10-Q 1 d122467d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2015

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-36192

 

 

Civista Bancshares, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Ohio   34-1558688
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
100 East Water Street, Sandusky, Ohio   44870
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (419) 625-4121

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Shares, no par value, outstanding at August 6, 2015 - 7,843,578 shares

 

 

 


Table of Contents

CIVISTA BANCSHARES, INC.

Index

 

PART I.  

Financial Information

  
Item 1.  

Financial Statements:

  
 

Consolidated Balance Sheets (Unaudited) June 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Income (Unaudited) Three and six months ended June 30, 2015 and 2014

     4   
 

Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended June 30, 2015 and 2014

     5   
 

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) Six months ended June 30, 2015

     6   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2015 and 2014

     7-8   
 

Notes to Interim Consolidated Financial Statements (Unaudited)

     9-57   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     58-71   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     72-74   
Item 4.  

Controls and Procedures

     75   
PART II.  

Other Information

  
Item 1.  

Legal Proceedings

     76   
Item 1A.  

Risk Factors

     76   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     76   
Item 3.  

Defaults upon Senior Securities

     76   
Item 4.  

Mine Safety Disclosures

     76   
Item 5.  

Other Information

     76   
Item 6.  

Exhibits

     77   
Signatures      78   


Table of Contents

Part I – Financial Information

 

ITEM 1. Financial Statements

CIVISTA BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     June 30,
2015
    December 31,
2014
 

ASSETS

    

Cash and due from financial institutions

   $ 35,092      $ 29,858   

Securities available for sale

     197,429        197,905   

Loans held for sale

     4,034        2,410   

Loans, net of allowance of $14,707 and $14,268

     988,210        900,589   

Other securities

     13,261        12,586   

Premises and equipment, net

     16,308        14,400   

Accrued interest receivable

     3,987        3,852   

Goodwill

     26,841        21,720   

Other intangibles

     2,767        2,025   

Bank owned life insurance

     19,870        19,637   

Other assets

     9,473        8,209   
  

 

 

   

 

 

 

Total assets

   $ 1,317,272      $ 1,213,191   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 296,762      $ 250,701   

Interest-bearing

     779,044        718,217   
  

 

 

   

 

 

 

Total deposits

     1,075,806        968,918   

Federal Home Loan Bank advances

     55,300        65,200   

Securities sold under agreements to repurchase

     17,460        21,613   

Subordinated debentures

     29,427        29,427   

Accrued expenses and other liabilities

     19,257        12,124   
  

 

 

   

 

 

 

Total liabilities

     1,197,250        1,097,282   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred shares, no par value, 200,000 shares authorized,

    

Series B Preferred stock, $1,000 liquidation preference, 24,072 shares issued at June 30, 2015 and 25,000 shares issued at December 31, 2014, net of issuance costs

     22,273        23,132   

Common shares, no par value, 20,000,000 shares authorized, 8,591,542 shares issued at June 30, 2015 and 8,455,881 shares issued at December 31, 2014

     115,248        114,365   

Accumulated earnings (deficit)

     414        (4,306

Treasury shares, 747,964 shares at cost

     (17,235     (17,235

Accumulated other comprehensive loss

     (678     (47
  

 

 

   

 

 

 

Total shareholders’ equity

     120,022        115,909   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,317,272      $ 1,213,191   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 3


Table of Contents

CIVISTA BANCSHARES, INC.

Consolidated Statements of Income (Unaudited)

(In thousands, except per share data)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  

Interest and dividend income

           

Loans, including fees

   $ 11,270       $ 9,850       $ 21,516       $ 19,632   

Taxable securities

     796         893         1,629         1,765   

Tax-exempt securities

     640         580         1,264         1,155   

Federal funds sold and other

     34         42         94         128   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     12,740         11,365         24,503         22,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense

           

Deposits

     533         573         1,075         1,188   

Federal Home Loan Bank advances

     94         327         215         651   

Subordinated debentures

     193         195         373         399   

Other

     4         4         9         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     824         1,099         1,672         2,248   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     11,916         10,266         22,831         20,432   

Provision for loan losses

     400         750         800         1,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     11,516         9,516         22,031         18,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income

           

Service charges

     1,170         1,064         2,225         2,074   

Net gain on sale of securities

     —           107         —           112   

Net gain on sale of loans

     415         128         619         231   

ATM fees

     515         477         964         906   

Trust fees

     734         786         1,501         1,574   

Bank owned life insurance

     116         126         233         255   

Tax refund processing fees

     400         438         2,000         2,315   

Other

     302         254         511         537   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     3,652         3,380         8,053         8,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense

           

Salaries, wages and benefits

     5,809         5,281         11,708         11,008   

Net occupancy expense

     615         573         1,239         1,262   

Equipment expense

     365         361         728         703   

Contracted data processing

     545         392         993         711   

FDIC assessment

     225         250         462         487   

State franchise tax

     217         230         456         440   

Professional services

     663         403         1,119         794   

Amortization of intangible assets

     192         201         334         403   

ATM expense

     162         200         445         403   

Marketing

     308         402         544         794   

Other operating expenses

     1,832         1,686         3,509         3,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expense

     10,933         9,979         21,537         20,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before taxes

     4,235         2,917         8,547         6,528   

Income tax expense

     1,113         677         2,255         1,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Income

     3,122         2,240         6,292         4,951   

Preferred stock dividends and discount accretion

     391         406         795         1,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 2,731       $ 1,834       $ 5,497       $ 3,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share, basic

   $ 0.35       $ 0.24       $ 0.71       $ 0.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share, diluted

   $ 0.29       $ 0.21       $ 0.58       $ 0.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

CIVISTA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2015     2014     2015     2014  

Net income

   $ 3,122      $ 2,240      $ 6,292      $ 4,951   

Other comprehensive income:

        

Unrealized holding gains (losses) on available for sale securities

     (1,982     1,700        (1,096     3,690   

Tax effect

     674        (578     373        (1,254

Pension liability adjustment

     70        4,128        140        4,171   

Tax effect

     (24     (1,403     (48     (1,417
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (1,262     3,847        (631     5,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,860      $ 6,087      $ 5,661      $ 10,141   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 5


Table of Contents

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited)

(In thousands, except share data)

 

                      Accumulated        
    Preferred Shares     Common Shares     Accumulated           Other     Total  
    Outstanding           Outstanding           Earnings     Treasury     Comprehensive     Shareholders’  
    Shares     Amount     Shares     Amount     (Deficit)     Shares     Income (Loss)     Equity  

Balance, December 31, 2014

    25,000      $ 23,132        7,707,917      $ 114,365      $ (4,306   $ (17,235   $ (47   $ 115,909   

Net Income

    —          —          —          —          6,292        —          —          6,292   

Other comprehensive loss

    —          —          —          —          —          —          (631     (631

Conversion of Series B preferred shares to common shares

    (928     (859     118,678        859        —          —          —          —     

Stock-based compensation

    —          —          —          24        —          —          —          24   

Common stock dividends ($.05 per share)

    —          —          —          —          (777     —          —          (777

Preferred stock dividend

    —          —          —          —          (795     —          —          (795
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

    24,072      $ 22,273        7,826,595      $ 115,248      $ 414      $ (17,235   $ (678   $ 120,022   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    

Six months ended

June 30,

 
     2015     2014  

Net cash from operating activities

   $ 13,323      $ 8,628   
  

 

 

   

 

 

 

Cash flows used for investing activities:

    

Maturities and calls of securities, available-for-sale

     14,870        29,329   

Purchases of securities, available-for-sale

     (16,194     (42,453

Sale of securities available for sale

     —          18,088   

Redemption of Federal Reserve stock

     138        11   

Redemption of Federal Home Loan Bank stock

     —          2,999   

Purchase of Federal Reserve stock

     (97     (134

Net loan originations

     (8,603     (7,361

Purchase of consumer loans

     (2,975     (2,159

Proceeds from sale of other real estate owned properties

     179        95   

Cash acquired in acquisition, net of purchase price

     926        —     

Proceeds from sale of premises and equipment

     —          181   

Purchases of property and equipment

     (727     (227
  

 

 

   

 

 

 

Net cash used for investing activities

     (12,483     (1,631
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of long-term FHLB advances

     (5,000     (226

Net change in short-term FHLB advances

     (4,900     —     

Increase in deposits

     20,019        36,661   

Decrease in securities sold under repurchase agreements

     (4,153     (2,172

Repayment of series A preferred stock

     —          (22,857

Common dividends paid

     (777     (694

Preferred dividends paid

     (795     (1,061
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,394        9,651   
  

 

 

   

 

 

 

Increase in cash and due from financial institutions

     5,234        16,648   

Cash and due from financial institutions at beginning of period

     29,858        34,186   
  

 

 

   

 

 

 

Cash and due from financial institutions at end of period

   $ 35,092      $ 50,834   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 1,662      $ 2,269   

Income taxes

   $ 350      $ 750   

Supplemental cash flow information:

    

Transfer of loans from portfolio to other real estate owned

   $ 76      $ 195   

Transfer of premises to held -for-sale

   $ —        $ 675   

 

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)

(In thousands)

 

     Six months ended
June 30, 2015
 

Acquisition of TCNB Financial Corp.

  

Noncash assets acquired:

  

Loans receivable

   $ 76,830   

FHLB Stock

     716   

Accrued interest receivable

     194   

Premises and equipment, net

     1,739   

Core deposit intangible

     1,009   

Other assets

     1,265   
  

 

 

 

Total non cash assets acquired

     81,753   

Liabilities assumed:

  

Deposits

     86,869   

Other liabilities

     5   
  

 

 

 

Total liabilities assumed

     86,874   

Net noncash assets acquired (Goodwill)

   $ 5,121   
  

 

 

 

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(1) Consolidated Financial Statements

Nature of Operations and Principles of Consolidation: As of May 1, 2015, our holding company changed its name from First Citizens Banc Corp to Civista Bancshares, Inc. (CBI). The Consolidated Financial Statements include the accounts of CBI and its wholly-owned subsidiaries: Civista Bank (Civista), First Citizens Insurance Agency, Inc., Water Street Properties, Inc. (Water St.) and FC Refund Solutions, Inc (FCRS). FCRS was formed to facilitate payment of individual state and federal income tax refunds. First Citizens Capital LLC (FCC) is wholly-owned by Civista and holds inter-company debt. The operations of FCC are located in Wilmington, Delaware. First Citizens Investments, Inc. (FCI) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware. The above companies together are referred to as the “Company.” Intercompany balances and transactions are eliminated in consolidation.

The consolidated financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2015 and its results of operations and changes in cash flows for the periods ended June 30, 2015 and 2014 have been made. The accompanying Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended June 30, 2015 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Company described in the notes to the financial statements contained in the Company’s 2014 annual report. The Company has consistently followed these policies in preparing this Form 10-Q.

The Company provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Madison, Summit, Huron, Ottawa, Richland, Montgomery and Cuyahoga. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. The bank has two concentrations, one to Lessors of Non-Residential Buildings and Dwellings totaling $214,304 or 21.4 percent of total loans as of June 30, 2015 and the other to Lessors of Residential Buildings and Dwellings totaling $137,004 or 13.7 percent of total loans as of June 30, 2015. These segments of the portfolio are stable and have been conservatively underwritten, monitored and managed by experienced commercial bankers. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area.

Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold that are in excess of federally insured limits. First Citizens Insurance Agency, Inc. was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue was less than 1.0% of total revenue through June 30, 2015. Revenue from Water St. was less than 1.0% of total revenue through June 30, 2015. Management considers the Company to operate primarily in one reportable segment, banking.

