease in rate. For the period ended June 30, 2020, the average balance of interest-bearing liabilities increased $206,855 to $1,502,552, as compared to $1,295,697 for the period ended June 30, 2019. Interest incurred on deposits decreased by $80 to $3,787 for the period ended June 30, 2020, compared to $3,867 for the same period in 2019. Although the average balance of interest-bearing deposits increased by $118,385 for the period ended June 30, 2020 as compared to the same period in 2019, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.34% in 2019 to 0.22% in 2020. The rate paid on time deposits increased from 1.82% to 1.93% in 2020. Interest expense incurred on FHLB advances and subordinated debentures decreased 26.8% from 2019. The average balance on FHLB balances increased $23,509 for the period ended June 30, 2020 as compared to the same period in 2019, while the rate paid decreased 98 basis points. In addition, the rate paid on subordinated debentures decreased 125 basis points for the period ended June 30, 2020 as compared to the same period in 2019. The average balance of other borrowings increased $62,410 for the period ended June 30, 2020 as compared to the same period in 2019 as a result of the Company’s borrowings under the Paycheck Protection Program Liquidity Facility to fund loans.

The following table presents the condensed average balance sheets for the six months ended June 30, 2020 and 2019. 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 $819 and $741 for the periods ended June 30, 202 and 2019, 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 six months ended June 30, 2020 and 2019. 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. Provisions for loan losses totaled $5,612 and $0 during the periods ended June 30, 2020 and 2019. The increase in the provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experience by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Our Commercial, Commercial Real Estate and Consumer portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the six-month periods ended June 30, 2020 and 2019 are as follows:

Page 48

Noninterest income for the six months ended June 30, 2020 was $13,730, an increase of $2,342 or 20.6% from $11,388 for the same period of 2019. The increase was primary due to increases in net gain on sale of loans of $2,202, ATM/Interchange fees of $186 and swap fees of $1,014 which was offset by a decrease in service charges of $610, tax refund processing fees of $375, other income of $89 and an increase in net loss on equity securities of $115. Net gain (loss) on equity securities decreased as a result of market value decreases. Net gain on sale of loans increased primarily as a result of an increase in volume of loans sold. During the six-months ended June 30, 2020, 658 loans were sold, totaling $126,828. During the six-months ended June 30, 2019, 251 loans were sold, totaling $44,441. ATM/Interchange fees increased as a result of increased transaction fees and MasterCard fees. Swap fees increased due to the volume of swaps performed during the six-months ended June 30, 2020 as compared to the same period of 2019. Service charges decreased due to Civista waiving $93 of service fees on deposits accounts related to the COVID-19 pandemic. In addition, overdraft fees have decreased during the period. Other income decreased due to the amortization of mortgage servicing rights as a result of higher loan payoffs.

Additionally, the Company processes state and federal income tax refund payments for customers of third-party income tax preparation vendors for which we receive a fee for processing the refund payments. Tax refund processing fees were $2,375 for the period ended June 30, 2019, a decrease of $375 from $2,750 for the same period of 2019. The decrease is the result of a decrease in volume of transactions processed during the period. This fee income is seasonal in nature, the majority of which is earned in the first quarter of the year.

Noninterest expense for the six-month periods ended June 30, 2020 and 2019 are as follows:

Noninterest expense for the six months ended June 30, 2020 was $35,970, an increase of $2,882, or 8.7%, from $33,088 reported for the same period of 2019. The primary reasons for the increase were increases in compensation expenses of $2,115, professional services costs of $225, software maintenance expense of $139 and other operating expenses of $399, offset by decreases in FDIC assessments of $55 and ATM/Interchange expense of $146. The increase in compensation expense was due to increased payroll, overtime pay, 401k expenses, payroll taxes, employee insurance and commission and incentive based costs. The year-to-date average full time equivalent (FTE) employees were 454.2 at June 30, 2020, an increase of 20.9 FTEs over 2019, which increased payroll and payroll related expenses. Payroll and payroll related expenses also increased due to annual pay increases and increases in commission based costs are the result of increased loan activity. The year-over-year decrease in FDIC assessments was attributable to the remaining small bank assessment credits the bank carried over into 2020 and applied to its first quarter assessment. The increase in professional services costs is the result of increased consulting services to implement cost savings and customer services and increased recruitment costs. The decrease in ATM/Interchange expense is primarily due to a settlement received in the second quarter of 2020 and savings realized by a vendor change. The increase in software maintenance expense is due to a general increase in software maintenance contracts. The increase in other operating expense is primarily due to increases in software depreciation, amortization of low income housing investments, other loan expense and MSR valuation expense, employee education and training, ATM/debit card losses and communication expense, offset by decreases in travel and lodging and meals.

