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

Introduction

The following discussion focuses on the consolidated financial condition of the Company at September 30, 2021 compared to December 31, 2020, and the consolidated results of operations for the three- and nine-month periods ended September 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 the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

Financial Condition

Total assets of the Company at September 30, 2021 were $2,952,236 compared to $2,768,862 at December 31, 2020, an increase of $183,374, or 6.6%. The increase in total assets was due to increases in cash and cash equivalents of $113,643, accompanied by other increases in securities available for sale and other assets of $134,685 and $3,784, respectively, partially offset by decreases in other securities, loans held for sale, loans and swap assets of $3,526, $1,191, $54,228 and $8,842, respectively. Total liabilities at September 30, 2021 were $2,603,786 compared to $2,418,754 at December 31, 2020, an increase of $185,032, or 7.6%. The increase in total liabilities was primarily attributable to increases in noninterest-bearing demand accounts and interest-bearing demand accounts of $111,683 and $133,685, respectively, accompanied by an increase in accrued expenses and other liabilities of $4,153, partially offset by decreases in long-term Federal Home Loan advances and swap liabilities of $50,000 and $8,906, respectively.

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

Included in Commercial & Agriculture loans above were $83,287 of PPP loans as of September 30, 2021 and $217,295 of PPP loans as of December 31, 2020.

Loans held for sale decreased $1,191 or 17.0% since December 31, 2020. The decrease was due to a decrease in the average loan balance held for sale. At September 30, 2021, 34 loans totaling $5,810 were held for sale as compared to 29 loans totaling $7,001 at December 31, 2020.

Net loans have decreased $54,228 or 2.7% since December 31, 2020. The Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied and Real Estate Construction loan portfolios increased $14,312, $83,826 and $3,882, respectively, since December 31, 2020, while the Commercial & Agriculture, Residential Real Estate, Farm Real Estate and Consumer and Other loan portfolios decreased $133,135, $18,035, $2,955 and $583, respectively, since December 31, 2020. At September 30, 2021, the net loan to deposit ratio was 81.2% 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 nine months of 2021, provisions made to the allowance for loan losses totaled $830, compared to a provision of $7,862 during the same period in 2020. The decrease in provision was due to the stability of our credit quality 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 nine months of 2021 have created some level of optimism in the business community, there remains uncertainty due to the continued concern over increased infections from the Delta variant of COVID. We remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry as well as challenges businesses face in today’s environment. 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 nine months of 2021 totaled $710, compared to net recoveries of $8 in the first nine months of 2020. For the first nine months of 2021, the Company charged off a total of sixteen loans. Nine Residential Real Estate loans totaling $114, one Commercial and Agriculture loan totaling $15 and six Consumer and Other loans totaling $19 were charged off in the first nine months of the year. In addition, during the first nine months of 2021, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $164, Commercial Real Estate – Owner Occupied loans of $6, Commercial Real Estate – Non-Owner Occupied loans of $392, Residential Real Estate loans of $232, Real Estate Construction loans of $1, Farm Real Estate loans of $9 and Consumer and Other loans of $54. 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 $1,176 since December 31, 2020, which was due to a decrease in loans on nonaccrual status of $1,606 and an increase in loans past due and accruing of $430. 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 1.33% at September 30, 2021 and 1.22% at December 31, 2020.

The available for sale security portfolio increased by $134,685, from $363,464 at December 31, 2020 to $498,149 at September 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 September 30, 2021, the Company was in compliance with all pledging requirements.

Other securities decreased $3,526 from December 31, 2020 to September 30, 2021. The decrease is the result of the FHLB of Indianapolis calling FHLB securities held by the Company during the third quarter of 2021.

Premises and equipment, net, increased $136 from December 31, 2020 to September 30, 2021. The increase is the result of new purchases of $1,467, offset by depreciation of $1,689 and disposals of $13.

Bank owned life insurance (BOLI) increased $752 from December 31, 2020 to September 30, 2021. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets decreased $8,842 from December 31, 2020 to September 30, 2021. The decrease of $8,842 is primarily the result of a decrease in market value.

Other assets increased $3,784 from December 31, 2020 to September 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, an increase in prepaid franchise taxes of $585, an increase in prepaid software of $641 and an increase in low income housing investments of $1,392.

