Civista Bancshares, Inc.: Form 10-Q for the period ended Mar 31, 2022

Introduction

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2022 compared to December 31, 2021, and the consolidated results of operations for the three-month periods ended March 31, 2022, compared to the same periods in 2021. 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:

• effects of the continuing novel coronavirus (COVID-19) pandemic on national, regional and local economies, and on our customers, counterparties, employees and third-party service providers, as well as the effects of various responses of governmental and nongovernmental authorities to the COVID-19 pandemic, including public health actions directed toward the containment of the COVID-19 pandemic (such as quarantines, shut downs and other restrictions on travel and commercial, social or other activities), the development, availability and effectiveness of vaccines, and the implementation of fiscal stimulus packages;
• current and future economic and financial market conditions, either nationally or in the states in which we do business, including the effects of inflation, U.S. fiscal debt, budget and tax matters, geopolitical matters (including the conflict in Ukraine), and any slowdown in global economic growth, in addition to the continuing impact of the COVID-19 pandemic on our customers’ operations and financial condition, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans;
• changes in unemployment levels in our market area, including as a result of the continuing COVID-19 pandemic;
• changes in customers’, suppliers’, and other counterparties’ performance and creditworthiness may be different than anticipated due to the continuing impact of and the various responses to the COVID-19 pandemic;
• changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity;
• the transition away from LIBOR as a reference rate for financial contracts, which could negatively impact our income and expenses and the value of various financial contracts;
• operational risks, reputational risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses or cyber-attacks;
• our ability to secure sensitive or confidential client information against unauthorized disclose or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate;
• a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks;
• competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel;
• unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future;
• the lack of assurances regarding the future revenues of our tax refund program;
• risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past, pending and possible future acquisitions;
• uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, as well as the reforms provided for in the Coronavirus Aid, Relief and Economic Security (CARES) Act and the follow-up legislation in the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021;
• changes in federal, state and/or local tax laws;
• the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (the “FASB”), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect our reported financial condition or results of operations;
• litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries;
• continued availability of earnings and dividends from Civista and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements;
• our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry;
• the impact on our business, personnel, facilities or systems of losses related to acts of fraud, scams and schemes of third parties; 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, 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 March 31, 2022 were $3,184,357 compared to $3,012,905 at December 31, 2021, an increase of $171,452, or 5.7%. The increase in total assets was due to increases in cash and cash equivalents of $148,459, accompanied by other increases in other securities, loans held for sale, loans and other assets of $1,500, $2,822, $19,917 and $10,342, respectively, partially offset by decreases in securities available for sale and swap assets of $7,497 and $4,220, respectively. Total liabilities at March 31, 2022 were $2,856,665 compared to $2,657,693 at December 31, 2021, an increase of $198,972, or 7.5%. The increase in total liabilities was primarily attributable to an increase in noninterest-bearing demand accounts of $198,441, accompanied by an increase in accrued expenses and other liabilities of $6,351, partially offset by a decrease in swap liabilities of $4,220.

Loans outstanding as of March 31, 2022 and December 31, 2021 were as follows:

Included in Commercial & Agriculture loans above were $15,529 of PPP loans as of March 31, 2022 and $43,209 of PPP loans as of December 31, 2021.

Loans held for sale increased $2,822, or 143.1%, since December 31, 2021. The increase was due to an increase in the average loan balance held for sale. At March 31, 2022, 24 loans totaling $4,794 were held for sale as compared to 14 loans totaling $1,972 at December 31, 2021.

Net loans have increased $19,917, or 1.0%, since December 31, 2021. The Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate and Real Estate Construction loan portfolios increased $5,900, $40,353, $2,710 and $4,524, respectively, since December 31, 2021, while the Commercial & Agriculture, Farm Real Estate and Consumer and Other loan portfolios decreased $28,059, $3,771 and $1,348, respectively, since December 31, 2021. At March 31, 2022, the net loan to deposit ratio was 76.1% compared to 81.6% at December 31, 2021. The decrease in the net loan to deposit ratio is primarily the result of an increase in deposits.

During the first three months of 2022, provisions made to the allowance for loan losses totaled $300, compared to a provision of $830 during the same period in 2021. The decrease in provision was due to the stability of our credit quality metrics coupled with the continued stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the prior economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations and improved treatments have created a level of optimism in the business community, there remains caution due to the lingering concerns over potential infection spikes. 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 have improved somewhat, but continued concerns linger due to the disruption of supply chains, additional employee costs, hiring challenges throughout our footprint and rising inflationary pressures. While some of these pressures have eased, ongoing supply chain and staffing challenges, as well as the impact of higher inflation remain.