Income tax expense for the six months ended June 30, 2020 totaled $2,001, down $1,429 compared to the same period in 2019. The effective tax rates for the six-month periods ended June 30, 2020 and 2019 were 12.2% and 15.8%, 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 and bank owned life insurance income. The decrease in the effective tax rate is due to lower taxable income for the six-months ended June 30, 2020, as compared to the same period in 2019.

Capital Resources

Shareholders’ equity totaled $336,613 at June 30, 2020 compared to $330,126 at December 31, 2019. The Company repurchased common shares during the period, which totaled $11,450. The increase in shareholders’ equity was also impacted by net income of $14,337, a $114 net decrease in the Company’s pension liability and an increase in the fair value of securities available for sale, net of tax, of $6,666, which was partially offset by dividends on common stock of $3,599.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of June 30, 2020 and December 31, 2019 as identified in the following table:

Liquidity

The Company maintains a conservative liquidity position. All securities are classified as available for sale. Securities, with maturities of one year or less, totaled $8,252, or 2.2% of the total security portfolio at June 30, 2020. 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 $11,590 and $20,369 for the six months ended June 30, 2020 and 2019, respectively. The primary additions to cash from operating activities are from proceeds from the sale of loans. In addition, in 2020, additions from the change in the provision of loan losses and net deferred loan fees of $5,612 and $8,816, respectively added to cash from operating activities. The primary use of cash from operating activities is from loans originated for sale. The increase in originations and sales of loans held for sale is due to an increase in volume due to refinances as rates have declined. Net cash used for investing activities was $326,182 and $38,740 for the six months ended June 30, 2020 and 2019, respectively, principally reflecting our loan and investment security activities. Cash provided by and used for deposits, borrowings and purchase of treasury shares comprised most of our financing activities, which resulted in net cash provided by of $462,577 and $25,431 for the six months ended June 30, 2020 and 2019, 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 June 30, 2020, Civista had total credit availability with the FHLB of $603,042 with standby letters of credit totaling $20,000 and a remaining borrowing capacity of approximately $458,042. In addition, CBI maintains a credit line totaling $10,000.

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, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, 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, 2019 and June 30, 2020, 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 June 30, 2020 and December 31, 2019.

The Company had derivative financial instruments as of December 31, 2019 and June 30, 2020. The changes in fair value of the assets and liabilities of the underlying contracts offset each other. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Company’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates.

Net Portfolio Value

The change in net portfolio value from December 31, 2019 to June 30, 2020, can be attributed to a couple of factors. There was a nearly parallel drop in the yield curve from the end of the year, and both the volume and mix of assets and funding sources has changed. The volume of loans has increased, but the mix has shifted toward cash. Both the increase in loans and cash are primarily a result of PPP loans and the proceeds of those loans on deposit, respectively. Similarly, the volume and mix of liabilities has shifted toward deposits and other borrowings. Deposits increased as a result of PPP loan proceeds on deposit and other borrowings increased as a result of PPP funding acquired from the PPPLF. The mix shifts from the end of the year led to a slight decrease in the base net portfolio value. Generally, assets have shifted toward less volatile components while liabilities have shifted toward more volatile components. Combined, this led to an increase in volatility. 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 larger decrease in the market value of liabilities than assets. Accordingly, we see an increase in the net portfolio value. For 100 and 200 basis point downward changes in rates, the market value of liabilities would increase more quickly than the market value of assets, leading to an increase 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 June 30, 2020, 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, 2019, and in “Item 1A. Risk Factors” of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

As a participating lender in the SBA Paycheck Protection Program (“PPP”), Civista is subject to additional risks of litigation from its customers or other parties regarding Civista’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the CARES Act, which included a loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Civista has participated as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there was some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes Civista to risks relating to noncompliance with the PPP.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. Civista may be exposed to the risk of similar litigation, from both customers and non-customers that approached Civista regarding PPP loans, regarding its process and procedures used in processing applications for the PPP, or litigation from agents with respect to agent fees. If any such litigation is filed against Civista and is not resolved in a favorable manner, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.

Civista also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by Civista, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by Civista, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from Civista.

THE OUTBREAK OF THE RECENT COVID-19, OR AN OUTBREAK OF ANOTHER HIGHLY INFECTIOUS OR CONTAGIOUS DISEASE, COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19. Could cause severe and prolonged disruptions to the economies in the U.S. and our market areas, which could in turn disrupt the business activities, and operations of our customers, as well as our business and operations. Since January 2020, the COVID-19 outbreak has caused significant disruption in the financial markets both globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, including the time such outbreak takes to wane and the time it takes our markets to return to normal, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a significant spread of COVID-19 or an outbreak of an infectious disease in our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease could also negatively impact the availability of key personnel necessary to conduct our business activities. Such a spread or outbreak also negatively impacts the business and operations of third-party service providers who perform critical services for us. The spread of COVID-19, or another highly infectious or contagious disease, or the failure to contain such spread could have a material adverse effect to our business, financial condition, and results of operations.