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

Total deposits at September 30, 2021 increased $245,368 from year-end 2020. Noninterest-bearing deposits increased $111,683 from year-end 2020, while interest-bearing deposits, including savings and time deposits, increased $133,685 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 $31,500. In addition, business demand deposit and public fund demand deposit accounts increased $48,937 and $28,515, 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 $36,448 and $52,121, respectively, accompanied by an increase in IOLTA accounts of $3,832. Statement savings, money market savings, business money market savings and public fund money market savings accounts increased by $45,336, $25,157, $23,723 and $18,182, respectively, accompanied by a decrease in brokered money market savings accounts of $40,137. Time certificates over $250, time certificates and Jumbo time certificates decreased

$16,836, $10,325 and $6,247, respectively. The year-to-date average balance of total deposits increased $451,324 compared to the average balance for the same period in 2020 mainly due to increases in noninterest-bearing business demand accounts of $113,158, accompanied by increases in non-public interest-bearing demand, non-public savings and money markets, public funds interest-bearing demand and public funds money market accounts of $60,534, $150,178, $49,993 and $8,949, respectively. In addition, the average balance of time deposits decreased $17,601 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 $5,583 from December 31, 2020 to September 30, 2021.

Long-term Federal Home Loan advances decreased $50,000 from December 31, 2020 to September 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 $8,906 from December 31, 2020 to September 30, 2021. The decrease of $8,906 is primarily the result of a decrease in market value.

Accrued expenses and other liabilities increased $4,153 from December 31, 2020 to September 30, 2021. The increase is primarily the result of securities purchased, not yet funded of $3,857.

Shareholders’ equity at September 30, 2021 was $348,450, or 11.8% of total assets, compared to $350,108, or 12.7% of total assets, at December 31, 2020. The decrease was the result of net income of $29,564, a decrease in the Company’s pension liability, net of tax, of $193, offset by a decrease in the fair value of securities available for sale, net of tax, of $5,514, dividends on common shares of $5,932 and the purchase of treasury shares of $20,557.

Total outstanding common shares at September 30, 2021 were 15,029,972, which decreased from 15,898,032 common shares outstanding at December 31, 2020. Common shares outstanding decreased as a result of 914,924 common shares being repurchased by the Company at an average repurchase price of $22.47. The Company repurchased 239,536 common shares pursuant to a stock repurchase program announced on May 4, 2020, 562,489 common shares pursuant to a stock repurchase program announced on April 20, 2021 and 107,834 common shares pursuant to a stock repurchase program announced August 12, 2021. An additional 5,065 common shares were surrendered to pay taxes upon vesting of restricted shares, and 1,067 restricted common shares were forfeited during the period. A repurchase program 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. A repurchase program publicly-announced on April 20, 2021 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until April 19 2022. On August 12, 2021, the Company publicly announced a new repurchase program, which replaced the April 20, 2021 repurchase program and authorizes the Company to repurchase up to a maximum of $13,500 of the Company’s common shares until August 10, 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 September 30, 2021 and 2020

The Company had net income of $9,642 for the three months ended September 30, 2021, an increase of $1,960 from net income of $7,682 for the same three months of 2020. Basic earnings per common share were $0.64 for the quarter ended September 30, 2021, compared to $0.48 for the same period in 2020. Diluted earnings per common share were $0.64 for the quarter ended September 30, 2021, compared to $0.48 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 September 30, 2021 was $24,433, an increase of $2,427 from $22,006 for the same three months of 2020. This increase is the result of an increase of $1,226 in total interest income with a decrease of $1,201 in interest expense. Interest-earning assets averaged $2,747,450 during the three months ended September 30, 2021, an increase of $129,566 from $2,617,884 for the same period of 2020. The Company’s average interest-bearing liabilities decreased from $1,764,283 during the three months ended September 30, 2020 to $1,715,590 during the three months ended

September 30, 2021. The Company’s fully tax equivalent net interest margin for the three months ended September 30, 2021 and 2020 was 3.62% and 3.44%, respectively.

Total interest income was $25,784 for the three months ended September 30, 2021, an increase of $1,226 from $24,558 of total interest income for the same period in 2020. The increase in interest income is attributable to an increase of $1,066 in interest and fees on loans, which resulted from an increase in loan yield, offset by a decrease in the average balance of loans. The average balance of loans decreased by $29,827 or 1.5% to $2,010,665 for the three months ended September 30, 2021 as compared to $2,040,492 for the same period in 2020. The loan yield increased to 4.48% for the three months ended September 30, 2021, from 4.22% for the same period in 2020. During the quarter, the average balance of PPP loans was $105,886. These loans had an average yield of 10.44%, which includes the amortization of PPP fees.

