10-Q 1 d96681d10q.htm FORM 10-Q Form 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: September 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 November 5, 2015 - 7,843,578 shares

 

 

 


Table of Contents

CIVISTA BANCSHARES, INC.

Index

 

PART I.  

Financial Information

  
Item 1.  

Financial Statements:

  
 

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

     3   
 

Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2015 and 2014

     4   
 

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

     5   
 

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) Nine months ended September  30, 2015

     6   
 

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

     7-8   
 

Notes to Interim Consolidated Financial Statements (Unaudited)

     9-56   
Item 2.  

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

     57-74   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     75-77   
Item 4.  

Controls and Procedures

     78   
PART II.  

Other Information

  
Item 1.  

Legal Proceedings

     79   
Item 1A.  

Risk Factors

     79   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     79   
Item 3.  

Defaults upon Senior Securities

     79   
Item 4.  

Mine Safety Disclosures

     79   
Item 5.  

Other Information

     79   
Item 6.  

Exhibits

     79-80   
Signatures      81   


Table of Contents

Part I – Financial Information

 

ITEM 1. Financial Statements

CIVISTA BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     September 30,
2015
    December 31,
2014
 

ASSETS

    

Cash and due from financial institutions

   $ 33,619      $ 29,858   

Securities available for sale

     198,655        197,905   

Loans held for sale

     1,223        2,410   

Loans, net of allowance of $14,760 and $14,268

     985,515        900,589   

Other securities

     13,324        12,586   

Premises and equipment, net

     16,200        14,400   

Accrued interest receivable

     4,880        3,852   

Goodwill

     27,095        21,720   

Other intangibles

     2,588        2,025   

Bank owned life insurance

     19,987        19,637   

Other assets

     10,245        8,209   
  

 

 

   

 

 

 

Total assets

   $ 1,313,331      $ 1,213,191   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 296,863      $ 250,701   

Interest-bearing

     759,096        718,217   
  

 

 

   

 

 

 

Total deposits

     1,055,959        968,918   

Federal Home Loan Bank advances

     72,200        65,200   

Securities sold under agreements to repurchase

     20,887        21,613   

Subordinated debentures

     29,427        29,427   

Accrued expenses and other liabilities

     11,521        12,124   
  

 

 

   

 

 

 

Total liabilities

     1,189,994        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 September 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 September 30, 2015 and 8,455,881 shares issued at December 31, 2014

     115,267        114,365   

Accumulated earnings (deficit)

     2,884        (4,306

Treasury shares, 747,964 shares at cost

     (17,235     (17,235

Accumulated other comprehensive income (loss)

     148        (47
  

 

 

   

 

 

 

Total shareholders’ equity

     123,337        115,909   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,313,331      $ 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
September 30,
     Nine months ended
September 30,
 
     2015     2014      2015     2014  

Interest and dividend income

         

Loans, including fees

   $ 11,755      $ 10,218       $ 33,271      $ 29,850   

Taxable securities

     810        845         2,439        2,610   

Tax-exempt securities

     653        595         1,917        1,750   

Federal funds sold and other

     5        9         98        137   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     13,223        11,667         37,725        34,347   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Deposits

     513        552         1,588        1,740   

Federal Home Loan Bank advances

     111        236         326        887   

Subordinated debentures

     192        190         565        590   

Other

     5        5         15        15   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     821        983         2,494        3,232   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     12,402        10,684         35,231        31,115   

Provision for loan losses

     400        —           1,200        1,500   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     12,002        10,684         34,031        29,615   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Service charges

     1,262        1,110         3,487        3,184   

Net gain (loss) on sale of securities

     (5     1         (5     114   

Net gain on sale of loans

     269        239         888        470   

ATM fees

     520        481         1,484        1,388   

Trust fees

     659        822         2,159        2,396   

Bank owned life insurance

     116        118         350        373   

Tax refund processing fees

     —          6         2,000        2,321   

Other

     255        235         769        770   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     3,076        3,012         11,132        11,016   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense

         