 

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Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(2) Significant Accounting Policies

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, impairment of goodwill, fair values of financial instruments, deferred taxes and pension obligations are particularly subject to change.

Income Taxes: Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Business Combinations: At the date of acquisition the Company records the assets and liabilities of the acquired companies on the Consolidated Balance Sheet at their estimated fair value. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Income beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Income during the period incurred.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Derivative Instruments and Hedging Activities: The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. All derivatives are accounted for in accordance with ASC-815, Derivatives and Hedging. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes because the Company does not currently intend to execute a setoff with its’ counterparties. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds.

 

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Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Adoption of New Accounting Standards:

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-10, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The amendments in this Update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting. For repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. The amendments also require enhanced disclosures. The accounting changes in this Update are effective for the first interim or annual period beginning after December 15, 2014. An entity is required to present changes in accounting for transactions outstanding on the effective date as a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and the disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This Update did not have a significant impact on the Company’s financial statements.

Effect of Newly Issued but Not Yet Effective Accounting Standards:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update on the Company’s financial statements.

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements -Going Concern (Subtopic 205-40). The amendments in this Update provide guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This Update clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements.

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements.

In January 2015, the FASB issued ASU 2015-01, Income Statement –Extraordinary and Unusual Items, as part of its initiative to reduce complexity in accounting standards. This Update eliminates from GAAP the concept of extraordinary items. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. This Update is not expected to have a significant impact on the Company’s financial statements.

 

Page 12


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

 

Page 13


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

In April 2015, the FASB issued ASU 2015-05, Intangible – Goodwill and Other Internal Use Software (Topic 350-40), as part of its initiative to reduce complexity in accounting standards. This guidance will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. For public business entities, the Board decided that the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted for all entities. This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2015, the FASB issued ASU 2015-06, Earnings Per Share (Topic 260):Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions. Topic 260, Earnings Per Share, contains guidance that addresses master limited partnerships that originated from Emerging Issues Task Force (EITF) Issue No. 07-4, Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships. Under Topic 260, master limited partnerships apply the two-class method of calculating earnings per unit because the general partner, limited partners, and incentive distribution rights holders each participate differently in the distribution of available cash in accordance with the contractual rights contained in the partnership agreement. The amendments in this Update specify that for purposes of calculating historical earnings per unit under the two-class method, the earnings (losses) of a transferred business before the date of a dropdown transaction should be allocated entirely to the general partner. In that circumstance, the previously reported earnings per unit of the limited partners (which is typically the earnings per unit measure presented in the financial statements) would not change as a result of the dropdown transaction. Qualitative disclosures about how the rights to the earnings (losses) differ before and after the dropdown transaction occurs for purposes of computing earnings per unit under the two-class method also are required. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on

 

Page 14


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-08, Business Combinations – Pushdown Accounting – Amendment to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115. This ASU was issued to amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115. This Update is not expected to have a significant impact on the Company’s financial statements.

In May 2015, the FASB issued ASU 2015-09, Financial Services-Insurance (Topic 944) – Disclosure about Short-Duration Contracts. The amendments apply to all insurance entities that issue short-duration contracts as defined in Topic 944, Financial Services-Insurance. The amendments require insurance entities to disclose for annual reporting periods certain information about the liability for unpaid claims and claim adjustment expenses. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements. Additionally, the amendments require insurance entities to disclose for annual and interim reporting periods a roll forward of the liability for unpaid claims and claim adjustment expenses, described in Topic 944. For health insurance claims, the amendments require the disclosure of the total of incurred-but-not-reported liabilities plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Transition guidance varies based on the amendments in this Update. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this Update. This Update is not expected to have a significant impact on the Company’s financial statements.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(3) Merger

On March 6, 2015, CBI completed the acquisition by merger of TCNB Financial Corp. (“TCNB”) in an all-cash transaction for aggregate consideration of $17,226, or $23.50 per share of TCNB stock. The Company and TCNB had first announced that they had entered into an agreement to merge in September of 2014. Immediately following the merger, TCNB’s banking subsidiary, The Citizens National Bank of Southwestern Ohio, was merged into CBI’s banking subsidiary, Civista Bank.

At the time of the merger, TCNB had total assets of $97,479, including $76,771 in loans and $86,708 in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of TCNB have been included in the Company’s Consolidated Financial Statements since the close of business on March 6, 2015. The aggregate of the purchase price over the fair value of the net assets acquired of approximately $5,121 was recorded as goodwill and will be evaluated for impairment on an annual basis.

The following table presents financial information for the former TCNB Financial Corp. included in the Consolidated Statements of Income from the date of acquisition through June 30, 2015.

 

     Actual From
Acquisition Date
Through June 30,
2015
(in thousands)
 

Net interest income after provision for loan losses

   $ 1,233   

Noninterest income

     71   

Net income

     464   

The following table presents financial information for the former TCNB Financial Corp. included in the Consolidated Statements of Income for the three-month period ended June 30, 2015.

 

     For the Three-Month
Period Ended June 30,
2015
(in thousands)
 

Net interest income after provision for loan losses

   $ 981   

Noninterest income

     60   

Net income

     416   

 

Page 16


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents pro forma information for the six and three-month periods ended June30, 2015 as if the acquisition of TCNB had occurred on January 1, 2014. This table has been prepared for comparative purposes only and is not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results.

 

     Pro Formas  
     Six months ended June 30,  
     2015      2014  

Net interest income after provision for loan losses

   $ 23,942       $ 20,999   

Noninterest income

     8,545         8,283   

Net income

     5,811         5,349   

Pro forma earnings per share:

     

Basic

   $ 0.64       $ 0.56   

Diluted

   $ 0.53       $ 0.47   

 

     Pro Formas  
     Three months ended June 30,  
     2015      2014  

Net interest income after provision for loan losses

   $ 12,465       $ 10,574   

Noninterest income

     3,711         3,570   

Net income

     3,276         2,489   

Pro forma earnings per share:

     

Basic

   $ 0.37       $ 0.27   

Diluted

   $ 0.30       $ 0.23   

 

Page 17


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for TCNB. Core deposit intangibles will be amortized over periods of between five and ten years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment.

 

     At March 6, 2015  

Total purchase price

      $ 17,226   

Net assets acquired:

     

Cash and short-term investments

     18,152      

Loans, net

     76,830      

Other securities

     716      

Premises and equipment

     1,739      

Accrued interest receivable

     194      

Goodwill

     5,121      

Core deposit intangible

     1,009      

Other assets

     1,265      

Noninterest-bearing deposits

     (18,263   

Interest-bearing deposits

     (68,606   

Other liabilities

     (5   
        18,152   
     

 

 

 

Cash acquired in acquisition

      $ 926   
     

 

 

 

The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgment in accounting for the acquisition. The following is a description of the methods used to determine fair value of significant assets and liabilities at the acquisition date:

Cash and short-term investments: The Company acquired $18.2 million in cash and short-term investments, which management deemed to reflect fair value based on the short term nature of the asset.

Loans: The Company acquired $76.8 million in loans receivable with and without evidence of credit quality deterioration. The loans consisted of commercial loans, commercial real estate loans, and residential mortgage loans which included home equity secured lines of credit, real estate construction and consumer and other loans. The fair value of the performing loan portfolio includes separate adjustments to reflect a credit risk and marketability component and a yield component reflecting the differential between portfolio and market yields. Credit impaired loans were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan was then discounted to present value using a risk-adjusted market rate.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Deposits: The Company acquired $86.7 million in deposits. Savings and transaction accounts are variable, have no stated maturity and can be withdrawn on short notice with no penalty. Therefore, the fair value of such deposits is considered equal to the carrying value. The fair value of CD’s consists of comparing the contractual cost of the CD’s to the market rates with corresponding maturities. The valuation adjustment reflects the present value of the difference between the cash flows attributable to the CD’s based on contractual and market rates. The core deposit intangible is determined by the present value difference of the net cost of the core deposit versus the same amount for an alternative funding source.

This acquisition provided the Company with the strategic opportunity to expand into new markets that, while similar to existing markets, are projected to be more vibrant in population growth and business opportunity growth. Additionally, the acquisition will provide exposure to suburbs of larger urban areas without the commitment of operating inside large metropolitan areas dominated by regional and national financial organizations. The acquisition also creates synergies on the operational side of the Company by allowing noninterest expenses to be spread over a larger operating base.

(4) Securities

The amortized cost and fair market value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

June 30, 2015

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

U.S. Treasury securities and obligations of U.S. government agencies

   $ 39,794       $ 183       $ (38    $ 39,939   

Obligations of states and political subdivisions

     87,277         3,947         (510      90,714   

Mortgage-backed securities in government sponsored entities

     65,320         996         (110      66,206   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     192,391         5,126         (658      196,859   

Equity securities in financial institutions

     481         89         —           570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,872       $ 5,215       $ (658    $ 197,429   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

December 31, 2014

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

U.S. Treasury securities and obligations of

           

U.S. government agencies

   $ 42,910       $ 115       $ (123    $ 42,902   

Obligations of states and political subdivisions

     83,215         5,112         (306      88,021   

Mortgage-backed securities in government sponsored entities

     65,646         976         (180      66,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     191,771         6,203         (609      197,365   

Equity securities in financial institutions

     481         59         —           540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,252       $ 6,262       $ (609    $ 197,905   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amortized cost and fair value of securities at June 30, 2015, by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities and equity securities are shown separately.

 

Available for sale    Amortized
Cost
     Fair Value  

Due in one year or less

   $ 632       $ 632   

Due after one year through five years

     29,651         29,782   

Due after five years through ten years

     30,734         32,123   

Due after ten years

     66,054         68,116   

Mortgage-backed securities

     65,320         66,206   

Equity securities

     481         570   
  

 

 

    

 

 

 

Total securities available for sale

   $ 192,872       $ 197,429   
  

 

 

    

 

 

 

Proceeds from sales of securities, gross realized gains and gross realized losses were as follows.

 

     Three months ended      Six months ended  
     June 30,      June 30,  
     2015      2014      2015      2014  

Sale proceeds

   $ —         $ 3,075       $ —         $ 18,088   

Gross realized gains

     —           107         —           112   

Gross realized losses

     —           —           —           —     

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $146,106 and $137,898 as of June 30, 2015 and December 31, 2014, respectively.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Securities with unrealized losses at June 30, 2015 and December 31, 2014 not recognized in income are as follows:

 

June 30, 2015

   12 Months or less     More than 12 months     Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury securities and obligations of U.S. government agencies

   $ 7,481       $ (24   $ 3,276       $ (14   $ 10,757       $ (38

Obligations of states and political subdivisions

     17,279         (310     2,982         (200     20,261         (510

Mortgage-backed securities in gov’t sponsored entities

     8,475         (46     8,180         (64     16,655         (110
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 33,235       $ (380   $ 14,438       $ (278   $ 47,673       $ (658
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

   12 Months or less     More than 12 months     Total  

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Treasury securities and obligations of U.S. government agencies

   $ 7,664       $ (17   $ 11,888       $ (106   $ 19,552       $ (123

Obligations of states and political subdivisions

     853         (11     5,647         (295     6,500         (306

Mortgage-backed securities in gov’t sponsored entities

     12,289         (29     11,492         (151     23,781         (180
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 20,806       $ (57   $ 29,027       $ (552   $ 49,833       $ (609
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2015, there were fifty-two securities in the portfolio with unrealized losses mainly due to higher market rates when compared to the time of purchase. Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to market yields increasing across the municipal sector. The fair value is expected to recover as the securities approach their maturity date or reset date. The Company does not intend to sell until recovery and does not believe selling will be required before recovery.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(5) Loans

Loan balances were as follows:

 

     June 30,
2015
     December 31,
2014
 

Commercial and agriculture

   $ 128,972       $ 114,186   

Commercial real estate- owner occupied

     169,600         143,014   

Commercial real estate- non-owner occupied

     331,830         308,666   

Residential real estate

     282,612         268,510   

Real estate construction

     68,734         65,452   

Consumer and other

     21,169         15,029   
  

 

 

    

 

 

 

Total loans

     1,002,917         914,857   

Allowance for loan losses

     (14,707      (14,268
  

 

 

    

 

 

 

Net loans

   $ 988,210       $ 900,589   
  

 

 

    

 

 

 

Included in total loans above are deferred loan fees of $118 at June 30, 2015 and $237 at December 31, 2014.

