Civista Bancshares, Inc.: Form 10-Q for the period ended Jun 30, 2021

Introduction

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2021 compared to December 31, 2020, and the consolidated results of operations for the three- and six-month periods ended June 30, 2021, compared to the same periods in 2020. 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, adverse affects from the ongoing COVID-19 pandemic, or an outbreak of another highly infectious or contagious disease; 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; the transition away from LIBOR as a reference rate for financial contracts; legislation or regulatory changes or actions; increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and assessments; changes in tax laws; operational risks; 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, 2020, as supplemented by “Item 1A. Risk Factors” of Part II of this 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 June 30, 2021 were $2,924,643 compared to $2,768,862 at December 31, 2020, an increase of $155,781, or 5.6%. The increase in total assets was due to increases in cash and cash equivalents of $105,784, accompanied by other increases in securities available for sale and other assets of $94,340 and $3,069, respectively, partially offset by decreases in loans and swap assets of $39,475 and $7,179, respectively. Total liabilities at June 30, 2021 were $2,572,230 compared to $2,418,754 at December 31, 2020, an increase of $153,476, or 6.3%. The increase in total liabilities was primarily attributable to increases in noninterest-bearing demand accounts and interest-bearing demand accounts of $132,915 and $80,679, respectively, partially offset by decreases in long-term Federal Home Loan advances and swap liabilities of $50,000 and $7,201, respectively.

Loans outstanding as of June 30, 2021 and December 31, 2020 were as follows:

Included in Commercial & Agriculture loans above as of June 30, 2021 is $153,007 of PPP loans.

Net loans have decreased $39,475 or 1.9% since December 31, 2020. The Commercial Real Estate – Non-Owner Occupied and Real Estate Construction loan portfolios increased $57,911 and $12,759, respectively, since December 31, 2020, while the Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Residential Real Estate, Farm Real Estate and Consumer and Other loan portfolios decreased $81,005, $6,746, $15,857, $4,486 and $882, respectively, since December 31, 2020. At June 30, 2021, the net loan to deposit ratio was 82.9% compared to 92.8% at December 31, 2020. The decrease in the net loan to deposit ratio is primarily the result of an increase in deposits.

During the first six months of 2021, provisions made to the allowance for loan losses totaled $830, compared to a provision of $5,612 during the same period in 2020. The decrease in provision was due to the stability of our metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations in the first six months of 2021 have created some level of optimism in the business community, we remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry. Economic impacts related to the COVID-19 pandemic since March 2020 include the loss of revenue 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. While some of these pressures have eased, ongoing supply chain and staffing challenges, as well as the threat of inflation remain. Net recoveries for the first six months of 2021 totaled $339, compared to net recoveries of $41 in the first six months of 2020. For the first six months of 2021, the Company charged off a total of eleven loans. Four Residential Real Estate loans totaling $37, one Commercial and Agriculture loan totaling $15 and six Consumer and Other loans totaling $19 were charged off in the first six months of the year. In addition, during the first six months of 2021, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $163, Commercial Real Estate – Owner Occupied loans of $6, Commercial Real Estate – Non-Owner Occupied loans of $11, Residential Real Estate loans of $179, Real Estate Construction loans of $1, Farm Real Estate loans of $6 and Consumer and Other loans of $44. 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 $1,056 since December 31, 2020, which was due to a decrease in loans on nonaccrual status of $1,056. 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 1.30% at June 30, 2021 and 1.22% at December 31, 2020.

The available for sale security portfolio increased by $94,340, from $363,464 at December 31, 2020 to $457,804 at June 30, 2021. 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, 2021, the Company was in compliance with all pledging requirements.

Premises and equipment, net, increased $237 from December 31, 2020 to June 30, 2021. The increase is the result of new purchases of $1,217, offset by depreciation of $980.

Bank owned life insurance (BOLI) increased $491 from December 31, 2020 to June 30, 2021. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets decreased $7,179 from December 31, 2020 to June 30, 2021. The decrease of $7,179 is primarily the result of a decrease in market value.