Interest on taxable securities increased $98 to $1,423 for the three months ended September 30, 2021, compared to $1,325 for the same period in 2020. The average balance of taxable securities increased $81,459 to $264,655 for the three months ended September 30, 2021 as compared to $183,196 for the same period in 2020. The yield on taxable securities decreased 83 basis points to 2.18% for 2021, compared to 3.01% for 2020. Interest on tax-exempt securities increased $19 to $1,555 for the three months ended September 30, 2021, compared to $1,536 for the same period in 2020. The average balance of tax-exempt securities increased $12,589 to $217,987 for the three months ended September 30, 2020 as compared to $205,398 for the same period in 2020. The yield on tax-exempt securities decreased 23 basis points to 3.91% for 2021, compared to 4.14% for 2020 due to the impact of lower interest rates in 2021 as compared to the same period of 2020.

Interest expense decreased $1,201, or 47.1%, to $1,351 for the three months ended September 30, 2021, compared with $2,552 for the same period in 2020. The change in interest expense can be attributed to both a decrease in both the average balance of interest-bearing liabilities and a decrease in rates on demand and savings accounts, FHLB borrowings and subordinated debentures. For the three months ended September 30, 2021, the average balance of interest-bearing liabilities decreased $48,693 to $1,715,590, as compared to $1,764,283 for the same period in 2020. Interest incurred on deposits decreased by $661 to $970 for the three months ended September 30, 2021, compared to $1,631 for the same period in 2020. Although the average balance of interest-bearing deposits increased by $186,761 for the three months ended September 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 0.14% in 2020 to 0.09% in 2021. The rate paid on time deposits decreased from 1.69% to 1.03% in 2021. Interest expense incurred on FHLB advances and subordinated debentures decreased 41.8% from 2020. The average balance on FHLB balances decreased $50,000 for the three months ended September 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 17 basis points for the three months ended September 30, 2021 as compared to the same period in 2020.

The following table presents the condensed average balance sheets for the three months ended September 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 $414 and $411 for the periods ended September 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 September 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 $2,250 during the quarters ended September 30, 2021 and 2020, respectively. The decrease in the provision in the third quarter of 2021 was due to the stability of our credit quality 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 2021 have created some level of optimism in the business community, there remains uncertainty due to the continued concern over increased infections from the Delta variant of COVID. We remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry as well as the challenges businesses face in today’s environment. 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 September 30, 2021 and 2020 are as follows:

Page 44

Noninterest income for the three months ended September 30, 2021 was $6,426, a decrease of $360, or 5.3%, from $6,786 for the same period of 2020. The decrease was primarily due to decreases in net gain on sale of securities, net gain on sale of loans and swap fees, offset by increases in net gain on equity securities, ATM/Interchange fees, wealth management fees and other. Net gain on sale of securities decreased as a result of fewer securities sales for the quarter. Net gain on sale of loans decreased primarily as a result of a decrease in volume of loans sold. During the three-months ended September 30, 2021, 303 loans were sold, totaling $56,887. During the three-months ended September 30, 2020, 418 loans were sold, totaling $84,315. Swap fees decreased due to the volume of swaps performed during the quarter ended September 30, 2021 as compared to the same period of 2020. 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 $158 and $71, respectively. Trust income increased as a result of new accounts and market conditions while brokerage income increased due to volume of business. Other income increased due to increases in amortization of mortgage servicing rights and merchant credit card fees.

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

Noninterest expense for the three months ended September 30, 2021 was $19,454, an increase of $1,727, or 9.7%, from $17,727 reported for the same period of 2020. The primary reasons for the increase were increases in compensation expense, state franchise tax, professional services, ATM/Interchange expense, software maintenance expense and other expenses, offset by decreases in expense for equipment and FDIC assessment. The increase in compensation expense was due to increased salary, payroll taxes, employer savings contributions and employee insurance costs, offset by a decrease in commission and incentive based costs. The increase in state franchise tax is the result of an increase in capital and apportionment rate. Professional services increased due to an increase in consulting fees related to cost savings initiatives and customer service programs. The quarter-over-quarter increase in ATM/Interchange expense is the result of an increase in volume of transactions as compared to the third quarter of 2020. The increase in software maintenance expense is due to a general increase in legacy software maintenance contracts and the implementation of our new digital banking. The quarter-over-quarter increase in other expense is due to increases in loan related expenses, the amortization of low income housing investments, education and training expense and mortgage servicing rights valuation. Equipment expense decreased due to a decrease in equipment depreciation as compared to the third quarter of 2020. The quarter-over-quarter decrease in FDIC assessments was attributable to lower assessment multipliers charged to Civista.