Included in the totals above are loans acquired from TCNB at the acquisition date, net of fair value adjustments, of:

 

     March 6,
2015
 

Commercial and agriculture

   $ 13,799   

Commercial real estate- owner occupied

     23,029   

Commercial real estate- non-owner occupied

     13,808   

Residential real estate

     17,541   

Real estate construction

     3,863   

Consumer and other

     4,790   
  

 

 

 

Net loans

     76,830   

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(6) Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Historical loss percentages for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. These historical loss percentages are calculated over a two-year period for all portfolio segments. Certain economic factors are also considered for trends which management uses to establish the directionality of changes to the unallocated portion of the reserve. The following economic factors are analyzed:

 

    Changes in lending policies and procedures

 

    Changes in experience and depth of lending and management staff

 

    Changes in quality of Civista’s credit review system

 

    Changes in nature and volume of the loan portfolio

 

    Changes in past due, classified and nonaccrual loans and TDRs

 

    Changes in economic and business conditions

 

    Changes in competition or legal and regulatory requirements

 

    Changes in concentrations within the loan portfolio

 

    Changes in the underlying collateral for collateral dependent loans

 

Page 23


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $14,707 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014.

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

For the six months ended June 30, 2015

               

Allowance for loan losses:

               

Beginning balance

  $ 1,822      $ 2,580      $ 4,798      $ 3,747      $ 428      $ 196      $ 697      $ 14,268   

Charge-offs

    —          (198     (64     (541     —          (87     —          (890

Recoveries

    31        210        90        165        3        30        —          529   

Provision

    (458     2,835        (1,441     99        3        51        (289     800   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 1,395      $ 5,427      $ 3,383      $ 3,470      $ 434      $ 190      $ 408      $ 14,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans. The decrease in specific reserves for impaired loans was the result of the anticipated resolution of an impaired loan. The Company does not expect to incur losses with this resolution. This decrease was offset by an increase in criticized loan balances. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Owner Occupied loans was the result of an increase in loss migration rates for special mention loans, based on the migration of loans into the special mention category during the migration analysis period, and an increase in substandard rated loan balances. The allowance for Commercial Real Estate—Non-Owner Occupied loans was reduced due to a decrease in loss migration rates offset by an increase in criticized loan balances. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs of loans that had a specific reserve previously applied. While loan balances are up, loss rates continue to decrease resulting in the allowance being lower. While criticized loan balances have increased, we have seen improvement in loss migration rates and a decline in specific reserves for impaired loans, management determined that it was appropriate to reduce unallocated reserves at this time.

 

Page 24


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

For the six months ended June 30, 2014

               

Allowance for loan losses:

               

Beginning balance

  $ 2,841      $ 3,263      $ 4,296      $ 5,224      $ 184      $ 214      $ 506      $ 16,528   

Charge-offs

    (313     (1,469     (105     (1,054     —          (43     —          (2,984

Recoveries

    95        75        24        121        3        33        —          351   

Provision

    (556     1,266        638        148        100        (8     (88     1,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 2,067      $ 3,135      $ 4,853      $ 4,439      $ 287      $ 196      $ 418      $ 15,395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the six months ended June 30, 2014, the allowance for Commercial and Agriculture loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the specific reserve required for this type. The net result of these changes was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate loans was the result of large charge offs, which led to increased general reserves due to an increase in loss rate. The net result of these changes was represented as an increase in the provision. The allowance for Residential Real Estate loans decreased during the period due to charge-offs of loans that had a specific reserve previously applied, a reduction in total loans past due and a reduction in nonaccrual loans. The net result of these changes was represented as a decrease in the provision. The loss rate on Consumer loans decreased for the six months ended June 30, 2014 and is reflected in a negative provision. Overall, we saw continued improvement in asset quality during the period, leading to a small decrease in unallocated reserves.

 

Page 25


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

For the three months ended June 30, 2015

               

Allowance for loan losses:

               

Beginning balance

  $ 1,794      $ 2,608      $ 4,926      $ 3,666      $ 498      $ 186      $ 637      $ 14,315   

Charge-offs

    —          —          (55     (213     —          (37     —          (305

Recoveries

    12        208        25        34        2        16        —          297   

Provision

    (411     2,611        (1,513     (17     (66     25        (229     400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 1,395      $ 5,427      $ 3,383      $ 3,470      $ 434      $ 190      $ 408      $ 14,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans. The decrease in specific reserves for impaired loans was the result of the anticipated resolution of an impaired loan. The Company does not expect to incur losses with this resolution. This decrease was offset by an increase in criticized loan balances. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate—Owner Occupied loans was the result of an increase in loss migration rates for special mention loans, based on the migration of loans into the special mention category during the migration analysis period, and an increase in substandard rated loan balances. The allowance for Commercial Real Estate—Non-Owner Occupied loans was reduced due to a decrease in loss migration rates and offset by an increase in criticized loan balances. The ending reserve balance for Residential Real Estate loans declined due to charge-offs of loans that had a specific reserve previously applied and a decline in the loss rates applied. The ending reserve balance for Real Estate Construction loans declined from the end of the previous quarter due to a decline in balances. While loan balances are up, loss migration rates continue to decrease resulting in the allowance being lower. While criticized loan balances have increased, we have seen improvement in loss migration rates and a decline in specific reserves for impaired loans, management determined that it was appropriate to reduce unallocated reserves at this time.

 

Page 26


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

For the three months ended June 30, 2014

               

Allowance for loan losses:

               

Beginning balance

  $ 2,607      $ 3,829      $ 4,168      $ 5,050      $ 295      $ 239      $ 579      $ 16,767   

Charge-offs

    (84     (1,422     (78     (737     —          (11     —          (2,332

Recoveries

    37        70        12        72        2        17        —          210   

Provision

    (493     658        751        54        (10     (49     (161     750   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 2,067      $ 3,135      $ 4,853      $ 4,439      $ 287      $ 196      $ 418      $ 15,395   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended June 30, 2014, the allowance for Commercial and Agriculture loans decreased both as a result of decreased reserves on specific loans and a decrease in the loss rate. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate loans was reduced by charge-offs, which was partially offset by an increase in the loss rate. The impact of these two changes was nearly equal and offsetting. The allowance for Residential Real Estate loans was reduced as a result of charge offs, a reduction in total loans past due and a reduction in nonaccrual loans, partially offset by changes related to increased volume. The net result of these changes was represented as a decrease in the provision. We saw continued improvement in asset quality during the period, leading to a small decrease in unallocated reserves.

 

Page 27


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of June 30, 2015 and December 31, 2014.

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

June 30, 2015

               

Allowance for loan losses:

               

Loans acquired with credit deterioration

  $ 91      $ —        $ —        $ 123      $ —        $ —        $ —        $ 214   

Ending balance:

               

Individually evaluated for impairment

  $ 137      $ 4      $ —        $ 255      $ 1      $ —        $ —        $ 397   

Ending balance:

               

Collectively evaluated for impairment

  $ 1,167      $ 5,423      $ 3,383      $ 3,092      $ 433      $ 190      $ 408      $ 14,096   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,395      $ 5,427      $ 3,383      $ 3,470      $ 434      $ 190      $ 408      $ 14,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan balances outstanding:

               

Loans acquired with credit deterioration

  $ 203      $ 33      $ —        $ 211      $ —        $ —          $ 447   

Ending balance:

               

Individually evaluated for impairment

  $ 1,223      $ 4,290      $ 1,913      $ 2,403      $ 40      $ 4        $ 9,873   

Ending balance:

               

Collectively evaluated for impairment

  $ 127,546      $ 165,277      $ 329,917      $ 279,998      $ 68,694      $ 21,165        $ 992,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance

  $ 128,972      $ 169,600      $ 331,830      $ 282,612      $ 68,734      $ 21,169        $ 1,002,917   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

Page 28


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    Commercial &
Agriculture
    Commercial
Real Estate -
Owner
Occupied
    Commercial
Real Estate -
Non-Owner
Occupied
    Residential
Real Estate
    Real Estate
Construction
    Consumer
and Other
    Unallocated     Total  

December 31, 2014

               

Allowance for loan losses:

               

Ending balance:

               

Individually evaluated for impairment

  $ 641      $ 57      $ 20      $ 305      $ —        $ —        $ —        $ 1,023   

Ending balance:

               

Collectively evaluated for impairment

  $ 1,181      $ 2,523      $ 4,778      $ 3,442      $ 428      $ 196      $ 697      $ 13,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,822      $ 2,580      $ 4,798      $ 3,747      $ 428      $ 196      $ 697      $ 14,268   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan balances outstanding:

               

Ending balance:

               

Individually evaluated for impairment

  $ 2,304      $ 3,557      $ 2,175      $ 3,108      $ —        $ 5        $ 11,149   

Ending balance:

               

Collectively evaluated for impairment

  $ 111,882      $ 139,457      $ 306,491      $ 265,402      $ 65,452      $ 15,024        $ 903,708   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance

  $ 114,186      $ 143,014      $ 308,666      $ 268,510      $ 65,452      $ 15,029        $ 914,857   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

Page 29


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables present credit exposures by internally assigned grades for the periods ended June 30, 2015 and December 31, 2014. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

 

    Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

 

    Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

 

    Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Civista will sustain some loss if the deficiencies are not corrected.

 

    Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

 

    Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

Generally, Residential Real Estate, Real Estate Construction and Consumer loans are not risk-graded, except when collateral is used for a business purpose.

 

Page 30


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

     Commercial &
Agriculture
     Commercial
Real Estate -
Owner
Occupied
     Commercial
Real Estate -
Non-Owner
Occupied
     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

June 30, 2015

                    

Pass

   $ 122,194       $ 152,878       $ 314,420       $ 110,665       $ 62,170       $ 11,699       $ 774,026   

Special Mention

     1,154         5,232         13,381         1,970         19         —           21,756   

Substandard

     5,624         11,490         4,029         8,130         31         82         29,386   

Doubtful

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 128,972       $ 169,600       $ 331,830       $ 120,765       $ 62,220       $ 11,781       $ 825,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial &
Agriculture
     Commercial
Real Estate -
Owner
Occupied
     Commercial
Real Estate -
Non-Owner
Occupied
     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

December 31, 2014

                    

Pass

   $ 107,903       $ 128,222       $ 298,237       $ 100,810       $ 59,584       $ 5,651       $ 700,407   

Special Mention

     3,446         5,492         6,305         697         19         —           15,959   

Substandard

     2,837         9,300         4,124         8,834         41         46         25,182   

Doubtful

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 114,186       $ 143,014       $ 308,666       $ 110,341       $ 59,644       $ 5,697       $ 741,548   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 31


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables present performing and nonperforming loans based solely on payment activity for the periods ended June 30, 2015 and December 31, 2014 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

 

     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

June 30, 2015

           

Performing

   $ 161,847       $ 6,514       $ 9,388       $ 177,749   

Nonperforming

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 161,847       $ 6,514       $ 9,388       $ 177,749   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

December 31, 2014

           

Performing

   $ 158,169       $ 5,808       $ 9,332       $ 173,309   

Nonperforming

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 158,169       $ 5,808       $ 9,332       $ 173,309   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 32


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2015 and December 31, 2014.