Other assets increased $3,069 from December 31, 2020 to June 30, 2021. The increase is the result of a $1,000 refund receivable related to an alternative minimum tax (AMT) credit refundable under the CARES Act and an increase in prepaid expenses of $1,695.

Total deposits as of June 30, 2021 and December 31, 2020 were as follows:

Total deposits at June 30, 2021 increased $213,594 from year-end 2020. Noninterest-bearing deposits increased $132,915 from year-end 2020, while interest-bearing deposits, including savings and time deposits, increased $80,679 from December 31, 2020. 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 $50,828. This increase is temporary as transactions are processed and is expected to return to levels more consistent with December 31, 2020 over the next two quarters. In addition, business demand deposit and public fund demand deposit accounts increased $61,065 and $12,163, respectively. Much of the increase in business demand deposit accounts resulted from customer deposits of PPP loan proceeds. The increase in interest-bearing deposits was primarily due to an increase in non-public interest-bearing demand and public fund interest-bearing demand accounts of $26,726 and $47,649, respectively, accompanied by a decrease in Jumbo Now accounts of $3,201. Statement savings, money market savings and public fund money market savings increased by $40,889, $26,652 and $14,776, respectively, accompanied by decreases in business money market savings and brokered money market savings accounts of $7,074 and $40,141, respectively. Time certificates over $250, time certificates, Jumbo time certificates and public fund time deposit decreased $7,128, $6,973, $4,999 and $9,753, respectively. The year-to-date average balance of total deposits increased $501,329 compared to the average balance for the same period in 2020 mainly due to increases in noninterest-bearing business demand accounts of $106,743, accompanied by increases in non-public interest-bearing demand, savings and money markets and public funds interest-bearing demand of $56,713, $146,068 and

$47,356, respectively. In addition, the average balance of time deposits decreased $8,386 as compared to the same period in 2020.

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 $3,998 from December 31, 2020 to June 30, 2021.

Long-term Federal Home Loan advances decreased $50,000 from December 31, 2020 to June 30, 2021. During the second quarter of 2021, the Company prepaid a $50,000 advance with a rate of 2.05% and a remaining maturity of approximately 8 years at a pre-tax loss of approximately $3,717. The prepayment penalty of $3,717 was recorded in other operating expenses on the Consolidated Statements of Operations.

Swap liabilities decreased $7,201 from December 31, 2020 to June 30, 2021. The decrease of $7,201 is primarily the result of a decrease in market value.

Shareholders’ equity at June 30, 2021 was $352,413, or 12.0% of total assets, compared to $350,108, or 12.7% of total assets, at December 31, 2020. The increase was the result of net income of $19,922, a decrease in the Company’s pension liability, net of tax, of $129, offset by a decrease in the fair value of securities available for sale, net of tax, of $3,055, dividends on common shares of $3,792 and the purchase of treasury shares of $11,355.

Total outstanding common shares at June 30, 2021 were 15,434,592, which decreased from 15,898,032 common shares outstanding at December 31, 2020. Common shares outstanding decreased as a result of 510,304 common shares being repurchased by the Company at an average repurchase price of $22.25. The Company repurchased 239,536 common shares pursuant to a stock repurchase program announced on May 4, 2020 and 265,703 common shares pursuant to a stock repurchase program announced on April 20, 2021. An additional 5,065 common shares were surrendered to pay taxes upon vesting of restricted shares and the forfeiture of 1,067 restricted common shares. The repurchase plan publicly-announced on May 4, 2020 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until April 20, 2021. The repurchase plan publicly-announced on April 20, 2020 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until April 19 2022. The repurchase of common shares was offset by the grant of 39,139 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. In addition, 8,792 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, 2021 and 2020

The Company had net income of $9,164 for the three months ended June 30, 2021, an increase of $2,660 from net income of $6,504 for the same three months of 2020. Basic earnings per common share were $0.59 for the quarter ended June 30, 2021, compared to $0.41 for the same period in 2020. Diluted earnings per common share were $0.59 for the quarter ended June 30, 2021, compared to $0.41 for the same period in 2020. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended June 30, 2021 was $23,841, an increase of $1,766 from $22,075 for the same three months of 2020. This increase is the result of an increase of $914 in total interest income with a decrease of $852 in interest expense. Interest-earning assets averaged $2,776,131 during the three months ended June 30, 2021, an increase of $248,125 from $2,528,006 for the same period of 2020. The Company’s average interest-bearing liabilities increased from $1,619,603 during the three months ended June 30, 2020 to $1,737,886 during the three months ended June 30, 2021. The Company’s fully tax equivalent net interest margin for the three months ended June 30, 2021 and 2020 was 3.53% and 3.61%, respectively.