Income tax expense for the three months ended September 30, 2021 totaled $1,763, up $630 compared to the same period in 2020. The effective tax rates for the three-month periods ended September 30, 2021 and 2020 were 15.5% and 12.9%, 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.

Nine Months Ended September 30, 2021 and 2020

The Company had net income of $29,564 for the nine months ended September 30, 2021, an increase of $7,545 from net income of $22,019 for the same nine months of 2020. Basic earnings per common share were $1.90 for the period ended September 30, 2021, compared to $1.36 for the same period in 2020. Diluted earnings per common share were $1.90 for the period ended September 30, 2021, compared to $1.36 for the same period in 2020. The primary reasons for the changes in net income are explained below.

Net interest income for the nine months ended September 30, 2021 was $72,102, an increase of $5,906 from $66,196 for the same nine months of 2020. This increase is the result of an increase of $2,864 in total interest income with a decrease of $3,042 in interest expense. Interest-earning assets averaged $2,842,462 during the nine months ended September 30, 2021, an increase of $382,529 from $2,459,933 for the same period of 2020. The Company’s average interest-bearing liabilities increased from $1,590,433 for the first nine months of 2020 to $1,723,936 for the same period in 2021. The Company’s fully tax equivalent net interest margin for the nine months ended September 30, 2021 and 2020 was 3.48% and 3.70%, respectively.

Total interest income increased $2,864 to $77,008 for the nine-month period ended September 30, 2021, which is attributable to an increase of $3,216 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 $131,227, or 6.9%, to $2,044,741 for the nine-month period ended September 30, 2021, as compared to $1,913,514 for the nine-month period ended September 30, 2020. The loan yield decreased to 4.46% for 2021, from 4.53% in 2020. During the nine months ended September 30, 2021, the average balance of PPP loans was $187,363. These loans had an average yield of 7.01%, which includes the amortization of PPP fees.

Interest on taxable securities decreased $172 to $3,928 for the nine-month period ended September 30, 2021, compared to $4,100 for the same period in 2020. The average balance of taxable securities increased $29,402 to $214,979 for the nine-month period ended September 30, 2021 as compared to $185,577 for the nine-month period ended September 30, 2020. The yield on taxable securities decreased 56 basis points to 2.51% for 2021, compared to 3.07% for 2020. Interest on tax-exempt securities increased $10 to $4,599 for the nine-month period ended September 30, 2021, compared to $4,589 for the same period in 2020. The average balance of tax-exempt securities increased $10,235 to $211,538 for the nine-month period ended September 30, 2021 as compared to $201,303 for the nine-month period ended September 30, 2020. The yield on tax-exempt securities decreased 16 basis points to 4.02% for 2021, compared to 4.18% for 2020.

Interest on interest-bearing deposits in other banks decreased $190 to $341 for the nine-month period ended September 30, 2021, compared to $531 for the same period in 2020. The average balance of interest-bearing deposits in other banks increased $211,665 to $371,204 for the nine-month period ended September 30, 2021 as compared to $159,539 for the nine-month period ended September 30, 2020. The yield on interest-bearing deposits in other banks decreased 32 basis points to 0.12% for 2021, compared to 0.44% for 2020.