 

June 30, 2015

   30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days or
Greater
     Total Past
Due
     Current      Total Loans      Past Due
90 Days
and
Accruing
 

Commericial & Agriculture

   $ 379       $ 77       $ 591       $ 1,047       $ 127,925       $ 128,972       $ —     

Commercial Real Estate - Owner Occupied

     489         —           873         1,362         168,238         169,600         —     

Commercial Real Estate - Non-Owner Occupied

     2,425         62         143         2,630         329,200         331,830         —     

Residential Real Estate

     688         917         1,716         3,321         279,291         282,612         —     

Real Estate Construction

     —           —           —           —           68,734         68,734         —     

Consumer and Other

     71         56         1         128         21,041         21,169         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,052       $ 1,112       $ 3,324       $ 8,488       $ 994,429       $ 1,002,917       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

   30-59
Days
Past Due
     60-89
Days
Past Due
     90 Days or
Greater
     Total Past
Due
     Current      Total Loans      Past Due
90 Days
and
Accruing
 

Commericial & Agriculture

   $ 58       $ —         $ 187       $ 245       $ 113,941       $ 114,186       $ —     

Commercial Real Estate - Owner Occupied

     622         251         657         1,530         141,484         143,014         —     

Commercial Real Estate - Non-Owner Occupied

     521         5         2,103         2,629         306,037         308,666         —     

Residential Real Estate

     1,923         721         2,347         4,991         263,519         268,510         —     

Real Estate Construction

     33         —           8         41         65,411         65,452         —     

Consumer and Other

     131         8         19         158         14,871         15,029         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,288       $ 985       $ 5,321       $ 9,594       $ 905,263       $ 914,857       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 33


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents loans on nonaccrual status as of June 30, 2015 and December 31, 2014.

 

     2015      2014  

Commericial & Agriculture

   $ 1,496       $ 1,264   

Commercial Real Estate - Owner Occupied

     4,054         3,403   

Commercial Real Estate - Non-Owner Occupied

     1,658         2,134   

Residential Real Estate

     5,608         6,674   

Real Estate Construction

     31         41   

Consumer and Other

     73         42   
  

 

 

    

 

 

 

Total

   $ 12,920       $ 13,558   
  

 

 

    

 

 

 

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. A loan may be returned to accruing status only if one of three conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days; the loan is a TDR and has made a minimum of six months payments; or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months.

Modifications: A modification of a loan constitutes a troubled debt restructuring (“TDR”) when the Company for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial Real Estate loans modified in a TDR often involve reducing the interest rate lower than the current market rate for new debt with similar risk. Real Estate loans modified in a TDR were primarily comprised of interest rate reductions where monthly payments were lowered to accommodate the borrowers’ financial needs.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of June 30, 2015, TDRs accounted for $337 of the allowance for loan losses. As of December 31, 2014, TDRs accounted for $895 of the allowance for loan losses.

 

Page 34


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Loan modifications that are considered TDRs completed during the six-month periods ended June 30, 2015 and June 30, 2014 were as follows:

 

     For the Six-Month Period Ended
June 30, 2015
     For the Six-Month Period Ended
June 30, 2014
 
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commericial & Agriculture

     1       $ 6       $ 6         —         $ —         $ —     

Commercial Real Estate - Owner Occupied

     —           —           —           —           —           —     

Commercial Real Estate - Non-Owner Occupied

     —           —           —           —           —           —     

Residential Real Estate

     3         374         374         2         149         149   

Real Estate Construction

     1         41         41         —           —           —     

Consumer and Other

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     5       $ 421       $ 421         2       $ 149       $ 149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no loan modifications that are considered troubled debt restructurings (TDRs) completed during the quarter ended June 30, 2015 and June 30, 2014.

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new originations loans, so modified loans present a higher risk of loss than do new origination loans. Loans modified in a TDR increased $272 compared to June 30, 2014. The increase is the result of loans purchased in the acquisition of TCNB. During both the three and six month period ended June 30, 2015 and June 30, 2014, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

 

Page 35


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Impaired Loans: Larger (greater than $500) commercial loans and commercial real estate loans, all TDRs and residential real estate and consumer loans that are part of a larger relationship are tested for impairment. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

 

Page 36


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable, as of June 30, 2015 and December 31, 2014.

 

     June 30, 2015      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commericial & Agriculture

   $ 881       $ 1,037          $ 1,377       $ 1,504      

Commercial Real Estate - Owner Occupied

     3,911         4,384            2,961         3,327      

Commercial Real Estate - Non-Owner Occupied

     1,913         2,178            92         140      

Residential Real Estate

     1,049         1,594            1,893         3,487      

Consumer and Other

     4         4            5         5      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     7,758         9,197            6,328         8,463      

With an allowance recorded:

                 

Commericial & Agriculture

     342         346       $ 137         927         1,056       $ 641   

Commercial Real Estate - Owner Occupied

     379         379         4         596         643         57   

Commercial Real Estate - Non-Owner Occupied

     —           —           —           2,083         2,287         20   

Residential Real Estate

     1,354         1,359         255         1,215         1,223         305   

Real Estate Construction

     40         40         1         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,115         2,124         397         4,821         5,209         1,023   

Total:

                 

Commericial & Agriculture

     1,223         1,383         137         2,304         2,560         641   

Commercial Real Estate - Owner Occupied

     4,290         4,763         4         3,557         3,970         57   

Commercial Real Estate - Non-Owner Occupied

     1,913         2,178         —           2,175         2,427         20   

Residential Real Estate

     2,403         2,953         255         3,108         4,710         305   

Real Estate Construction

     40         40         1         —           —           —     

Consumer and Other

     4         4         —           5         5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,873       $ 11,321       $ 397       $ 11,149       $ 13,672       $ 1,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 37


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables include the average recorded investment and interest income recognized for impaired financing receivables for the three and six-month periods ended June 30, 2015 and 2014.

 

For the six months ended:    June 30, 2015      June 30, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commericial & Agriculture

   $ 1,943       $ 37       $ 3,986       $ 79   

Commercial Real Estate - Owner Occupied

     3,866         125         7,058         187   

Commercial Real Estate - Non-Owner Occupied

     2,053         19         2,976         35   

Residential Real Estate

     2,752         66         3,628         146   

Real Estate Construction

     27         —           —           —     

Consumer and Other

     5         —           7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,646       $ 247       $ 17,655       $ 447   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

For the three months ended:    June 30, 2015      June 30, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commericial & Agriculture

   $ 1,762       $ 3       $ 4,045       $ 14   

Commercial Real Estate - Owner Occupied

     4,125         62         6,996         61   

Commercial Real Estate - Non-Owner Occupied

     1,992         10         2,911         14   

Residential Real Estate

     2,471         26         3,495         54   

Real Estate Construction

     40         —           —           —     

Consumer and Other

     5         —           7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,395       $ 101       $ 17,454       $ 143   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 38


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of June 30, 2015 and December 31, 2014, a total of $473 and $560, respectively of foreclosed assets were included with other assets. As of June 30, 2015, included within the foreclosed assets is $473 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2015, the Company had initiated formal foreclosure procedures on $1,052 of consumer residential mortgages.

 

Page 39


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(7) Other Comprehensive Income

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the six-month periods ended June 30, 2015 and 2014:

 

     For the Six-Month Period Ended
June 30, 2015
    For the Six-Month Period Ended
June 30, 2014
 
     Unrealized
Gains and
Losses on
Available-for-
Sale
Securities
    Defined
Benefit
Pension
Items
    Total     Unrealized
Gains and
Losses on
Available-for-
Sale
Securities
    Defined
Benefit
Pension
Items
    Total  

Beginning balance

   $ 3,730      $ (3,777   $ (47   $ 341      $ (4,588   $ (4,247
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     (723     —          (723     2,510        2,666        5,176   

Amounts reclassified from accumulated other comprehensive income (loss)

     —          92        92        (74     88        14   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (723     92        (631     2,436        2,754        5,190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,007      $ (3,685   $ (678   $ 2,777      $ (1,834   $ 943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

 

Page 40


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six-month periods ended June 30, 2015 and 2014:

 

    Amount Reclassified from
Accumulated Other Comprehensive
Income (Loss) (a)
     

Details about Accumulated Other Comprehensive

(Loss) Components

  For the six
months ended
June 30, 2015
    For the six
months ended
June 30, 2014
   

Affected Line Item in the
Statement Where Net Income

is Presented

Unrealized gains and losses on available-for-sale securities

  $ —        $ 112      Net gain on sale of securities

Tax effect

    —          (38   Income tax expense
 

 

 

   

 

 

   
    —          74     

Net of tax

 

 

 

   

 

 

   

Amortization of defined benefit pension items

     

Actuarial gains/(losses)

    (140 )(b)      (132 )(b)    Salaries, wages and benefits

Tax effect

    48        44     

Income tax expense

 

 

 

   

 

 

   
    (92     (88  

Net of tax

 

 

 

   

 

 

   

Total reclassifications for the period

  $ (92   $ (14  

Net of tax

 

 

 

   

 

 

   

 

(a) Amounts in parentheses indicate expenses and other amounts indicate income
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

 

Page 41


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three-month periods ended June 30, 2015 and 2014:

 

     For the Three-Month Period Ended
June 30, 2015
    For the Three-Month Period Ended
June 30, 2014
 
     Unrealized
Gains and
Losses on
Available-for-
Sale
Securities
    Defined
Benefit
Pension
Items
    Total     Unrealized
Gains and
Losses on
Available-for-
Sale
Securities
    Defined
Benefit
Pension
Items
    Total  

Beginning balance

   $ 4,315      $ (3,731   $ 584      $ 1,655      $ (4,559   $ (2,904
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     (1,308     —          (1,308     1,193        2,666        3,859   

Amounts reclassified from accumulated other comprehensive income (loss)

     —          46        46        (71     59        (12
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     (1,308     46        (1,262     1,122        2,725        3,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,007      $ (3,685   $ (678   $ 2,777      $ (1,834   $ 943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

Page 42


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three-month periods ended June 30, 2015 and 2014:

 

    Amout Reclassified from
Accumulated Other Comprehensive
Income (Loss) (a)
     

Details about Accumulated Other Comprehensive
(Loss) Components

  For the three
months ended
June 30, 2015
    For the three
months ended
June 30, 2014
   

Affected Line Item in the

Statement Where Net Income

is Presented

Unrealized gains and losses on available-for-sale securities

  $ —        $ 107      Net gain on sale of securities

Tax effect

    —          (36   Income tax expense
 

 

 

   

 

 

   
    —          71     

Net of tax

 

 

 

   

 

 

   

Amortization of defined benefit pension items

     

Actuarial gains/(losses)

    (70 )(b)      (89 )(b)    Salaries, wages and benefits

Tax effect

    24        30      Income tax expense
 

 

 

   

 

 

   
    (46     (59  

Net of tax

 

 

 

   

 

 

   

Total reclassifications for the period

  $ (46   $ 12     

Net of tax

 

 

 

   

 

 

   

 

(a)  Amounts in parentheses indicate expenses and other amounts indicate income
(b)  These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

 

Page 43


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(8) Goodwill and Intangible Assets

The carrying amount of goodwill has increased $5,121 since December 31, 2014 as a result of the TCNB acquisition. The balance of goodwill was $26,841 at June 30, 2015 and $21,720 at December 31, 2014.