Other Information

On March 11. 2020, the World Health Organization announced that infections of COVID-19 had become pandemic, and on March 13, the U.S. President announced a national emergency relating to the disease. National, state and local authorities have recommended social distancing and imposed quarantine and isolation measures on large portions of the population, including mandatory stay-at-home orders and business closures. More recently, authorities have issued recommendations and mandates, including a state-wide mask mandate in Ohio, in connection with the reopening of businesses. These measures, while intended to protect human life, are expected to continue to have serious adverse impacts on the U.S. and our local economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain. Some economists are predicting the United States will soon enter a recession. Any of the foregoing factors, or other cascading effects of the pandemic that are not currently foreseeable, could materially affect our business, including our customers’ willingness to conduct banking transactions, their ability to pay on existing obligations and the availability of liquidity, which would negatively affect our financial condition and results of operations. The duration of any such impacts cannot be predicted.

OPERATIONAL IMPACTS FROM THE COVID-19 PANDEMIC COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In response to COVID-19, the Company has modified its business practices with a portion of employees working remotely from their homes to limit interruptions to operations as much as possible and to help reduce the risk of COVID-19 infecting entire departments. Reduced workforces which may be caused by, but not limited to, illness, quarantine, stay at home or other government mandates, or difficulties transitioning back to an in office environment, could result in an adverse impact to the Company’s operations and financial performance. Employees with health conditions putting them at higher risk of adverse effects from COVID-19 are working remotely. The Company is encouraging virtual meetings and conference calls in place of in-person meetings, including the annual shareholders meeting which was held via teleconference this year. Additionally, travel has been restricted. The Company is promoting social distancing, frequent hand washing and thorough disinfection of all surfaces. Civista’s financial service location lobbies have been closed except for advance appointments only. Branch drive-ups, call center, ATMs and online/mobile banking services continue to operate and are the preferred option of service. Even with the precautions undertaken, the continued spread or prolonged impact of COVID-19 could negatively impact the availability of key personnel or significant numbers of the Company's staff, who are necessary to conduct the Company' business.

Further, technology in employees’ homes may not be as robust as in the Company’s offices and could cause the networks, information systems, applications, and other tools available to employees to be more limited or less reliable than in our offices. The continuation of these work-from-home measures also introduces additional operational risk, including increased cybersecurity risk. These cybersecurity risks include greater phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of the Company’s information technology infrastructure and telecommunications systems for remote operations, increased risk of unauthorized dissemination of confidential information, limited ability to restore the systems in the event of a systems failure or interruption, greater risk of a security breach resulting in destruction or misuse of valuable information, and potential impairment of the Company’s ability to perform critical functions, including wiring funds, all of which could expose the Company to risks of data or financial loss, litigation and liability and could seriously disrupt operations and the operations of any impacted customers.

The Company also relies on many third parties in business operations, including appraisers of real property collateral, vendors that supply essential services such as loan servicers, providers of financial information, systems and analytical tools and providers of electronic payment and settlement systems, and local and federal government agencies, offices, and courthouses. In light of the developing measures responding to the pandemic, many of these entities may limit the availability and access of their services. For example, loan originations could be delayed due to the limited availability of real estate appraisers for the underlying collateral. Loan closings could be delayed due to reductions in available staff in recording offices or the closing of courthouses in certain counties, which slows the process for title work, and mortgage and UCC filings in those counties. If the third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect the Company’s operations.

Other Information

THE COMPANY MAY BE EXPOSED TO INCREASED INTEREST RATE RISK AS A RESULT OF THE COVID-19 PANDEMIC.

The Company’s net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0% to 0.25%, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase the Company’s funding costs and negatively affect market risk mitigation strategies. Higher revenue volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in the fair market values of the Company’s assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of the Company’s assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on the Company’s net income, results of operations and financial condition. Low rates increase the risk in the U.S. of a negative interest rate environment in which interest rates drop below zero, either broadly or for some types of instruments. Such an occurrence would likely further reduce the interest the Company earns on loans and other earning assets, while also likely requiring the Company to pay to maintain its deposits with the Federal Reserve. The Company’s systems may not be able to adequately handle a negative interest rate environment and not all variable rate instruments are designed for such a circumstance. The Company cannot predict the nature or timing of future changes in monetary policies in response to the outbreak or the precise effects that they may have on the Company’s activities and financial results.