Total interest income was $25,498 for the three months ended June 30, 2021, an increase of $914 from $24,584 of total interest income for the same period in 2020. The increase in interest income is attributable to an increase of $1,040 in interest and fees on loans, which resulted from an increase in the average balance of loans. The average balance of loans increased by $81,815 or 4.1% to $2,054,784 for the three months ended June 30, 2021 as compared to $1,972,969 for the same period in 2020. The loan yield increased to 4.42% for the three months ended June 30, 2021, from 4.41% for the same period in 2020. During the quarter, the average balance of PPP loans was $207,511. These loans had an average yield of 6.34%, which includes the amortization of PPP fees.

Interest on taxable securities decreased $129 to $1,230 for the three months ended June 30, 2021, compared to $1,359 for the same period in 2020. The average balance of taxable securities increased $18,598 to $204,554 for the three months ended June 30, 2021 as compared to $185,956 for the same period in 2020. The yield on taxable securities decreased 59 basis points to 2.47% for 2021, compared to 3.06% for 2020. Interest on tax-exempt securities decreased $16 to $1,525 for the three months ended June 30, 2021, compared to $1,541 for the same period in 2020. The average balance of tax-exempt securities increased $8,058 to $208,940 for the three months ended June 30, 2020 as compared to $200,882 for the same period in 2020. The yield on tax-exempt securities decreased 15 basis points to 4.04% for 2021, compared to 4.19% for 2020 due to the impact of lower interest rates in 2021 as compared to the same period of 2020.

Interest expense decreased $852, or 34.0%, to $1,657 for the three months ended June 30, 2021, compared with $2,509 for the same period in 2020. 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, 2021, the average balance of interest-bearing liabilities increased $118,283 to $1,737,886, as compared to $1,619,603 for the same period in 2020. Interest incurred on deposits decreased by $666 to $1,136 for the three months ended June 30, 2021, compared to $1,802 for the same period in 2020. Although the average balance of interest-bearing deposits increased to $263,286 for the three months ended June 30, 2021 as compared to the same period in 2020, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.17% in 2020 to 0.10% in 2021. The rate paid on time deposits decreased from 1.89% to 1.19% in 2021. Interest expense incurred on FHLB advances and subordinated debentures decreased 26.1% from 2020. The average balance on FHLB balances decreased $23,111 for the three months ended June 30, 2021 as compared to the same period in 2020 as a result of the prepayment of a long-term advance. In addition, the rate paid on subordinated debentures decreased 90 basis points for the three months ended June 30, 2021 as compared to the same period in 2020.

The following table presents the condensed average balance sheets for the three months ended June 30, 2021 and 2020. 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 $406 and $413 for the periods ended June 30, 2021 and 2020, 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, 2021 and 2020.

(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 $0 and $3,486 during the quarters ended June 30, 2021 and 2020. The decrease in the provision in the second quarter of 2021 was due to the stability of our metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations in the first six months of 2021 have created some level of optimism in the business community, we remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry. Economic impacts related to the COVID-19 pandemic since March 2020 have included the loss of revenue 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. While some of the pressures have eased, ongoing supply chain and staffing challenges, as well as the threat of inflation remain. Our Commercial and Commercial Real Estate portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the three-month periods ended June 30, 2021 and 2020 are as follows:

