Civista Bancshares, Inc.: Form 10-Q for the period ended Sep 30, 2022

Introduction

The following discussion focuses on the consolidated financial condition of the Company at September 30, 2022 compared to December 31, 2021, and the consolidated results of operations for the three-and nine-month periods ended September 30, 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 and inflationary pressures;
• 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 disclosure or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate;
• a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks;
• competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel;
• unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future;
• the lack of assurances regarding the future revenues of our tax refund program;
• risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past, pending and possible future acquisitions; including, without limitation, the recently completed acquisitions of Comunibanc Corp. and VFG;
• uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry, 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 (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: 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 September 30, 2022 were $3,241,719 compared to $3,012,905 at December 31, 2021, an increase of $228,814, or 7.6%. The increase in total assets was due to the Company’s acquisition by merger of Comunibanc Corp. effective July 1, 2022 and increases in loans of $329,603, accompanied by increases in securities available-for-sale, and other assets of $42,172 and $24,260, respectively, partially offset by a decrease in cash and cash equivalents of $223,325. Total liabilities at September 30, 2022 were $2,939,117 compared to $2,657,693 at December 31, 2021, an increase of $281,424, or 10.6%. The increase in total liabilities was primarily attributable to an increase in total deposit accounts of $291,552, accompanied by an increase in short term FHLB borrowings of $55,000, partially offset by decreases in long term FHLB borrowings of $68,277.

Loans outstanding as of September 30, 2022 and December 31, 2021 were as follows:

Included in Commercial & Agriculture loans above were $819 of PPP loans as of September 30, 2022 and $43,209 of PPP loans as of December 31, 2021.

Loans held for sale increased $1,519, or 77.0%, since December 31, 2021. The increase was due to an increase in the average loan balance held for sale. At September 30, 2022, 19 loans totaling $3,491 were held for sale as compared to 14 loans totaling $1,972 at December 31, 2021.

Net loans have increased $329,603, or 16.7%, since December 31, 2021. The Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate, Real Estate Construction and Consumer and Other loan portfolios increased $69,016, $126,859, $101,104, $45,666 and $9,988, respectively, since December 31, 2021, while the Commercial & Agriculture and Farm Real Estate loan portfolios decreased $19,115 and $2,783, respectively, since December 31, 2021. Loans acquired as part of the Comunibanc Corp. acquisition for Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate, Real Estate Construction, Farm Real Estate and Consumer and Other loan portfolios totaled $9,731, $30,680, $45,731, $61,752, $12,394 $2,872 and $11,757, respectively. At September 30, 2022, the net loan to deposit ratio was 85.0% compared to 81.6% at December 31, 2021. The increase in the net loan to deposit ratio is primarily the result of an increase in loans, partially offset by an increase in deposits.

During the first nine months of 2022, provisions made to the allowance for loan losses totaled $1,000, compared to a provision of $830 during the same period in 2021. The increase in provision was due to the strong loan growth during the first nine months of 2022. The challenges of the international, national, regional and local economic conditions, particularly inflation, has taken greater focus from the prior economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. Despite these concerns, our portfolio quality has remained stable overall with decreases in criticized loans. We continue to be optimistic that asset quality will continue to remain strong despite ongoing headwinds. While we remain cautious given the impact of inflation on all of our borrowers, we are encouraged by strong loan growth.

Net recoveries for the first nine months of 2022 totaled $132, compared to net recoveries of $710 in the first nine months of 2021. For the first nine months of 2022, the Company charged off a total of 14 loans. One Commercial and Agriculture loan totaling $22, five Residential Real Estate loan totaling $97 and eight Consumer and Other loans totaling $45 were charged off in the first nine months of the year. In addition, during the first nine months of 2022, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $16, Commercial Real Estate – Owner Occupied loans of $42, Commercial Real Estate – Non-Owner Occupied loans of $68, Residential Real Estate loans of $140, Farm Real Estate loans of $5 and Consumer and Other loans of $25. 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 $1,106 since December 31, 2021, which was due to a $780 increase in loans on nonaccrual status and an increase in loans past due 90 days and accruing of $326. 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 1.19% at September 30, 2022 and 1.33% at December 31, 2021.

The available-for-sale security portfolio increased by $42,172, from $559,874 at December 31, 2021 to $602,046 at September 30, 2022. Securities acquired as part of the acquisition of Comunibanc Corp. totaled $120,399 and $57,322 were sold immediately after the merger. 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, 2022, the Company was in compliance with all pledging requirements.