Net recoveries for the first three months of 2022 totaled $92, compared to net recoveries of $275 in the first three months of 2021. For the first three months of 2022, the Company charged off a total of five loans. One Residential Real Estate loan totaling $1 and four Consumer and Other loans totaling $29 were charged off in the first three months of the year. In addition, during the first three months of 2022, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $1, Commercial Real Estate – Non-Owner Occupied loans of $48, Residential Real Estate loans of $61, Farm Real Estate loans of $2 and Consumer and Other loans of $10. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans increased by $52 since December 31, 2021, which was due to an increase in loans on nonaccrual status of $52. 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 1.34% at March 31, 2022 and 1.33% at December 31, 2021.

The available for sale security portfolio decreased by $7,497, from $559,874 at December 31, 2021 to $552,377 at March 31, 2022. 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 March 31, 2022, the Company was in compliance with all pledging requirements.

Other securities increased $1,500 from December 31, 2021 to March 31, 2022. The increase is the result of additional investments in the Federal Reserve Bank of Cleveland.

Premises and equipment, net, decreased $335 from December 31, 2021 to March 31, 2022. The decrease is the result of new purchases of $138, offset by depreciation of $473.

Bank owned life insurance (BOLI) increased $244 from December 31, 2021 to March 31, 2022. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets decreased $4,220 from December 31, 2021 to March 31, 2022. The decrease of $4,220 is primarily the result of a decreases in fair value of swap assets.

Other assets increased $10,342 from December 31, 2021 to March 31, 2022. The increase is the result of an increase in prepaid franchise taxes of $1,990 and an increase in deferred taxes - securities of $7,881.

Total deposits as of March 31, 2022 and December 31, 2021 were as follows:

Total deposits at March 31, 2022 increased $198,436 from year-end 2021. Noninterest-bearing deposits increased $198,441 from year-end 2021, while interest-bearing deposits, including savings and time deposits, decreased $5 from December 31, 2021. 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 $199,393. This increase is temporary as transactions are processed and is expected to return to levels more consistent with December 31, 2021 over the next two quarters. In addition, public fund demand deposit accounts increased $9,826, accompanied by a decrease in business demand deposit accounts of $10,647. The increase in interest-bearing deposits was primarily due to an increase in public fund interest-bearing demand accounts of $20,402, accompanied by decreases in non-public interest-bearing demand and JUMBO NOW accounts of $15,507 and $2,109, respectively. Statement savings, money market savings and public fund money market savings accounts increased by $21,036, $7,541 and $3,487, respectively, accompanied by decreases in business money market savings and brokered money market savings accounts of $6,073 and $19,005, respectively. Time certificates over $250, time certificates and Jumbo time certificates decreased $5,995, $3,331 and $3,958, respectively. The year-to-date average balance of total deposits decreased $75,144 compared to the average balance for the same period in 2021 mainly due to a decrease in noninterest-bearing demand accounts of $166,369, accompanied by increases in interest-bearing demand and savings and money markets accounts of $76,403 and $58,252, respectively. In addition, the average balance of time deposits decreased $43,430 as compared to the same period in 2021.

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 $1,564 from December 31, 2021 to March 31, 2022.

Swap liabilities decreased $4,220 from December 31, 2021 to March 31, 2022. The decrease of $4,220 is primarily the result of a decrease in fair value of swap liabilities.

Accrued expenses and other liabilities increased $6,351 from December 31, 2021 to March 31, 2022. The increase is primarily the result of an increase in a clearing account related to our tax refund processing program of $9,683, offset by decreases in accrued commissions and securities purchased, not yet funded, of $1,755 and $1,648, respectively.

Shareholders’ equity at March 31, 2022 was $327,692, or 10.3% of total assets, compared to $355,212, or 11.8% of total assets, at December 31, 2021. The decrease was the result of net income of $8,466, accompanied by a decrease in the Company’s pension liability, net of tax, of $55, offset by a decrease in the fair value of securities available for sale, net of tax, of $29,564, dividends on common shares of $2,090 and the purchase of treasury shares of $4,565.

Total outstanding common shares at March 31, 2022 were 14,797,214, which decreased from 14,954,200 common shares outstanding at December 31, 2021. Common shares outstanding decreased as a result of 188,760 common shares being repurchased by the Company at an average repurchase price of $24.18. The Company repurchased 183,357 common shares pursuant to a stock repurchase program announced on August 12, 2021, which authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until August 10, 2022. An additional 5,403 common shares were surrendered by officers to the Company to pay taxes upon vesting of restricted shares. The repurchase of common shares was offset by the grant of 31,774 restricted common shares to certain officers under the Company’s 2014 Incentive Plan.