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Noninterest income for the three months ended June 30, 2021 was $9,025, an increase of $2,171, or 31.7%, from $6,854 for the same period of 2020. The increase was primarily due to increases in service charges, net gain on sale of securities, net gain on equity securities, ATM/Interchange fees, wealth management fees and other, offset by a decrease in swap fees. Service charges increased as a result of higher overdraft fees and service charges. During the second quarter of 2020, Civista waived service fees on deposit accounts of $93. In addition, overdraft fees are rebounding to pre-pandemic levels. Net gain on sale of securities increased as a result of the sale of Visa Class B shares. Net gain on equity securities increased as a result of market value increases. ATM/Interchange fees increased as a result of increased transaction volume and incentives. Wealth management fees increased primarily as a result of an increase in trust and brokerage fees of $230 and $54, respectively. Trust income increased as a result of new accounts and market conditions while brokerage income has increased due to volume of business. Other income increased due to increases in wire transfer fees, amortization of mortgage servicing rights and merchant credit card fees. Swap fees decreased due to the volume of swaps performed during the quarter ended June 30, 2021 as compared to the same period of 2020.

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 each of the three months ended June 30, 2021 and 2020. 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, 2021 and 2020 are as follows:

Noninterest expense for the three months ended June 30, 2021 was $22,467, an increase of $4,353, or 24.0%, from $18,114 reported for the same period of 2020. The primary reasons for the increase were increases in compensation expense, FDIC assessment, ATM/Interchange expense, software maintenance expense and other expenses, offset by a decrease in expense for professional services. The increase in compensation expense was due to increased salary and salary based expenses, commission and incentive based costs and employee insurance costs. The quarter-over-quarter increase in FDIC assessments was attributable to small bank assessment credits applied to the 2020 assessments not repeated in 2021. The quarter-over-quarter increase in ATM/Interchange expense is the result of an increase in volume of transactions and a settlement received in the second quarter of 2020. The increase in software maintenance expense is due to a general increase in legacy software maintenance contracts and new maintenance contracts. The quarter-over-quarter increase in other expense is due to the prepayment expense of $3,717 related to the early payoff of an FHLB long-term advance, offset by a credit to the valuation adjustment for mortgage servicing rights. Professional services decreased due to a decrease in consulting fees related to cost savings initiatives and customer service programs the Company was undertaking during 2020.

Income tax expense for the three months ended June 30, 2021 totaled $1,235, up $410 compared to the same period in 2020. The effective tax rates for the three-month periods ended June 30, 2021 and 2020 were 11.9% and 11.3%, 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.

Six Months Ended June 30, 2021 and 2020

The Company had net income of $19,922 for the six months ended June 30, 2021, an increase of $5,585 from net income of $14,337 for the same six months of 2020. Basic earnings per common share were $1.27 for the period ended June 30, 2021, compared to $0.88 for the same period in 2020. Diluted earnings per common share were $1.27 for the period ended June 30, 2021, compared to $0.88 for the same period in 2020. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2021 was $47,669, an increase of $3,479 from $44,190 in the same six months of 2020. This increase is the result of an increase of $1,638 in total interest income with a decrease of $1,841 in interest expense. Interest-earning assets averaged $2,890,755 during the six months ended June 30, 2021, an increase of $510,667 from $2,380,088 for the same period of 2020. The Company’s average interest-bearing liabilities increased from $1,502,552 for the first six months of 2020 to $1,728,179 for the same period in 2021. The Company’s fully tax equivalent net interest margin for the six months ended June 30, 2021 and 2020 was 3.41% and 3.84%, respectively.

Total interest income increased $1,638 to $51,224 for the period ended June 30, 2021, which is attributable to an increase of $2,150 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 $212,734, or 11.5%, to $2,062,061 for the period ended June 30, 2021, as compared to $1,849,327 for the period ended June 30, 2020. The loan yield decreased to 4.44% for 2021, from 4.71% in 2020. During the six months ended June 30, 2021, the average balance of PPP loans was $228,102. These loans had an average yield of 6.22%, which includes the amortization of PPP fees.