Premises and equipment, net, increased $7,723 from December 31, 2021 to September 30, 2022. The increase is the result of new purchases of $3,208, offset by depreciation of $1,558. Premises and equipment, net, acquired from the acquisition of Comunibanc Corp. totaled $6,073.

Goodwill increased by $24,801, from $76,851 at December 31, 2021 to $101,652 at September 30, 2022. The increase is due to the goodwill created from the acquisition of Comunibanc Corp. Other intangible assets increased $3,973 from year-end 2021. The increase includes $4,426 of core deposit intangibles and $419 of mortgage servicing rights from the acquisition of Comunibanc Corp.

Bank owned life insurance (BOLI) increased $6,650 from December 31, 2021 to September 30, 2022. BOLI acquired from the merger with Comunibanc Corp. totaled $5,918. The remaining difference is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets increased $7,376 from December 31, 2021 to September 30, 2022. The increase is primarily the result of an increase in market value.

Deferred taxes available-for-sale securities increased $24,138 from December 31, 2021 to September 30, 2022. The increase is the result of an increase in deferred taxes - securities of $21,044.

Total deposits as of September 30, 2022 and December 31, 2021 were as follows:

Total deposits at September 30, 2022 increased $291,552 from year-end 2021. Noninterest-bearing deposits increased $155,335 from year-end 2021, while interest-bearing deposits, including savings and time deposits, increased $136,217 from December 31, 2021. Noninterest-bearing deposits acquired in the acquisition of Comunibanc Corp. totaled $65,491, while interest-bearing deposits, including savings and time deposits totaled $185,332. 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 $60,070. In addition, demand deposit and public fund demand deposit accounts increased $19,672 and $10,212, respectively. Noninterest-bearing deposits acquired from Comunibanc Corp. totaled $65,491 at September 30, 2022. The increase in interest-bearing deposits was primarily due to increases in personal interest-bearing demand and public fund interest-bearing demand accounts of $8,044 and $11,782, respectively, accompanied by decreases in business interest-bearing demand and JUMBO NOW accounts of $30,951 and $9,523, respectively. Interest-bearing demand deposits acquired from Comunibanc Corp. totaled $41,376 at September 30, 2022. Statement savings, business money market savings and public fund money market savings accounts increased by $25,012, $5,376 and $1,669, respectively, accompanied by a decrease in brokered money market savings accounts of $16,997. Savings and money market deposits acquired from Comunibanc Corp. totaled $87,641 at September 30, 2022. Time certificates over $250, time certificates and Jumbo time certificates decreased $7,767, $11,365 and $9,676, respectively. Time deposits acquired from Comunibanc Corp. totaled $56,315 at September 30, 2022. The year-to-date average balance of total deposits increased $93,652, compared to the average balance for the same period in 2021, mainly due to increases in the average balances of interest-bearing demand and savings and money markets accounts of $47,234 and $46,890, respectively. In addition, the average balance of time deposits decreased $19,909 as compared to the same period in 2021.

FHLB advances decreased $13,277 from December 31, 2021 to September 30, 2022. The decrease is due to the repayment of an FHLB advance in the amount of $75,000. This advance had terms of one hundred twenty months with a fixed rate of 1.03% and was puttable. The advance was not replaced. Long-term advances acquired in the acquisition of Comunibanc Corp. totaled $21,706, of which $14,983 has been paid down. The Company had $55,000 in overnight funds with FHLB as of September 30, 2022.

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 $5,340 from December 31, 2021 to September 30, 2022.

Securities purchased payable decreased $913 from December 31, 2021 to September 30, 2022. The decrease is primarily the result of a decrease in accounts payable related to securities purchased but not yet funded of $913.

Tax refunds in process increased $2,160 from December 31, 2021 to September 30, 2022. The increase is primarily the result of an increase in a clearing account related to our tax refund processing program of $2,160.

Shareholders’ equity at September 30, 2022 was $302,602, or 9.3% of total assets, compared to $355,212, or 11.8% of total assets, at December 31, 2021. The decrease was the result of a decrease in the fair value of securities available-for-sale, net of tax, of $78,802, dividends on common shares of $6,291 and the purchase of treasury shares of $16,734, offset by net income of $27,279 and a decrease in the Company’s pension liability, net of tax, of $164.