Results of Operations

Three Months Ended March 31, 2022 and 2021

The Company had net income of $8,466 for the three months ended March 31, 2022, a decrease of $2,292 from net income of $10,758 for the same three months of 2021. Basic earnings per common share were $0.57 for the quarter ended March 31, 2022, compared to $0.68 for the same period in 2021. Diluted earnings per common share were $0.57 for the quarter ended March 31, 2022, compared to $0.68 for the same period in 2021. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended March 31, 2022 was $22,932, a decrease of $896 from $23,828 for the same three months of 2021. This decrease is the result of a decrease of $1,059 in total interest income with a decrease of $163 in interest expense. Interest-earning assets averaged $2,814,589 during the three months ended March 31, 2022, a decrease of $192,064 from $3,006,653 for the same period of 2021. The Company’s average interest-bearing liabilities increased from $1,719,286 during the three months ended March 31, 2021 to $1,828,283 during the three months ended March 31, 2022. The Company’s fully tax equivalent net interest margin for the three months ended March 31, 2022 and 2021 was 3.38% and 3.30%, respectively.

Total interest income was $24,666 for the three months ended March 31, 2022, a decrease of $1,059 from $25,725 of total interest income for the same period in 2021. The decrease in interest income is attributable to a decrease of $1,745 in interest and fees on loans, which resulted from decreases in loan yield and the average balance of loans. The average balance of loans decreased by $62,435, or 3.0% to $2,006,984 for the three months ended March 31, 2022 as compared to $2,069,419 for the same period in 2021. The loan yield decreased to 4.25% for the three months ended March 31, 2022, from 4.47% for the same period in 2021. During the quarter, the average balance of PPP loans was $24,262. These loans had an average yield of 18.9%, which includes the amortization of PPP fees.

Interest on taxable securities increased $445 to $1,720 for the three months ended March 31, 2022, compared to $1,275 for the same period in 2021. The average balance of taxable securities increased $139,753 to $314,493 for the three months ended March 31, 2022 as compared to $174,740 for the same period in 2021. The yield on taxable securities decreased 88 basis points to 2.20% for 2022, compared to 3.08% for 2021. Interest on tax-exempt securities increased $271 to $1,789 for the three months ended March 31, 2022, compared to $1,518 for the same period in 2021. The average balance of tax-exempt securities increased $53,293 to $260,866 for the three months ended March 31, 2022 as compared to $207,573 for the same period in 2021. The yield on tax-exempt securities decreased 45 basis points to 3.67% for 2022, compared to 4.12% for 2021 due to the impact of lower interest rates in 2022 as compared to the same period of 2021.

Interest expense decreased $163, or 8.6%, to $1,734 for the three months ended March 31, 2022, compared with $1,897 for the same period in 2021. The change in interest expense can be attributed to both a decrease in rates on interest-bearing deposit accounts and Federal Home Loan Bank (FHLB) borrowings, offset by an increase in the average balance of interest-bearing liabilities. For the three months ended March 31, 2022, the average balance of interest-bearing liabilities increased $108,997 to $1,828,283, as compared to $1,719,286 for the same period in 2021. Interest incurred on deposits decreased by $555 to $705 for the three months ended March 31, 2022, compared to $1,260 for the same period in 2021. Although the average balance of interest-bearing deposits increased by $91,225 for the three months ended March 31, 2022 as compared to the same period in 2021, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.11% in 2021 to 0.07% in 2022. The rate paid on time deposits decreased from 1.31% to 0.79% in 2022. Interest expense incurred on FHLB advances decreased 57.1% from 2021. The average balance on FHLB balances decreased $50,000 for the three months ended March 31, 2022 as compared to the same period in 2021 as a result of the prepayment of a long-term advance. Interest expense incurred on subordinated debentures increased $650, to $836 for the three months ended March 31, 2022, compared to $186 for the same period in 2021. For the three months ended March 31, 2022, the average balance of subordinated debentures increased $73,364 to $103,713, as compared to $30,349 for the same period in 2021. During the fourth quarter of 2021, the Company entered into a Subordinated Note Purchase Agreement pursuant to which the Company sold and issued $75,000 aggregate principal amount of its 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031.

The following table presents the condensed average balance sheets for the three months ended March 31, 2022 and 2021. 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 $476 and $407 for the periods ended March 31, 2022 and 2021, 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 March 31, 2022 and 2021.