Interest on taxable securities decreased $270 to $2,505 for the period ended June 30, 2021, compared to $2,775 for the same period in 2020. The average balance of taxable securities increased $2,949 to $189,729 for the period ended June 30, 2021 as compared to $186,780 for the period ended June 30, 2020. The yield on taxable securities decreased 35 basis points to 2.75% for 2021, compared to 3.10% for 2020. Interest on tax-exempt securities decreased $9 to $3,044 for the period ended June 30, 2021, compared to $3,053 for the same period in 2020. The average balance of tax-exempt securities increased $9,027 to $208,260 for the period ended June 30, 2021 as compared to $199,233 for the period ended June 30, 2020. The yield on tax-exempt securities decreased 13 basis points to 4.08% for 2021, compared to 4.21% for 2020.

Interest on interest-bearing deposits in other banks decreased $233 to $239 for the period ended June 30, 2021, compared to $472 for the same period in 2020. The average balance of interest-bearing deposits in other banks increased $285,957 to $430,705 for the period ended June 30, 2021 as compared to $144,748 for the period ended June 30, 2020. The yield on interest-bearing deposits in other banks decreased 55 basis points to 0.11% for 2021, compared to 0.66% for 2020.

Interest expense decreased $1,841, or 34.1%, to $3,555 for the period ended June 30, 2021, compared with $5,396 for the same period in 2020. 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, 2021, the average balance of interest-bearing liabilities increased $225,627 to $1,728,179, as compared to $1,502,552 for the period ended June 30, 2020. Interest incurred on deposits decreased by $1,391 to $2,396 for the period ended June 30, 2021, compared to $3,787 for the same period in 2020. Although the average balance of interest-bearing deposits increased by $310,359 for the period ended June 30, 2021 as compared to the same period in 2020, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.22% in 2020 to 0.11% in 2021. The rate paid on time deposits decreased from 1.93% to 1.25% in 2021. Interest expense incurred on FHLB advances and subordinated debentures decreased 28.0% from 2020. The average balance on FHLB balances decreased $27,993 as a result of the prepayment of a long-term advance for the period ended June 30, 2021 as compared to the same period in 2020, while the rate paid decreased 8 basis points. In addition, the rate paid on subordinated debentures decreased 131 basis points for the period ended June 30, 2021 as compared to the same period in 2020. The average balance of other borrowings decreased $62,410 for the period ended June 30, 2021 as compared to the same period in 2020 as a result of the Company’s repayment of the Paycheck Protection Program Liquidity Facility.

The following table presents the condensed average balance sheets for the six months ended June 30, 2021 and 2020. 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 $814 and $819 for the periods ended June 30, 2021 and 2020, 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, 2021 and 2020. 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 $830 and $5,612 during the periods ended June 31, 2021 and 2020. The decrease in the provision in the second quarter of 2021 was due to the stability of our metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations in the first six months of 2021 have created some level of optimism in the business community, we remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry. Economic impacts related to the COVID-19 pandemic since March 2020 have included the loss of revenue 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. While some of the pressures have eased, ongoing supply chain and staffing challenges, as well as the threat of inflation remain. Our Commercial and Commercial Real Estate portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the six-month periods ended June 30, 2021 and 2020 are as follows:

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Noninterest income for the six months ended June 31, 2021 was $18,215, an increase of $4,485, or 32.7%, from $13,730 for the same period of 2020. The increase was primary due to increases in net gain (loss) on equity securities of $287, net gain on sale of securities of $1,783, net gain on sale of loans of $1,875, ATM/Interchange fees of $577, wealth management fees of $424 and other income of $371, which was offset by a decrease in swap fees of $1,008. Net gain on sale of securities increased as a result of the sale of Visa Class B shares. Net gain (loss) on equity securities increased as a result of market value increases. 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, 752 loans were sold, totaling $147,841. During the six-months ended June 30, 2020, 658 loans were sold, totaling $126,828. ATM/Interchange fees increased as a result of increased transaction fees and MasterCard fees. Wealth management fees increased primarily as a result of an increase in trust and brokerage fees of $343 and $81, respectively. Trust income increased as a result of new accounts and market conditions while brokerage income has increased due to volume of business. Swap fees decreased due to the volume of swaps performed during the six-months ended June 30, 2021 as compared to the same period of 2020. Other income increased due to increases in wire transfer fees, the amortization of mortgage servicing rights, merchant credit card fees and gains on the sale of OREO properties.