Total outstanding common shares at September 30, 2022 were 15,235,545, which increased from 14,954,200 common shares outstanding at December 31, 2021. Common shares outstanding increased due to the issuance of 984,723 common shares to former shareholders of Comunibanc Corp. in connection with the acquisition of Comunibanc Corp. effective July 1, 2022. Additionally, common share outstanding was impacted by 740,238 common shares being repurchased by the Company at an average repurchase price of $22.61. The Company repurchased 341,963 common shares pursuant to a stock repurchase program announced on May 4, 2022 and 392,847 common shares pursuant to a stock repurchase program announced on August 12, 2021. The repurchase program publicly announced on May 4, 2022 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until May 9, 2023. The repurchase plan publicly announced on August 12, 2021 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until August 10, 2022. An additional 5,428 common shares were surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 2,138 restricted common shares were forfeited. 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. In addition, 7,224 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, 2022 and 2021

The Company had net income of $11,112 for the three months ended September 30, 2022, an increase of $1,470 from net income of $9,642 for the same three months of 2021. Basic earnings per common share were $0.72 for the quarter ended September 30, 2022, compared to $0.64 for the same period in 2021. Diluted earnings per common share were $0.72 for the quarter ended September 30, 2022, compared to $0.64 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 September 30, 2022 was $30,439, an increase of $6,006 from $24,433 for the same three months of 2021. This increase is the result of an increase of $6,749 in total interest income, offset by an increase of $743 in interest expense. Interest-earning assets averaged $3,002,256 during the three months ended September 30, 2022, an increase of $254,806 from $2,747,450 for the same period of 2021. The Company’s average interest-bearing liabilities increased from $1,716,512 during the three months ended September 30, 2021 to $1,893,092 during the three months ended September 30, 2022. The Company’s fully tax equivalent net interest margin for the three months ended September 30, 2022 and 2021 was 4.03% and 3.62%, respectively.

Total interest income was $32,533 for the three months ended September 30, 2022, an increase of $6,749 from $25,784 of total interest income for the same period in 2021. The increase in interest income is attributable to increases in interest and fees on loans and interest income on taxable and tax-exempt securities of $4,472, $1,513, and $443, respectively. Interest on loans increased $4,472 to $27,176 for the three months ended September 30, 2022, as compared to $22,704 for the same period in 2021. The average balance of loans increased by $278,923, or 13.9% to $2,289,588 for the three months ended September 30, 2022 as compared to $2,010,665 for the same period in 2021. The loan yield increased to 4.71% for the three months ended September 30, 2022, from 4.48% for the same period in 2021.

Interest on taxable securities increased $1,513 to $2,936 for the three months ended September 30, 2022, compared to $1,423 for the same period in 2021. The average balance of taxable securities increased $89,942 to $354,597 for the three months ended September 30, 2022, as compared to $264,655 for the same period in 2021. The yield on taxable securities increased 88 basis points to 3.06% for 2022, compared to 2.18% for 2021. Interest on tax-exempt securities increased $443 to $1,998 for the three months ended September 30, 2022, compared to $1,555 for the same period in 2021. The average balance of tax-exempt securities increased $50,340 to $268,327 for the three months ended September 30, 2022, as compared to $217,987 for the same period in 2021. The yield on tax-exempt securities decreased 44 basis points to 3.47% for 2022, compared to 3.91% for 2021 due to the impact of lower interest rates in 2022 as compared to the same period of 2021.