(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 $300 and $830 during the quarters ended March 31, 2022 and 2021, respectively. The decrease in the provision in the first quarter of 2022 was due to the stability of our credit quality metrics coupled with the continued stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the prior economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations and improved treatments have created a level of optimism in the business community, there remains caution due to the lingering concerns over potential infection spikes. 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 have improved somewhat, but continued concerns linger due to the disruption of supply chains, additional employee costs, hiring challenges throughout our footprint and rising inflationary pressures. While some of these pressures have eased, ongoing supply chain and staffing challenges, as well as the impact of higher 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 March 31, 2022 and 2021 are as follows:

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Noninterest income for the three months ended March 31, 2022 was $7,643, a decrease of $1,547, or 16.8%, from $9,190 for the same period of 2021. The decrease was primarily due to decreases in net gain on equity securities, net gain on sale of loans, swap fees and other income, offset by increases in service charges and wealth management fees. Net gain on equity securities decreased as a result of market value decreases. Net gain on sale of loans decreased primarily as a result of a decrease in volume of loans sold. During the three-months ended March 31, 2022, 208 loans were sold, totaling $38,164. During the three-months ended March 31, 2021, 376 loans were sold, totaling $77,554. Swap fees decreased due to the volume of swaps performed during the quarter ended March 31, 2022 as compared to the same period of 2021. Other income decreased due to a decrease in gains on the sale of OREO properties of $72. Service charges increased due to higher service charges and overdraft fees of $100 and $223, respectively. Wealth management fees increased primarily as a result of an increase in trust and brokerage fees of $33 and $95, respectively. Brokerage income increased due to volume of business.

Additionally, the Company processes state and federal income tax refunds 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 $1,900 for each of the three months ended March 31, 2022 and 2021. 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 March 31, 2022 and 2021 are as follows:

Noninterest expense for the three months ended March 31, 2022 was $20,258, an increase of $1,071, or 5.6%, from $19,187 reported for the same period of 2021. The primary reasons for the increase were increases in compensation expense, equipment expense, contracted data processing expense, professional services and software maintenance expense, offset by decreases in expense for FDIC assessment and ATM/Interchange expense. The increase in compensation expense was due to increased salary, payroll taxes and commission and incentive based costs, offset by a decrease in employer savings contributions. Equipment expense increased due to an increase in computer equipment purchases of $61 and reimbursement of COVID-19 expenses of $12 in 2021. Contracted data processing fees increased due to merger related system deconversion fees of $215. Professional services increased due to merger related legal and audit and consulting fees of $118 and $150, respectively. 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 decrease in FDIC assessments was attributable to lower assessment multipliers charged to Civista. The quarter-over-quarter decrease in ATM/Interchange expense is the result of a decrease in billings from MasterCard of $57 in 2022.

Income tax expense for the three months ended March 31, 2022 totaled $1,551, down $692 compared to the same period in 2021. The effective tax rates for the three-month periods ended March 31, 2022 and 2021 were 15.5% and 17.3%, 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.

Capital Resources

Shareholders’ equity totaled $327,692 at March 31, 2022 compared to $355,212 at December 31, 2021. Shareholders’ equity was impacted by net income of $8,466, accompanied by a $55 net decrease in the Company’s pension liability, offset by a decrease in the fair value of securities available for sale, net of tax, of $29,564, dividends on common stock of $2,090 and the Company’s repurchase of common shares during the period, which totaled $4,565.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of March 31, 2022 and December 31, 2021 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 $794, or 0.14% of the total security portfolio at March 31, 2022. 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 $9,114 and $15,910 for the three months ended March 31, 2022 and 2021, 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 $50,872 for the three months ended March 31, 2022 and net cash provided by investing activities was $583 for the three months ended March 31, 2021, principally reflecting our loan and investment security activities. Cash provided by and used for deposits and purchase of treasury shares comprised most of our financing activities, which resulted in net cash provided by of $190,217 and $281,225 for the three months ended March 31, 2022 and 2021, 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 March 31, 2022, Civista had total credit availability with the FHLB of $713,784 with standby letters of credit totaling $21,300 and a remaining borrowing capacity of approximately $617,484. In addition, CBI maintains a credit line totaling $10,000. No borrowings were outstanding by CBI under this credit line as of March 31, 2022.

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, 2021 and March 31, 2022, 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 March 31, 2022 and December 31, 2021.

The Company had derivative financial instruments as of December 31, 2021 and March 31, 2022. 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, 2021 to March 31, 2022, can be attributed to a couple of factors. The yield curve has shifted up and inverted compared to 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. The decrease in loans is result of PPP loan forgiveness. Cash increased as a result of the increase in deposits. The volume and mix of liabilities has shifted toward deposits and away from certificates of deposit and other borrowings. Deposits primarily increased related to the tax refund processing program, which is a seasonal increase. The mix shifts from the end of the year, particularly to cash and deposits, contributed to a small increase in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a larger decrease in the market value of liabilities than assets. Accordingly, we see an increase in the net portfolio value. For a 100-basis point downward changes in rates, the market value of liabilities would increase faster than the market value of assets, leading to a decrease in the net portfolio value. For a 200-basis point downward changes in rates, the change in market value of liabilities is limited due to the low base cost of deposits while the increase in the market value of assets would expand, leading to a small 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 March 31, 2022, 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, 2021.