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 each of the six months ended June 30, 2021 and 2020. 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, 2021 and 2020 are as follows:

Noninterest expense for the six months ended June 30, 2021 was $41,857, an increase of $5,887, or 16.4%, from $35,970 reported for the same period of 2020. The primary reasons for the increase were increases in compensation expenses of $1,720, FDIC assessments of $339, state franchise tax of $129, ATM/Interchange expense of $471, software maintenance expense of $209 and other operating expenses of $3,146. The increase in compensation expense was due to increased payroll, overtime pay, 401k expenses, payroll taxes and commission and incentive based costs. Payroll and payroll related expenses increased due to annual pay increases and increases in commission based costs are a result of increased loan activity. The year-over-year increase in FDIC assessments was attributable to small bank assessment credits applied to the 2020 assessments. The state franchise tax increase is related to $172 of additional taxes paid on the Company’s 2019 franchise tax return as a result of findings from a State of Ohio audit. The increase in ATM/Interchange expense is primarily due to increased transaction fees and a settlement received in the second quarter of 2020. The increase in software maintenance expense is due to a general increase in legacy software maintenance contracts and new maintenance contracts. The increase in other operating expense is primarily due to the prepayment expense of $3,717 related to the early payoff of an FHLB long-term advance, offset by a credit to the valuation adjustment for mortgage servicing rights.

Income tax expense for the six months ended June 30, 2021 totaled $3,275, up $1,274 compared to the same period in 2020. The effective tax rates for the six-month periods ended June 30, 2021 and 2020 were 14.1% and 12.3%, 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 increase in the effective tax rate is due to higher taxable income for the six-months ended June 30, 2021, as compared to the same period in 2020.

Capital Resources

Shareholders’ equity totaled $352,413 at June 30, 2021 compared to $350,108 at December 31, 2020. Shareholders’ equity was impacted by net income of $19,922, a $129 net decrease in the Company’s pension liability, which was offset by and a decrease in the fair value of securities available for sale, net of tax, of $3,055, dividends on common stock of $3,792 and the Company’s repurchase of common shares during the period, which totaled $11,355.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of June 30, 2021 and December 31, 2020 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 $12,246, or 2.7% of the total security portfolio at June 30, 2021. 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 $19,996 and $11,590 for the six months ended June 30, 2021 and 2020, respectively. The primary additions to cash from operating activities are from proceeds from the sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used by investing activities was $58,661 and $326,182 for the six months ended June 30, 2021 and 2020, 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 $144,449 and $462,577 for the six months ended June 30, 2021 and 2020, 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 $602,978 with standby letters of credit totaling $23,300 and a remaining borrowing capacity of approximately $504,678. 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, 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, 2020 and June 30, 2021, 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, 2021 and December 31, 2020.

The Company had derivative financial instruments as of December 31, 2020 and June 30, 2021. 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, 2020 to June 30, 2021, can be attributed to a couple of factors. The yield curve has shifted up and steepened on the short end 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. Cash also increased as a result of the tax refund processing program, as it does each year in the first half of the year. The volume and mix of liabilities has shifted toward deposits and away from certificates of deposit and other borrowings. Deposits increased as a result of PPP loan proceeds on deposit and also as a result of the influx of cash due to the tax refund processing program. The mix shifts from the end of the year led to a small increase 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 a small 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 assets would increase faster than the market value of liabilities, 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, 2021, 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, 2021.

CHANGES IN THE FEDERAL, STATE, OR LOCAL TAX LAWS MAY NEGATIVELY IMPACT OUR FINANCIAL PERFORMANCE.

On March 31, 2021, the President unveiled his infrastructure plan, which includes a proposal to increase the federal corporate tax rate from 21% to 28% as part of a package of tax reforms to help fund the spending proposals in the plan. The plan is in the early stages of the legislative process. If adopted as proposed, the increase of the corporate tax rate would adversely affect our results of operations in future periods.