Interest expense increased $743, or 55.0%, to $2,094 for the three months ended September 30, 2022, compared with $1,351 for the same period in 2021. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, accompanied by increases in rates. For the three months ended September 30, 2022, the average balance of interest-bearing liabilities increased $176,580 to $1,893,092, as compared to $1,716,512 for the same period in 2021. Interest incurred on deposits decreased by $34 to $936 for the three months ended September 30, 2022, compared to $970 for the same period in 2021. Although the average balance of interest-bearing deposits increased by $149,936 for the three months ended September 30, 2022, as compared to the same period in 2021, deposit expense decreased due to a decrease in the rate paid on time deposits from 1.03% in 2021 to 0.79% in 2022. Interest expense incurred on FHLB advances decreased 6.7% from 2021. The average balance on FHLB balances decreased $42,951 for the three months ended September 30, 2022, as compared to the same period in 2021, as a result of the repayment of a long-term advance. Interest expense incurred on subordinated debentures increased $793, to $975 for the three months ended September 30, 2022, compared to $182 for the same period in 2021. For the three months ended September 30, 2022, the average balance of subordinated debentures increased $73,402 to $103,751, 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 September 30, 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 $532 and $414 for the periods ended September 30, 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 September 30, 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 $0 during the quarters ended September 30, 2022 and 2021, respectively. The increase in the provision in the third quarter of 2022 reflects the Company’s strong loan growth during the quarter. Our credit quality metrics remain stable despite the ongoing headwinds of the challenging international, national, regional and local economic conditions. While the direct impact of COVID-19 wains, we remain cautious due to increasing inflationary pressures. Criticized loans were reduced in the third quarter, primarily loans to borrowers in the hotel industry due to improved occupancy. Economic impacts related to the COVID-19 pandemic have improved somewhat, but continued concerns linger due to the disruption of supply chains, workforce shortages, rising inflationary pressures and the prospects of recession.

Noninterest income for the three-month periods ended September 30, 2022 and 2021 are as follows:

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Noninterest income for the three months ended September 30, 2022 was $5,734, a decrease of $692, or 10.8%, from $6,426 for the same period of 2021. The decrease was primarily due to decreases in net gain (loss) on equity securities, net gain on sale of loans and swap fees, offset by increases in service charges and other income. Net gain (loss) 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 September 30, 2022, 117 loans were sold, totaling $33,929. During the three-months ended September 30, 2021, 303 loans were sold, totaling $56,887. Swap fees decreased due to the volume of swaps performed during the quarter ended September 30, 2022 as compared to the same period of 2021. Service charges increased due to higher service charges of $196 and overdraft fees of $130. Other income increased as result of an increase in servicing fee income.

Noninterest expense for the three-month periods ended September 30, 2022 and 2021 are as follows:

Noninterest expense for the three months ended September 30, 2022 was $22,555, an increase of $3,304, or 17.2%, from $19,251 reported for the same period of 2021. The primary reasons for the increase were increases in compensation expense, net occupancy, equipment expense, contracted data processing expense, state franchise tax, professional services, amortization expense, software maintenance expense and other operating expense, offset by a decrease in FDIC assessment. The increase in compensation expense was mainly due to the acquisition of Comunibanc Corp. The increase in occupancy expense is due to increases in utilities and ground maintenance. Equipment expense increased due to increases in computer, security and office equipment purchases of $101. Contracted data processing fees increased due to the payment of deconversion fees related to the merger with Comunibanc Corp. of $349. The quarter-over-quarter decrease in FDIC assessments was attributable to lower assessment multipliers charged to Civista. The increase in state franchise tax expense was attributable to an increase in equity capital, which is the basis of the Ohio Financial Institutions tax. Professional services increased due to acquisition and merger related legal, accounting and tax professional fees of $430, accompanied by increases in recruitment fees and increased call volumes at the Company’s call center. The increase in amortization of intangible assets is related to the merger with Comunibanc Corp. 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 merger related expenses of $116 and travel, lodging and meals of $64.

Income tax expense for the three months ended September 30, 2022 totaled $2,206, up $240 compared to the same period in 2021. The effective tax rates for the three-month periods ended September 30, 2022 and 2021 were 16.7% and 16.9%, 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, 2022 and 2021

The Company had net income of $27,279 for the nine months ended September 30, 2022, a decrease of $2,285 from net income of $29,564 for the same nine months of 2021. Basic earnings per common share were $1.82 for the period ended September 30, 2022, compared to $1.90 for the same period in 2021. Diluted earnings per common share were $1.82 for the period ended September 30, 2022, compared to $1.90 for the same period in 2021. The primary reasons for the changes in net income are explained below.

Net interest income for the nine months ended September 30, 2022 was $77,639, an increase of $5,537 from $72,102 in the same nine months of 2021. This increase is the result of an increase of $6,255 in total interest income, partially offset by an increase of $718 in interest expense. Interest-earning assets averaged $2,895,090 during the nine months ended September 30, 2022, an increase of $52,628 from $2,842,462 for the same period of 2021. The Company’s average interest-bearing liabilities increased from $1,724,858 for the first nine months of 2021 to $1,850,724 for the same period in 2022. The Company’s fully tax equivalent net interest margin for the nine months ended September 30, 2022 and 2021 was 3.62% and 3.48%, respectively.