Management performs an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Management last performed an evaluation of the Company’s goodwill during the fourth quarter of 2014 and concluded that the Company’s goodwill was not impaired at December 31, 2014.

 

     Acquired intangible assets were as follows as of June 30,  
     2015      2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Core deposit and other intangibles

   $ 7,697       $ 5,498       $ 9,378       $ 7,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

Aggregate amortization expense was $334 and $403 for June 30, 2015 and 2014, respectively.

Estimated amortization expense for each of the next three years and thereafter is as follows.

 

2015

   $ 377   

2016

     698   

2017

     586   

Thereafter

     538   
  

 

 

 
   $ 2,199   
  

 

 

 

 

Page 44


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(9) Short-Term Borrowings

Short-term borrowings, which consist of federal funds purchased and other short-term borrowings are summarized as follows:

 

     At June 30, 2015     At December 31, 2014  
     Federal
Funds
Purchased
     Short-term
Borrowings
    Federal
Funds
Purchased
    Short-term
Borrowings
 

Outstanding balance

   $ —         $ 37,800      $ —        $ 42,700   

Maximum indebtedness

     —           50,300        —          42,700   

Average balance

     —           10,609        41        1,951   

Average rate paid

     —           0.17     0.54     0.19

Interest rate on balance

     —           0.15     —          0.14

Outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances.

These borrowing transactions can range from overnight to six months in maturity. The average maturity was one day at June 30, 2015 and December 31, 2014.

Securities sold under agreements to repurchase are used to facilitate the needs of our customers as well as to facilitate our short-term funding needs. Securities sold under repurchase agreements are carried at the amount of cash received in association with the agreement. We continuously monitor the collateral levels and may be required, from time to time, to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of June 30, 2015 and December 31, 2014. All of the repurchase agreements are overnight agreements.

 

     June 30, 2015      December 31, 2014  

Repurchase agreements:

     

U.S. Treasury securities

   $ 744       $ 876   

Obligations of U.S. government agencies

     16,716         20,737   
  

 

 

    

 

 

 

Total borrowings

   $ 17,460       $ 21,613   
  

 

 

    

 

 

 

Gross amount of recognized liabilities for repurchase agreements

   $ 17,460       $ 21,613   
  

 

 

    

 

 

 

Amounts related to agreements not included in offsetting disclosures above

   $ —         $ —     
  

 

 

    

 

 

 

 

Page 45


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(10) Earnings per Common Share

Basic earnings per share are computed as net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under the equity incentive plan, computed using the treasury stock method, and the impact of the Company’s convertible preferred stock using the “if converted” method.

 

     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Basic

           

Net income

   $ 3,122       $ 2,240       $ 6,292       $ 4,951   

Preferred stock dividends

     391         406         795         1,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders - basic

   $ 2,731       $ 1,834       $ 5,497       $ 3,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - basic

     7,825,176         7,707,917         7,790,862         7,707,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.35       $ 0.24       $ 0.71       $ 0.50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Net income available to common shareholders - basic

   $ 2,731       $ 1,834       $ 5,497       $ 3,890   

Preferred stock dividends on convertible preferred stock

     391         406         795         1,061   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders - diluted

   $ 3,122       $ 2,240       $ 6,292       $ 4,951   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding for basic earnings per common share basic

     7,825,176         7,707,917         7,790,862         7,707,917   

Add: Dilutive effects of convertible perferred shares

     3,079,665         3,196,931         3,113,980         3,196,931   

Add: Dilutive effects of unearned restricted stock

     92         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares and dilutive potential common shares outstanding - diluted

     10,904,933         10,904,848         10,904,842         10,904,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.29       $ 0.21       $ 0.58       $ 0.43   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 46


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

For the three-month period ended June 30, 2015 there were 3,079,665 dilutive shares related to the Company’s convertible preferred stock. For the six-month period ended June 30, 2015 there were 3,113,980 dilutive shares related to the Company’s convertible preferred stock. For the three- and six- month period ended June 30, 2014 there were 3,196,931 dilutive shares related to the Company’s convertible preferred stock. Under the “if converted” method, all convertible preferred shares are assumed to be converted into common shares at the corresponding conversion rate. These additional shares are then added to the common shares outstanding to calculate diluted earnings per share.

For the three-month period ended June 30, 2015 there were 92 dilutive shares related to the Company’s restricted stock. For the six-month period ended June 30, 2015, there were 16,983 shares of unvested restricted stock outstanding at a price of $10.82 per share that were not included in the computation of diluted earnings per share because they were anti-dilutive. At June 30, 2014, there was no non-vested restricted stock outstanding. There were no stock options outstanding during the three- and six- month periods ended June 30, 2015 and 2014.

(11) Commitments, Contingencies and Off-Balance Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amounts of financial instruments with off-balance-sheet risk were as follows for June 30, 2015 and December 31, 2014:

 

     Contract Amount  
     June 30, 2015      December 31, 2014  
     Fixed
Rate
     Variable
Rate
     Fixed
Rate
     Variable
Rate
 

Commitment to extend credit:

           

Lines of credit and construction loans

   $ 8,875       $ 193,637       $ 9,405       $ 160,718   

Overdraft protection

     4         24,628         4         22,122   

Letters of credit

     200         885         200         1,007   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,079       $ 219,150       $ 9,609       $ 183,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments included in the table above had interest rates ranging from 3.05% to 8.75% at June 30, 2015 and December 31, 2014, respectively. Maturities extend up to 30 years.

 

Page 47


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Civista is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was $5,922 on June 30, 2015 and $3,259 on December 31, 2014.

(12) Pension Information

The Company also sponsors a pension plan which is a noncontributory defined benefit retirement plan. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. In 2006, the Company amended the pension plan to provide that no employee could be added as a participant to the pension plan after December 31, 2006. In 2014, the Company amended the pension plan again to provide that no additional benefits would accrue beyond April 30, 2014.

Net periodic pension expense was as follows:

 

     Three months
ended June 30,
     Six months
ended June 30,
 
     2015     2014      2015     2014  

Service cost

   $ —        $ 94       $ —        $ 170   

Interest cost

     156        201         312        381   

Expected return on plan assets

     (283     (312      (566     (592

Other components

     70        89         140        132   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net periodic pension cost (benefit)

   $ (57   $ 72       $ (114   $ 91   
  

 

 

   

 

 

    

 

 

   

 

 

 

The total amount of pension contributions expected to be paid by the Company in 2015 is $700, compared to $1,515 in 2014.

 

Page 48


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(13) Equity Incentive Plan

At the Company’s 2014 annual meeting, the shareholders adopted the Company’s 2014 Incentive Plan (“2014 Incentive Plan”). The 2014 Incentive Plan authorizes the Company to grant options, stock awards, stock units and other awards for up to 375,000 common shares of the Company. There were 358,017 shares available for grants under this plan at June 30, 2015.

Certain officers were granted an aggregate of 16,983 restricted shares on March 17, 2015. The 2015 restricted shares vest over a 3-year service period, with one third each vesting on January 2 of 2016, 2017 and 2018. The product of the number of restricted shares granted and the grant date market price of the Company’s common shares determines the fair value of restricted shares under the Company’s 2014 Incentive Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

The Company classifies share-based compensation for employees with “Salaries, wages and benefits” in the consolidated statements of income. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows, and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow.

No options had been granted under the 2014 Incentive Plan as of June 30, 2015 and 2014.

During the three and six months ended June 30, 2015, the Company recorded $18 and $24 of share-based compensation expense for restricted shares granted under the 2014 Incentive Plan, respectively. Expected future compensation expense relating to the 16,983 restricted shares at June 30, 2015, is $160 over the remaining vesting period of 2.5 years.

The following is a summary of the status of the Company’s restricted shares as of June 30, 2015, and changes therein during the three and six months ended:

 

     Three months ended
June 30, 2015
     Six months ended
June 30, 2015
 
     Number of
Restricted
Shares
     Weighted
Average
Grant Date
Fair Value
     Number of
Restricted
Shares
     Weighted
Average
Grant Date
Fair Value
 

Nonvested at beginning of period

     16,983       $ 10.82         —         $ —     

Granted

     —           —           16,983         10.82   

Vested

     —           —           —           —     

Forfeited

     —           —           —           —     
  

 

 

       

 

 

    

Nonvested at June 30, 2015

     16,983         10.82         16,983         10.82   
  

 

 

       

 

 

    

 

Page 49


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(14) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale is determined by using market data inputs for similar securities that are observable (Level 2 inputs).

The fair value of the swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2.

Impaired loans: The fair values of impaired loans are determined using the fair values of collateral for collateral dependent loans, or discounted cash flows. The Company uses independent appraisals, discounted cash flow models and other available data to estimate the fair value of collateral (Level 3 inputs).

Other real estate owned: The fair value of other real estate owned is determined using the fair value of collateral. The Company uses appraisals and other available data to estimate the fair value of collateral (Level 3 inputs). The appraised values are discounted to represent an estimated value in a distressed sale. Additionally, estimated costs to sell the property are used to further adjust the value.

 

Page 50


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Assets measured at fair value are summarized below.

 

    Fair Value Measurements at June 30, 2015 Using:  
    (Level 1)     (Level 2)     (Level 3)  

Assets:

     

Assets measured at fair value on a recurring basis:

     

U.S. Treasury securities and obligations of U.S. Government agencies

  $ —        $ 39,939      $ —     

Obligations of states and political subdivisions

    —          90,714        —     

Mortgage-backed securities in government sponsored entities

    —          66,206        —     

Equity securities in financial institutions

    —          570        —     

Fair value of swap asset

    —          1,671        —     

Fair value of swap liability

    —          1,671        —     

Assets measured at fair value on a nonrecurring basis:

     

Impaired loans

  $ —        $ —        $ 9,476   

Other real estate owned

    —          —          473   
    Fair Value Measurements at December 31, 2014 Using:  
    (Level 1)     (Level 2)     (Level 3)  

Assets:

     

Assets measured at fair value on a recurring basis:

     

U.S. Treasury securities and obligations of U.S. Government agencies

  $ —        $ 42,902      $ —     

Obligations of states and political subdivisions

    —          88,021        —     

Mortgage-backed securities in government sponsored entities

    —          66,442        —     

Equity securities in financial institutions

    —          540        —     

Fair value of swap asset

    —          1,721        —     

Fair value of swap liability

    —          1,721        —     

Assets measured at fair value on a nonrecurring basis:

     

Impaired loans

  $ —        $ —        $ 10,126   

Other real estate owned

    —          —          560   

 

Page 51


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2015.

 

     Quantitative Information about Level 3 Fair Value Measurements
June 30, 2015    Fair Value
Estimate
     Valuation Technique    Unobservable Input    Range

Impaired loans

   $ 9,476       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%
         Holding period    0 - 30 months
      Discounted cash flows    Discount rates    3.8% - 8.0%

Other real estate owned

   $ 473       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2014.