Interest expense decreased $3,042, or 38.3%, to $4,906 for the nine-month period ended September 30, 2021, compared with $7,948 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 nine-month period ended September 30, 2021, the average balance of interest-bearing liabilities increased $133,503 to $1,723,936, as compared to $1,590,433 for the nine-month period ended September 30, 2020. Interest incurred on deposits decreased by $2,052 to $3,366 for the nine-month period ended September 30, 2021, compared to $5,418 for the same period in 2020. Although the average balance of interest-bearing deposits increased by $268,897 for the nine-month period ended September 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 0.19% in 2020 to 0.10% in 2021. The rate paid on time deposits decreased from 1.85% to 1.18% in 2021. Interest expense incurred on FHLB advances and subordinated debentures decreased 32.0% from 2020. The average balance on FHLB balances decreased $35,430 as a result of the prepayment of a long-term advance for the nine-month period ended September 30, 2021 as compared to the same period in 2020, while the rate paid decreased 15 basis points. In addition, the rate paid on subordinated debentures decreased 93 basis points for the nine-month period ended September 30, 2021 as compared to the same period in 2020. The average balance of other borrowings decreased $103,133 for the nine-month period ended September 30, 2021 as compared to the same period in 2020 as a result of the Company’s repayment of amounts borrowed under the Paycheck Protection Program Liquidity Facility.

The following table presents the condensed average balance sheets for the nine months ended September 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 $1,228 and $1,130 for the periods ended September 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 nine months ended September 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 $7,862 during the periods ended September 30, 2021 and 2020. The decrease in the provision for the first nine months of 2021 was due to the stability of our credit quality 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 2021 have created some level of optimism in the business community, there remains uncertainty due to the continued concern over increased infections from the Delta variant of COVID. We remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry as well as the challenges businesses face in today’s environment. 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 nine-month periods ended September 30, 2021 and 2020 are as follows:

Noninterest income for the nine months ended September 30, 2021 was $24,641, an increase of $4,125, or 20.1%, from $20,516 for the same period of 2020. The increase was primary due to increases in net gain (loss) on equity securities of $317, net gain on sale of securities of $1,695, net gain on sale of loans of $1,074, ATM/Interchange fees of $724, wealth management fees of $654 and other income of $487, which was offset by a decrease in swap fees of $1,125. 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 due to an increase in the premium on loans sold. 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 $501 and $153, 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 nine-months ended September 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 nine months ended September 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 nine-month periods ended September 30, 2021 and 2020 are as follows:

Page 49

Noninterest expense for the nine months ended September 30, 2021 was $61,311, an increase of $7,614, or 14.2%, from $53,697 reported for the same period of 2020. The primary reasons for the increase were increases in compensation expenses of $2,515, FDIC assessments of $298, state franchise tax of $213, ATM/Interchange expense of $527, software maintenance expense of $522 and other operating expenses of $3,626, offset by a decrease in expense in equipment expenses of $167. The increase in compensation expense was due to increased payroll, employee insurance, employer savings contributions, 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 the implementation of our new digital banking. 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. Equipment expense decreased as a result of a decrease in equipment depreciation.

Income tax expense for the nine months ended September 30, 2021 totaled $5,038, up $1,904 compared to the same period in 2020. The effective tax rates for the nine-month periods ended September 30, 2021 and 2020 were 14.6% and 12.5%, 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 nine-months ended September 30, 2021, as compared to the same period in 2020.

Capital Resources

Shareholders’ equity totaled $348,450 at September 30, 2021 compared to $350,108 at December 31, 2020. Shareholders’ equity was impacted by net income of $29,564, a $193 net decrease in the Company’s pension liability, which was offset by a decrease in the fair value of securities available for sale, net of tax, of $5,514, dividends on common stock of $5,932 and the Company’s repurchase of common shares during the period, which totaled $20,557.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of September 30, 2021 and December 31, 2020 as identified in the following table:

Page 50

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 $9,172, or 1.8% of the total security portfolio at September 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 $34,295 and $25,301 for the nine months ended September 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 $83,948 and $340,281 for the nine months ended September 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 $163,296 and $461,218 for the nine months ended September 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 September 30, 2020, Civista had total credit availability with the FHLB of $630,339 with standby letters of credit totaling $21,300 and a remaining borrowing capacity of approximately $550,849. 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 September 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 September 30, 2021 and December 31, 2020.

The Company had derivative financial instruments as of December 31, 2020 and September 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 September 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 decreased and the mix has shifted toward cash and investment securities. The decrease in loans is result of PPP loan forgiveness. Cash increased as a result of the increase in deposits. Some of our excess liquidity has been redeployed into our investment portfolio. 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 personal, business and public fund account increases. The mix shifts from the end of the year, particularly to deposits, led to a small decrease in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a 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 September 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

There were no material changes during the current period to 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, 2020, as supplemented by the risk factors disclosed in “Item 1A. Risk Factors” of the Company’s Quarterly Report on Form 10Q for the quarterly period ended June 30, 2021.