Total interest income increased $6,255 to $83,263 for the period ended September 30, 2022. This change was the result of increases in the average balance of interest-earning assets, accompanied by higher yields on the portfolio. The average balance of loans increased by $66,278, or 3.2%, to $2,111,019 for the period ended September 30, 2022, as compared to $2,044,741 for the period ended September 30, 2021. The loan yield decreased to 4.44% for 2022, from 4.46% in 2021.

Interest on taxable securities increased $2,503 to $6,431 for the period ended September 30, 2022, compared to $3,928 for the same period in 2021. The average balance of taxable securities increased $107,283 to $322,262 for the period ended September 30, 2022, as compared to $214,979 for the period ended September 30, 2021. The yield on taxable securities increased 2 basis points to 2.53% for 2022, compared to 2.51% for 2021. Interest on tax-exempt securities increased $1,070 to $5,669 for the period ended September 30, 2022, compared to $4,599 for the same period in 2021. The average balance of tax-exempt securities increased $51,252 to $262,790 for the period ended September 30, 2022, as compared to $211,538 for the period ended September 30, 2021. The yield on tax-exempt securities decreased 47 basis points to 3.55% for 2022, compared to 4.02% for 2021.

Interest on interest-bearing deposits in other banks increased $757 to $1,098 for the period ended September 30, 2022, compared to $341 for the same period in 2021. The average balance of interest-bearing deposits in other banks decreased $172,185 to $199,019 for the period ended September 30, 2022, as compared to $371,204 for the period ended September 30, 2021. The yield on interest-bearing deposits in other banks increased 62 basis points to 0.74% for 2022, compared to 0.12% for 2021.

Interest expense increased $718, or 14.6%, to $5,624 for the period ended September 30, 2022, compared with $4,906 for the same period in 2021. The change in interest expense can be attributed to an increase in rate, accompanied by an increase in the average balance of interest-bearing liabilities. For the period ended September 30, 2022, the average balance of interest-bearing liabilities increased $125,866 to $1,850,724, as compared to $1,724,858 for the period ended September 30, 2021. Interest incurred on deposits decreased by $1,015 to $2,351 for the period ended September 30, 2022, compared to $3,366 for the same period in 2021. Although the average balance of interest-bearing deposits increased by $97,088 for the period ended September 30, 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 0.10% in 2021 to 0.08% in 2022. The rate paid on time deposits decreased from 1.18% in 2021 to 0.80% in 2022. Interest expense incurred on FHLB advances and subordinated debentures increased 114.7% from 2021. The average balance on FHLB balances decreased $39,815 as a result of the repayment of a long-term advance for the period ended September 30, 2022, as compared to the same period in 2021, while the rate paid decreased 11 basis points. In addition, the average balance of subordinated debentures increased $73,377 to $103,726, 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 rate paid on subordinated debentures increased 97 basis points for the period ended September 30, 2022, as compared to the same period in 2021.

The following table presents the condensed average balance sheets for the nine months ended September 30, 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 $1,508 and $1,228 for the periods ended September 30, 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 nine months ended September 30, 2022 and 2021. 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 $1,000 and $830 during the periods ended September 30, 2022 and 2021, respectively. The increase in provision was due to the strong loan growth during the first nine months of 2022. The challenges of the international, national, regional and local economic conditions, particularly inflation, has taken greater focus from the prior economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. Despite these concerns, our portfolio quality has remained stable overall with decreases in criticized loans. We continue to be optimistic that asset quality will continue to remain strong despite ongoing headwinds. While we remain cautious given the impact of inflation on all of our borrowers, we are encouraged by strong loan growth.

Noninterest income for the nine-month periods ended September 30, 2022 and 2021 are as follows:

Noninterest income for the nine months ended September 30, 2022 was $19,012, a decrease of $5,629, or 22.8%, from $24,641 for the same period of 2021. The decrease was primary due to decreases in net gain on the sale of securities of $1,777, net gain (loss) on equity securities of $235, net gain on sale of loans of $4,429, swap fees of $135 and other income of $1289, which was offset by an increase in service charges of $912. Net gain on sale of securities decreased due to the sale of Visa Class B shares in 2021. Net gain (loss) 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 nine-months ended September 30, 2022, 571 loans were sold, totaling $107,587. During the nine-months ended September 30, 2021, 1,055 loans were sold, totaling $204,728. Swap fees decreased due to the volume of swaps performed during the nine-months ended September 30, 2022, as compared to the same period of 2021. Other income decreased as result of an increase in insurance loss reserves from the Company’s reinsurance subsidiary. Service charges increased due to an increase in service charges and overdraft fees of $336 and $576, respectively.