 

     Quantitative Information about Level 3 Fair Value Measurements
December 31, 2014    Fair Value
Estimate
     Valuation Technique    Unobservable Input    Range

Impaired loans

   $ 10,126       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%
         Holding period    0 - 30 months
      Discounted cash flows    Discount rates    3.8% - 8.0%

Other real estate owned

   $ 560       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%

 

Page 52


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The carrying amount and fair values of financial instruments are as follows.

 

June 30, 2015   Carrying
Amount
    Total
Fair Value
    Level 1     Level 2     Level 3  

Financial Assets:

         

Cash and due from financial institutions

  $ 35,092      $ 35,092      $ 35,092      $ —        $ —     

Securities available for sale

    197,429        197,429        —          197,429        —     

Other securities

    13,261        13,261        13,261        —          —     

Loans, held for sale

    4,034        4,034        4,034        —          —     

Loans, net of allowance for loan losses

    988,210        994,973        —          —          994,973   

Bank owned life insurance

    19,870        19,870        19,870        —          —     

Accrued interest receivable

    3,987        3,987        3,987        —          —     

Fair value swap asset

    1,671        1,671        —          1,671        —     

Financial Liabilities:

         

Nonmaturing deposits

    842,246        842,246        842,246        —          —     

Time deposits

    233,560        234,387        —          —          234,387   

Federal Home Loan Bank advances

    55,300        55,381        —          —          55,381   

Securities sold under agreement to repurchase

    17,460        17,460        17,460        —          —     

Subordinated debentures

    29,427        23,965        —          —          23,965   

Accrued interest payable

    136        136        136        —          —     

Fair value swap liability

    1,671        1,671        —          1,671        —     

 

Page 53


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

December 31, 2014    Carrying
Amount
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial Assets:

              

Cash and due from financial institutions

   $ 29,858       $ 29,858       $ 29,858       $ —         $ —     

Securities available for sale

     197,905         197,905         —           197,905         —     

Other securities

     12,586         12,586         12,586         —           —     

Loans, held for sale

     2,410         2,410         2,410         —           —     

Loans, net of allowance for loan losses

     900,589         908,118         —           —           908,118   

Bank owned life insurance

     19,637         19,637         19,637         —           —     

Accrued interest receivable

     3,852         3,852         3,852         —           —     

Fair value swap asset

     1,721         1,721         —           1,721         —     

Financial Liabilities:

              

Nonmaturing deposits

     748,948         748,948         748,948         —           —     

Time deposits

     219,970         221,263         —           —           221,263   

Federal Home Loan Bank advances

     65,200         65,399         —           —           65,399   

Securities sold under agreement to repurchase

     21,613         21,613         21,613         —           —     

Subordinated debentures

     29,427         24,688         —           —           24,688   

Accrued interest payable

     126         126         126         —           —     

Fair value swap liability

     1,721         1,721         —           1,721         —     

 

Page 54


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Cash and due from financial institutions: The carrying amounts for cash and due from financial institutions approximate fair value because they have original maturities of less than 90 days and do not present unanticipated credit concerns.

Securities available for sale: The fair value of securities are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For equity securities, management uses market information related to the value of similar institutions to determine the fair value (Level 2 inputs).

Other securities: The carrying value of regulatory stock approximates fair value based on applicable redemption provisions.

Loans, held-for-sale: Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment to an investor. Because the holding period of such loans is typically short, the carrying value generally approximates the fair value at the time the commitment is received. All loans in the held-for-sale account conform to Fannie Mae underwriting guidelines, with specific intent of the loan being purchased by an investor at the predetermined rate structure.

Loans, net of allowance for loan losses: Fair values for loans, other than impaired, are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows of the underlying portfolios. The discount rates used in these calculations are generally derived from the treasury yield curve and are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimated maturity is based on the Company’s historical experience with repayments for each loan classification. Changes in these significant unobservable inputs used in discounted cash flow analysis, such as the discount rate or prepayment speeds, could lead to changes in the underlying fair value.

Bank owned life insurance: The carrying value of bank owned life insurance approximates the fair value based on applicable redemption provisions.

Accrued interest receivable and payable and securities sold under agreements to repurchase: The carrying amounts for accrued interest receivable, accrued interest payable and securities sold under agreements to repurchase approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand.

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the current market rates currently offered for deposits of similar remaining maturities.

 

Page 55


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Federal Home Loan Bank (“FHLB”) advances: Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows of the underlying debt agreements. The discount rate is estimated using the current rate for the borrowing from the FHLB with the most similar terms.

Fair value swap asset and liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date.

(15) Preferred Shares

On December 19, 2013, the Company completed the sale of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a 6.50% Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B, of the Company, with a liquidation preference of $1,000 per share (equivalent to $25.00 per depositary share). The Company sold the maximum of 1,000,000 depositary shares in the offering, resulting in gross proceeds to the Company of $25,000.

Using proceeds from the sale of the depositary shares, the Company redeemed all of its outstanding Series A Preferred Shares for an aggregate purchase price of $22,857, which redemption was completed as of February 15, 2014.

(16) Derivative Hedging Instruments

To accommodate customer need and to support the Company’s asset/liability positioning, on occasion we enter into interest rate swaps with a customer and a bank counterparty. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.

 

Page 56


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of June 30, 2015.

 

            Weighted     Impact of a       
     Notional      Average Rate     1 basis point change      Repricing
     Amount      Received/(Paid)     in interest rates      Frequency

Derivative Assets

   $ 31,601         5.30   $ 19       Monthly

Derivative Liabilities

     (31,601      -5.30     (19    Monthly
  

 

 

      

 

 

    

Net Exposure

   $ —           $ —        
  

 

 

      

 

 

    

The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of December 31, 2014

 

            Weighted     Impact of a       
     Notional      Average Rate     1 basis point change      Repricing
     Amount      Received/(Paid)     in interest rates      Frequency

Derivative Assets

   $ 29,060         5.47   $ 19       Monthly

Derivative Liabilities

     (29,060      -5.47     (19    Monthly
  

 

 

      

 

 

    

Net Exposure

   $ —           $ —        
  

 

 

      

 

 

    

The Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All hedge transactions must be approved in advance by the Lenders Loan Committee or the Directors Loan Committee of the Board of Directors.

 

Page 57


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2015 compared to December 31, 2014, and the consolidated results of operations for the three- and six-month periods ended June 30, 2015, compared to the same periods in 2014. 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 results discussed in the forward-looking statements include, but are not limited to, changes in financial markets or national or local economic conditions; sustained weakness or deterioration in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and assessments; changes in tax laws; failure of or breach in our information and data processing systems; unforeseen litigation; and other risks identified from time-to-time in the Company’s other public documents on file with the SEC, including those risks identified in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. 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.

 

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Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Financial Condition

Total assets of the Company at June 30, 2015 were $1,317,272 compared to $1,213,191 at December 31, 2014, an increase of $104,081, or 8.6 percent. The increase in total assets was mainly attributable to an increase in cash and due from banks, loans held for sale and the merger of TCNB Financial Corp. (“TCNB”) with the Company. Total liabilities at June 30, 2015 were $1,197,250 compared to $1,097,282 at December 31, 2014, an increase of $99,968, or 9.1 percent. The increase in total liabilities was mainly attributable to an increase in total deposits and accrued expenses and other liabilities offset by a decrease in FHLB advances and securities sold under agreements to repurchase.

Net loans have increased $87,621 or 9.7 percent since December 31, 2014. The increase in net loans was spread across all segments and resulted primarily from the acquisition of net loans totaling $76,830 from TCNB. Commercial and agriculture loans increased $14,786, with a total of $13,799 of these being acquired as part of the TCNB acquisition. Commercial real estate – owner occupied loans increased $26,586, with a total of $23,029 of these loans being acquired as part of the TCNB acquisition. Commercial real estate-non-owner occupied loans increased $23,164, with a total of $13,808 of these loans being acquired as part of the TCNB acquisition. Residential real estate loans increased $14,102, with a total of $17,541 of these loans being acquired as part of the TCNB acquisition. Real estate construction loans increased $3,282, with a total of $3,863 of these loans being acquired as part of the TCNB acquisition. Consumer and other loans increased $6,140, with a total of $4,790 of these loans being acquired as part of the TCNB acquisition.

Loans held for sale have increased $1,624 or 67.4 percent since December 31, 2014, due to increased originations and sales volumes during the first six months of 2015. At June 30, 2015, the net loan to deposit ratio was 91.9 percent compared to 93.0 percent at December 31, 2014. This ratio has declined in 2015 due to the increase in deposits outpacing loan growth.

For the six months of operations in 2015, $800 was placed into the allowance for loan losses from earnings, compared to $1,500 in the same period of 2014. The decrease in provision for loan losses in the first six months of 2015 is related to the decrease in the specific reserve required for loans and a decrease in net charge-offs compared to a year ago. Net charge-offs have decreased to $361, compared to $2,633 in 2014. For the first six months of 2015, the Company charged off thirty-three loans. Fifteen real estate mortgage loans totaling $376 net of recoveries, four commercial real estate – owner occupied loans totaling $(12) net of recoveries, three commercial real estate – non-owner occupied loans totaling $(26) net of recoveries, zero commercial and agriculture loans totaling ($31) net of recoveries and zero real estate construction loans totaling ($3) net of recoveries were charged off in the first six months of the year. In addition, eleven Consumer and Other loans totaling $57, net of recoveries, were charged off. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans have decreased by $638 since December 31, 2014, which was due to a decrease in loans on nonaccrual status. 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. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses.

 

Page 59


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Management analyzes each commercial and commercial real estate loan, 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 indicate that underlying cash flows are not adequate to meet its debt service requirements. In addition, 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 1.47 percent at June 30, 2015 and 1.56 percent at December 31, 2014.

The available for sale security portfolio decreased by $476, from $197,905 at December 31, 2014 to $197,429 at June 30, 2015. Management continually evaluates our securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which the Company is exposed. These evaluations may cause the Company to change the level of funds it deploys into investment securities and change the composition of its investment securities portfolio. As of June 30, 2015, the Company was in compliance with all pledging requirements.

Premises and equipment, net, have increased $1,908 from December 31, 2014 to June 30, 2015. The increase is attributed to the acquisition of TCNB assets of $1,739, consisting of branch offices and equipment within those branches. The remaining difference resulted from new purchases of $727, offset by depreciation of $558.

Goodwill increased by $5,121, from $21,720 at December 31, 2014 to $26,841 at June 30, 2015. The increase is due to the goodwill created from the merger with TCNB. Other intangible assets increased $742 from year-end 2014. The increase includes $1,009 of core deposit intangibles from the merger with TCNB.

Total deposits at June 30, 2015 increased $106,888 from year-end 2014. Noninterest-bearing deposits increased $46,061 from year-end 2014, while interest-bearing deposits, including savings and time deposits, increased $60,827 from December 31, 2014. The increase in noninterest-bearing deposits was primarily due to the acquisition of TCNB, which added noninterest-bearing deposits of $18,263, as well as an increase in commercial accounts related to the Company’s participation in a tax refund processing program. The interest-bearing deposit increase was mainly due to the acquisition of TCNB, which contributed interest-bearing deposits totaling $68,606. The year-to-date average balance of total deposits increased $83,109 compared to the average balance of the same period in 2014. The increase in average balance is due to increases of $44,294 in demand deposit accounts, $16,510 in brokered deposits, $22,459 in money market savings, $6,720 in interest-bearing demand, $3,556 in interest-bearing public funds and $3,954 in statement saving accounts, offset by decreases of $17,392 in time certificates and $1,328 in IRA’s.

 

Page 60


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

FHLB advances decreased $9,900 from December 31, 2014 to June 30, 2015. The decrease is mainly due to a decrease in overnight funds of $4,900. In addition, the Company had one FHLB advance mature during the six months ended June 30, 2015. The advance matured on March 11, 2015, in the amount of $5,000. This advance had a term of eighty-four months with a fixed rate of 2.84%. The advance was not replaced. Securities sold under agreements to repurchase, which tend to fluctuate, have decreased $4,153 from December 31, 2014 to June 30, 2015.

Accrued expenses and other liabilities increased $7,133 from December 31, 2014 to June 30, 2015. The increase is primarily the result of an increase in a clearing account related to the Company’s tax refund processing program.

Shareholders’ equity at June 30, 2015 was $120,022, or 9.1 percent of total assets, compared to $115,909, or 9.6 percent of total assets, at December 31, 2014. The decrease in the ratio of equity to total assets was the result of an increase in total assets. The increase in shareholders’ equity was primarily due to net income of $6,292, a decrease in the Company’s pension liability, net of tax, of $92, a decrease in the fair value of securities available for sale, net of tax, of $723 and offset by dividends on preferred stock and common stock of $795 and $777, respectively. Additionally, $24 was recognized as stock-based compensation in connection with the grant of restricted shares. Total outstanding common shares at June 30, 2015 were 7,826,595. Total outstanding common shares at December 31, 2014 were 7,707,917. The increase in common shares outstanding is the result of the conversion of 928 preferred shares into 118,678 common shares under the provisions of the Form S-1, as amended, filed with the Securities and Exchange Commission on November 1, 2013.

 

Page 61


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Results of Operations

Six Months Ended June 30, 2015 and 2014

The Company had net income of $6,292 for the six months ended June 30, 2015, an increase of $1,341 from net income of $4,951 for the same six months of 2014. Basic earnings per common share were $0.71 for the six months ended June 30, 2015, compared to $0.50 for the same period in 2014. Diluted earnings per common share were $0.58 for the six months ended June 30, 2015, compared to $0.43 for the same period in 2014. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2015 was $22,831, an increase of $2,399 from $20,432 in the same six months of 2014. Total interest income for the six months ended June 30, 2015 was $24,503, an increase of $1,823 from $22,680 in the same six months of 2014. Average earning assets increased 6.8 percent during the period ended June 30, 2015 as compared to the same period in 2014. Average loans and non-taxable securities for the first six months of 2015 increased 11.9 percent and 14.0 percent, respectively, compared to the first six months of last year. The increases were offset by decreases in taxable securities and interest-bearing deposits in banks. Interest-bearing deposits in other banks decreased mainly due to the timing of cash inflows and outflows related to our tax refund processing program. The yield on earning assets increased 6 basis points for the first six months of 2015 compared to the first six months of last year. Total interest expense for the six months ended June 30, 2015 was $1,672, a decrease of $576 from $2,248 in the same six months of 2014. Interest expense on time deposits and FHLB borrowings decreased $135 and $436, respectively in the first six months of 2015 compared to the same period in 2014. Average time deposits for the first six months of 2015 decreased 0.7 percent compared to the first six months of 2014, while average FHLB borrowings for the first six months of 2015 decreased 19.9 percent compared to the first six months of 2014. The interest rate paid on time deposits during the first six months of 2015 decreased by 12 basis points as compared to the same period in 2014. The interest rate paid on FHLB borrowings during the first six months of 2015 decreased 204 basis points as compared to the same period in 2014. The Company’s net interest margin for the six months ended June 30, 2015 and 2014 was 3.81% and 3.63%, respectively.

 

Page 62


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the condensed average balance sheets for the six months ended June 30, 2015 and 2014. 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 34% 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.

 

     Six Months Ended June 30,  
     2015     2014  
     Average
balance
    Interest      Yield/
rate *
    Average
Balance
    Interest      Yield/
rate *
 

Assets:

              

Interest-earning assets:

              

Loans

   $ 959,474      $ 21,516         4.53   $ 857,765      $ 19,632         4.62

Taxable securities

     141,420        1,629         2.37     155,487        1,765         2.31

Non-taxable securities

     70,128        1,264         5.78     61,512        1,155         5.87

Interest-bearing deposits in other banks

     79,794        94         0.24     96,719        128         0.26
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,250,816        24,503         4.08     1,171,483        22,680         4.02
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-earning assets:

              

Cash and due from financial institutions

     46,515             50,117        

Premises and equipment, net

     15,537             16,638        

Accrued interest receivable

     4,225             4,112        

Intangible assets

     27,513             23,841        

Other assets

     9,877             8,554        

Bank owned life insurance

     19,737             19,255        

Less allowance for loan losses

     (14,520          (16,479     
  

 

 

        

 

 

      

Total assets

   $ 1,359,700           $ 1,277,521        
  

 

 

        

 

 

      

Liabilities and Shareholders Equity:

              

Interest-bearing liabilities:

              

Demand and savings

   $ 540,336      $ 207         0.08   $ 499,948      $ 185         0.08

Time

     228,846        868         0.76     230,419        1,003         0.88

FHLB

     30,179        215         1.44     37,686        651         3.48

Subordinated debentures

     29,427        373         2.56     29,427        399         2.73

Repurchase agreements

     18,745        9         0.10     20,246        10         0.10
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     847,533        1,672         0.40     817,726        2,248         0.55
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     379,786             335,492        

Other liabilities

     14,258             11,322        

Shareholders’ equity

     118,123             112,981        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 1,359,700           $ 1,277,521        
  

 

 

        

 

 

      

Net interest income and interest rate spread

  

  $ 22,831         3.68     $ 20,432         3.47

Net interest margin

          3.81          3.63

 

* - All yields and costs are presented on an annualized and tax equivalent basis

 

Page 63


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the six months ended June 30, 2015 and 2014. The table is presented on a fully tax-equivalent basis.

 

     Increase (decrease) due to:  
     Volume(1)      Rate(1)      Net  
     (Dollars in thousands)  

Interest income:

        

Loans

   $ 2,288       $ (404    $ 1,884   

Taxable securities

     (164      28         (136

Nontaxable securities

     163         (54      109   

Interest-bearing deposits in other banks

     (21      (13      (34
  

 

 

    

 

 

    

 

 

 

Total interest income

   $ 2,266       $ (443    $ 1,823   
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Demand and savings

   $ 15       $ 7       $ 22   

Time

     (7      (128      (135

FHLB

     (110      (326      (436

Subordinated debentures

     —           (26      (26

Repurchase agreements

     (1      —           (1
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $ (103    $ (473    $ (576
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 2,369       $ 30       $ 2,399   
  

 

 

    

 

 

    

 

 

 

 

(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. The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses. Provisions for loan losses totaled $800 for the six months ended June 30, 2015, compared to $1,500 for the same period in 2014. The decrease in provision for loan losses in the first six months of 2015 is related to the decrease in the specific reserve required for loans and a decrease in net charge-offs compared to a year ago.

 

Page 64


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Noninterest income for the six months ended June 30, 2015 was $8,053, an increase of $49 or 0.6 percent from $8,004 for the same period of 2014. The primary reasons for the decrease follow.

Service charge fee income for the period ended June 30, 2015 was $2,225, up $151 or 7.3 percent over the same period of 2014. The increase is primarily due to an increase in business service charges partially offset by a decrease in overdraft fees.

Trust fee income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets that we manage and the fee rate charged to customers. Trust fee income decreased $73 or 4.6 percent during the period ended June 30, 2015 compared to the same period in 2014. The decrease is related to a general decrease in brokerage transactions compared to the same period in 2014.

Gain on the sale of securities decreased $112 during the period ended June 30, 2015 compared to the same period of 2014. Management, from time to time, will reposition the investment portfolio to match liquidity needs of the Company.

Gain on sale of loans increased $388 or 168.0 percent during the period ended June 30, 2015 compared to the same period of 2014. The increase is due to an increase in volume of loans sold during the first six months of 2015 as compared to the same period in 2014, as well as an increase in the premium earned .

The Company processes state and federal income tax refund payments for customers of third-party income tax preparation vendors. The third-party vendors pay us a fee for processing the payments. As a result of this change, tax refund processing fees decreased $315 or 13.6 percent during the period ended June 30, 2015 compared to the same period in 2014. In 2015, a new fee structure was agreed upon between the Company and its’ vendors. The new fee calls for a flat processing fee, whereas in 2014, the Company received a per transaction fee. This fee income is seasonal in nature, the majority of which is received in the first quarter of the year.

Noninterest expense for the six months ended June 30, 2015 was $21,537, an increase of $1,129, from $20,408 reported for the same period of 2014. The primary reasons for the increase follow.

Salary and other employee costs were $11,708, up $700 or 6.4 percent as compared to the same period of 2014. The increase was mainly due to an increase in salaries and 401(k) expenses. Salaries and related payroll taxes increased mainly due to annual pay increases and overtime related to the acquisition of TCNB, as well as the addition of TCNB employees. In 2015, the Company adopted a Safe Harbor 401(k) plan which increased the match paid to participants.

Contracted data processing costs were $993, up $282 or 39.7 percent compared to the same period in 2014 due to increases in the cost of technology services and core processing costs related to the acquisition of TCNB.

 

Page 65


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Amortization expense decreased $69, or 17.1 percent from the same period of 2014, as a result of scheduled amortization of intangible assets associated with mergers.

ATM costs were $445, up $42 or 10.4 percent compared to the same period in 2014. The increase is due to software upgrades performed on the Company’s ATM network during the first six months of 2015, offset by vendor credits that began in the second quarter of 2015.

Marketing costs were $544, down $249 or 31.4 percent compared to the same period in 2014. In 2014, the Company increased marketing expenses as part of its rebranding effort.

Professional service costs were $1,119, up $325 or 40.9 percent compared to the same period in 2014. The increase is due to increased legal and audit fees relating to the acquisition of TCNB, increased recruiting expenses and increased legal expenses that were previously disclosed concerning litigation related to a proposed sale of real estate that the Company owns near one of its branches.

Income tax expense for the six months ended June 30, 2015 totaled $2,255, up $678 compared to the same period in 2014. The effective tax rates for the six-month periods ended June 30, 2015 and June 30, 2014 were 26.4% and 24.2%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits and bank owned life insurance income. The increase in the effective tax rate as of June 30, 2015 is the result of an increase in taxable income as compared to the same period in 2014.

Three Months Ended June 30, 2015 and 2014

The Company had net income of $3,122 for the three months ended June 30, 2015, an increase of $882 from net income of $2,240 for the same three months of 2014. Basic earnings per common share were $0.35 for the quarter ended June 30, 2015, compared to $0.24 for the same period in 2014. Diluted earnings per common share were $0.29 for the quarter ended June 30, 2015, compared to $0.21 for the same period in 2014. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended June 30, 2015 was $11,916, an increase of $1,650 from $10,266 in the same three months of 2014. The Company’s net interest margin for the three months ended June 30, 2015 and 2014 was 3.96% and 3.76%, respectively. Total interest income for the three months ended June 30, 2015 was $12,740, an increase of $1,375 from $11,365 in the same three months of 2014. Average earning assets increased 10.1 percent during the quarter ended June 30, 2015 as compared to the same period in 2014. Average loans, non-taxable securities and bank stocks for the second quarter of 2015 increased 15.0 percent, 14.1 percent and 6.7 percent, respectively, compared to the second quarter of last year. The yield on earning assets increased 8 basis points for the second quarter of 2015 compared to the second quarter of last year. Total interest expense for the three months ended June 30, 2015 was $824, a decrease of $275 from $1,099 in the same three months of 2014. Interest expense on time deposits and FHLB borrowings decreased $54 and $233, respectively in the second quarter of 2015 compared to the same period in 2014. Average FHLB borrowings for the second quarter of 2015 decreased 31.1 percent compared to the second quarter of 2014. The interest rate paid on time deposits and FHLB borrowings during the second quarter of 2015 also decreased by 12 and 203 basis points, respectively as compared to the same period in 2014.