Tax refund processing fees were $2,375 for each of the nine months ended September 30, 2022 and 2021. These fees are received for processing state and federal income tax refund payments for customers of third-party income tax preparation vendors. This fee income is seasonal in nature, the majority of which is earned in the first quarter of the year.

Noninterest expense for the nine-month periods ended September 30, 2022 and 2021 are as follows:

Noninterest expense for the nine months ended September 30, 2022 was $63,192, an increase of $2,490, or 4.1%, from $60,702 reported for the same period of 2021. The primary reasons for the increase were increases in compensation expenses of $2,076, equipment expense of $354, contracted data processing of $537, state franchise tax of $241, professional services of $1,338, amortization of intangible assets of $222 and software maintenance expense of $568, offset by decreases in FDIC assessments of $261, ATM/Interchange expense of $184 and other operating expenses of $2,682. The increase in compensation expense was due to increased payroll, 401k expenses, payroll taxes and commission and incentive based costs and the acquisition by merger of Comunibanc Corp. Payroll and payroll related expenses increased due to annual pay increases. Equipment expense increased due to an increase in computer and security equipment purchases of $202 and reimbursement of COVID-19 expenses of $12 in 2021. Contracted data processing fees increased due to merger related system deconversion fees of $564, offset by a decrease in computer processing fees. The decrease in FDIC assessments was attributable to lower assessment multipliers charged to Civista. The increase in state franchise tax expense was attributable to an increase in equity capital, which is the basis of the Ohio Financial Institutions tax, offset by the payment of $172 of additional taxes in 2021 as a result of findings from a State of Ohio audit. Professional services increased due to merger related legal, accounting and tax professional fees, accompanied by increases in recruitment fees and increased call volumes at the Company’s call center. The decrease in ATM/Interchange expense is the result of a decrease in billings from Mastercard in 2022 and lower processing fees. 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 decrease in other operating expense is primarily due to the prepayment expense of $3,717 related to the early payoff of an FHLB long-term advance, offset by a credit to the valuation adjustment for mortgage servicing rights and increases in travel, lodging and meals, stationery and supplies and bad check expense.

Income tax expense for the nine months ended September 30, 2022 totaled $5,180, down $467 compared to the same period in 2021. The effective tax rates for the nine-month periods ended September 30, 2022 and 2021 were 16.0% and 16.0%, 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 $302,602 at September 30, 2022, compared to $355,212 at December 31, 2021. Shareholders’ equity decreased during the first nine months of 2022 as a result of a decrease in fair value of securities available-for-sale, net of tax, of $78,802, dividends on common stock of $6,291 and the Company’s repurchase of common shares during the period, which totaled $16,734, offset by net income of $27,279 and a $164 net decrease in the Company’s pension liability.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of September 30, 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 $1,490, or 0.3% of the total security portfolio at September 30, 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 $27,421 and $34,295 for the nine months ended September 30, 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 $207,756 and $83,948 for the nine months ended September 30, 2022 and 2021, respectively, 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 $42,990 and $163,296 for the nine months ended September 30, 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 September 30, 2022, Civista had total credit availability with the FHLB of $753,521 with standby letters of credit totaling $110,900 and a remaining borrowing capacity of approximately $580,827. In addition, CBI maintains a credit line with a third party lender totaling $10,000. No borrowings were outstanding by CBI under this credit line as of September 30, 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 September 30, 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 September 30, 2022 and December 31, 2021.

The Company had derivative financial instruments as of December 31, 2021 and September 30, 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 September 30, 2022, can be attributed to a couple of factors. The yield curve has risen 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 cash has decreased, and the mix has shifted toward loans. While the loan portfolio increased due to growth and acquisition, the market value of loans has decreased due to market rate increases. The volume non-maturing deposits has increased due to acquisition, but the market value has decreased. The volume and mix shifts from the end of the year, along with market rate changes, contributed to a small decrease in the base net portfolio value, which partially offset the increase due to acquisition. 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. The change in the rates down scenario for both the 100 and 200 basis point movements would lead to a larger increase in the market value of liabilities than assets, leading to a decrease in the net portfolio value.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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