 

Page 66


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the condensed average balance sheets for the three months ended June 30, 2015 and 2014. 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 34% 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.

 

     Three Months Ended June 30,  
     2015     2014  
     Average
balance
    Interest      Yield/
rate *
    Average
balance
    Interest      Yield/
rate *
 

Assets:

              

Interest-earning assets:

              

Loans

   $ 991,487      $ 11,270         4.56   $ 861,842      $ 9,850         4.59

Taxable securities

     140,943        796         2.31     151,020        893         2.40

Non-taxable securities

     70,610        640         5.74     61,889        580         5.87

Interest-bearing deposits in other banks

     43,691        34         0.31     57,500        42         0.29
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

   $ 1,246,731        12,740         4.23   $ 1,132,251        11,365         4.15
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-earning assets:

              

Cash and due from financial institutions

     26,222             25,769        

Premises and equipment, net

     16,173             16,371        

Accrued interest receivable

     4,561             4,332        

Intangible assets

     29,164             23,740        

Other assets

     10,885             9,155        

Bank owned life insurance

     19,795             19,320        

Less allowance for loan losses

     (14,593          (16,271     
  

 

 

        

 

 

      

Total Assets

   $ 1,338,938           $ 1,214,667        
  

 

 

        

 

 

      

Liabilities and Shareholders Equity:

              

Interest-bearing liabilities:

              

Demand and savings

   $ 555,144      $ 109         0.08   $ 505,828      $ 95         0.08

Time

     233,047        424         0.73     225,182        478         0.85

FHLB

     25,958        94         1.45     37,649        327         3.48

Subordinated debentures

     29,427        193         2.63     29,427        195         2.66

Repurchase Agreements

     17,302        4         0.09     16,590        4         0.10
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

   $ 860,878        824         0.38   $ 814,676        1,099         0.54
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     345,241             278,266        

Other liabilities

     13,607             11,846        

Shareholders’ Equity

     119,212             109,879        
  

 

 

        

 

 

      

Total Liabilities and Shareholders’ Equity

   $ 1,338,938           $ 1,214,667        
  

 

 

        

 

 

      

Net interest income and interest rate spread

  

  $ 11,916         3.85     $ 10,266         3.61

Net interest margin

          3.96          3.76

 

* - All yields and costs are presented on an annualized basis

 

Page 67


Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the three months ended June 30, 2015 and 2014. The table is presented on a fully tax-equivalent basis.

 

     Increase (decrease) due to:  
     Volume(1)      Rate(1)      Net  
     (Dollars in thousands)  

Interest income:

        

Loans

   $ 1,474       $ (54    $ 1,420   

Taxable securities

     (59      (38      (97

Nontaxable securities

     83         (23      60   

Interest-bearing deposits in other banks

     (11      3         (8
  

 

 

    

 

 

    

 

 

 

Total interest income

   $ 1,487       $ (112    $ 1,375   
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Demand and savings

     10         4         14   

Time

     16         (70      (54

FHLB

     (81      (152      (233

Subordinated debentures

     —           (2      (2

Repurchase agreements

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $ (55    $ (220    $ (275
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 1,542       $ 108       $ 1,650   
  

 

 

    

 

 

    

 

 

 

 

(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.

Provision for loan losses totaled $400 for the three months ended June 30, 2015, compared to $750 for the same period in 2014. The decrease in provision for loan losses in the second quarter of 2015 is related to the decrease in the specific reserve required for loans and a decrease in net charge-offs compared to a year ago.

Noninterest income for the three months ended June 30, 2015 was $3,652, an increase of $272 or 8.0 percent from $3,380 for the same period of 2014. The primary reasons for the increase follow.

Service charge fee income for the period ended June 30, 2015 was $1,170, up $106 or 10.0 percent over the same period of 2014. The increase is primarily due to an increase in business service charges partially offset by a decrease in overdraft fees.

 

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Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Trust fee income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets that we manage and the fee rate charged to customers. Trust fee income decreased $52 or 6.6 percent during the second quarter of 2015 compared to the same period in 2014. The decrease is related to a general decrease in brokerage transactions compared to the same period in 2014.

Gain on the sale of securities decreased $107 during the second quarter of 2015 compared to the same period of 2014. Management, from time to time, will reposition the investment portfolio to match liquidity needs of the Company.

Gain on the sale of loans increased $287 or 224.2 percent during the second quarter of 2015 compared to the same period of 2014. The increase is due to an increase in volume of loans sold during the second quarter of 2015 compared to the same period of 2014, as well as an increase in the premiums earned.

Noninterest expense for the three months ended June 30, 2015 was $10,933, an increase of $954, from $9,979 reported for the same period of 2014. The primary reasons for the increase follow.

Salary and other employee costs were $5,809, up $528 or 10.0 percent as compared to the same period of 2014. The increase was mainly due to an increase in salaries and related taxes and 401(k) expenses. Salaries and related payroll taxes increased mainly due to annual pay increases. In 2015, the Company the Company adopted a Safe Harbor 401(k) plan which increased the match paid to participants.

Contracted data processing costs were $545, up $153 or 39.0 percent compared to the same period in 2014 due to increases in cost of technology services and in core processing costs related to the acquisition of TCNB.

Net occupancy and equipment costs were $980, up $46 or 4.9 percent compared to the same period in 2014. The increase is mainly due to the cancellation of alarm system maintenance services as a result of the Company’s merger with TCNB.

ATM costs were $162, down $38 or 19.0 percent compared to the same period in 2014. The decrease is due to credits received from a vendor for billing errors.

Marketing costs were $308, down $94 or 23.4 percent compared to the same period in 2014. In 2014, the Company increased marketing expenses as part of our rebranding efforts.

Professional service costs were $663, up $260 or 64.5 percent compared to the same period in 2014. The increase is due to increased legal and audit fees relating to the acquisition of TCNB, increased recruiting expenses and increased legal expenses that were previously disclosed concerning litigation related to a proposed sale of real estate that the Company owns near one of its branches.

Other operating expenses were $1,832, up $146 or 8.7 percent compared to the same period in 2014. The increase is mainly due to increased travel and lodging, stationary and supplies and general insurance expenses as compared to the same period in 2014.

 

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Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Income tax expense for the three months ended June 30, 2015 totaled $1,113, up $436 compared to the same period in 2014. The effective tax rates for the three-month periods ended June 30, 2015 and June 30, 2014 were 26.3% and 23.2%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits and bank owned life insurance income.

Capital Resources

Shareholders’ equity totaled $120,022 at June 30, 2015 compared to $115,909 at December 31, 2014. The increase in shareholders’ equity resulted primarily from net income of $6,292, which was offset by dividends on preferred stock and common stock of $795 and $777, respectively.

During the first quarter of 2015, the Company adopted the new BASEL III regulatory capital framework as approved by the federal banking agencies. The final BASEL III rules also require the Company to now maintain minimum amounts and ratios of Common Equity Tier 1 Capital to risk-weighted assets (as these terms are defined in the BASEL III rules). Under the BASEL III rules, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, The Company’s regulatory capital ratios were calculated under BASEL I rules because the BASEL III rules were not yet effective and, thus, the Common Equity Tier 1 Capital ratio was not required. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of June 30, 2015 and December 31, 2014 as identified in the following table:

 

     Total Risk
Based
Capital
    Tier I Risk
Based
Capital
    CET1 Risk
Based
Capital
    Leverage
Ratio
 

Corporation Ratios—June 30, 2015

     13.5     12.2     7.1     9.4

Corporation Ratios—December 31, 2014

     14.7     13.4     N/A        10.7

For Capital Adequacy Purposes

     8.0     6.0     4.5     4.0

To Be Well Capitalized Under Prompt Corrective Action Provisions

     10.0     8.0     6.5     5.0

The Company paid a cash dividend of $0.05 per common share on February 1, 2015 and on May 1, 2015. In 2014, the Company paid a cash dividend of $0.04 per common share on February 1 and a cash dividend of $0.05 per common share on May 1. The Company also paid a 6.50% cash dividend on its Series B preferred shares in the amount of approximately $404 on March 15, 2015 and approximately $391 on June 16, 2015. In 2014, the Company paid the final 5.00% cash dividend on its Series A preferred shares in the amount of approximately $267 at the time of redemption, which was completed on February 15, 2014. The Company also paid an annualized 6.50% cash dividend on its Series B preferred shares in the amount of approximately $388 on March 17, 2014 and approximately $388 on June 16, 2014.

 

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Table of Contents

Civista Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Form 10-Q

(Amounts in thousands, except share data)

 

 

Liquidity

The Company maintains a conservative liquidity position. All securities are classified as available for sale. Securities, with maturities of one year or less, totaled $632, or 0.3 percent of the total security portfolio at June 30, 2015. The available for sale portfolio helps to provide the Company with the ability to meet its funding needs. The 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.

Cash from operations for the period ended June 30, 2015 was $13,323. This includes net income of $6,292 plus net adjustments of $7,031 to reconcile net earnings to net cash provided by operations. Cash provided by operations is primarily from proceeds from sale of loans and net change in other assets and accrued expenses of $24,590 and $6,525, respectively. Cash used by operations is primarily from loans originated for sale of $25,595. Cash used by investing activities was $12,483 for the period ended June 30, 2015. Cash received from investing activities is primarily from maturing, called securities of $14,870. This increase in cash was offset by security purchases, net loan originations and loan purchases of $16,194, $8,603 and $2,975, respectively. Cash provided from financing activities for the first six months of 2015 totaled $4,394. The increase of cash from financing activities is due to a net change in deposits of $20,019 for the first six months of 2015. Noninterest-bearing deposits increased $27,798 from year-end 2014, while interest-bearing deposits, including savings and time deposits, decreased $7,779 during the first six months of 2015. Cash of $9,900 was used to repay short term FHLB overnight advances and to repay a matured FHLB advance. In addition, securities sold under agreements to repurchase decreased $4,153, cash of $795 was used to pay preferred dividends and cash of $777 was used to pay common dividends. Cash and cash equivalents increased from $29,858 at December 31, 2014 to $35,092 at June 30, 2015.

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 $35,000. As of June 30, 2015, Civista had total credit availability with the FHLB of $129,766, with a remaining borrowing capacity of approximately $51,666.

 

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Table of Contents

Civista Bancshares, Inc.

Quantitative and Qualitative Disclosures About Market Risk

Form 10-Q

(Amounts in thousands, except share data)

 

 

 

ITEM 3. 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 Company, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk.

Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

 

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Table of Contents

Civista Bancshares, Inc.

Quantitative and Qualitative Disclosures About Market Risk

Form 10-Q

(Amounts in thousands, except share data)

 

 

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.

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 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, 2014 and June 30, 2015, 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 an interest rate decrease of 100 basis points at June 30, 2015 and December 31, 2014.

 

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Table of Contents

Civista Bancshares, Inc.

Quantitative and Qualitative Disclosures About Market Risk

Form 10-Q

(Amounts in thousands, except share data)

 

 

The Company had derivative financial instruments as of December 31, 2014 and June 30, 2015. T