Salaries, wages and benefits

     6,025        5,654         17,732        16,661   

Net occupancy expense

     595        510         1,833        1,771   

Equipment expense

     303        320         1,030        1,023   

Contracted data processing

     399        369         1,392        1,080   

FDIC assessment

     192        212         654        700   

State franchise tax

     205        240         661        680   

Professional services

     597        538         1,716        1,332   

Amortization of intangible assets

     189        201         522        604   

ATM expense

     119        203         563        606   

Marketing

     298        434         842        1,227   

Other operating expenses

     1,744        1,980         5,258        5,384   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     10,666        10,661         32,203        31,068   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before taxes

     4,412        3,035         12,960        9,563   

Income tax expense

     1,159        729         3,414        2,306   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

     3,253        2,306         9,546        7,257   

Preferred stock dividends and discount accretion

     391        406         1,186        1,467   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 2,862      $ 1,900       $ 8,360      $ 5,790   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.36      $ 0.25       $ 1.07      $ 0.75   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, diluted

   $ 0.30      $ 0.21       $ 0.87      $ 0.64   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 4


Table of Contents

CIVISTA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 3,253      $ 2,306      $ 9,546      $ 7,257   

Other comprehensive income:

        

Unrealized holding gains on available for sale securities

     1,183        615        87        4,303   

Tax effect

     (403     (210     (30     (1,462

Pension liability adjustment

     70        89        210        4,260   

Tax effect

     (24     (31     (72     (1,448
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income

     826        463        195        5,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,079      $ 2,769      $ 9,741      $ 12,910   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

    —          —          —          —          9,546        —          —          9,546   

Other comprehensive loss

    —          —          —          —          —          —          195        195   

Conversion of Series B preferred shares to common shares

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

Stock-based compensation

    —          —          16,983        43        —          —          —          43   

Common stock dividends ($.15 per share)

    —          —          —          —          (1,170     —          —          (1,170

Preferred stock dividend

    —          —          —          —          (1,186     —          —          (1,186
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

    24,072      $ 22,273        7,843,578      $ 115,267      $ 2,884      $ (17,235   $ 148      $ 123,337   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

    

Nine months ended

September 30,

 
     2015     2014  
  

 

 

   

 

 

 

Net cash from operating activities

   $ 14,375      $ 11,043   
  

 

 

   

 

 

 

Cash flows used for investing activities:

    

Maturities and calls of securities, available-for-sale

     20,538        38,343   

Purchases of securities, available-for-sale

     (22,250     (54,425

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

     (160     (140

Net loan originations

     (9,426     (25,406

Purchase of consumer loans

     (3,826     (3,120

Proceeds from sale of other real estate owned properties

     289        191   

Cash acquired in acquisition, net of purchase price

     926        —     

Proceeds from sale of premises and equipment

     —          1,310   

Purchases of premises and equipment

     (933     (257
  

 

 

   

 

 

 

Net cash used for investing activities

     (14,704     (22,406
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of long-term FHLB advances

     (5,000     (30,226

Net change in short-term FHLB advances

     12,000        —     

Proceeds from short-term FHLB advances

     —          8,700   

Proceeds from long-term FHLB advances

     —          10,000   

Increase in deposits

     172        38,159   

Increase (decrease) in securities sold under repurchase agreements

     (726     75   

Repayment of series A preferred stock

     —          (22,857

Common dividends paid

     (1,170     (1,079

Preferred dividends paid

     (1,186     (1,467
  

 

 

   

 

 

 

Net cash provided by financing activities

     4,090        1,305   
  

 

 

   

 

 

 

Increase (decrease) in cash and due from financial institutions

     3,761        (10,058

Cash and due from financial institutions at beginning of period

     29,858        34,186   
  

 

 

   

 

 

 

Cash and due from financial institutions at end of period

   $ 33,619      $ 24,128   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 2,468      $ 3,254   

Income taxes

   $ 2,250      $ 950   

Supplemental cash flow information:

    

Transfer of loans from portfolio to other real estate owned

   $ 174      $ 261   

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

CIVISTA BANCSHARES, INC

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

(In thousands)

 

 

        
    

Nine months ended

September 30, 2015

 

Acquisition of TCNB Financial Corp.

  

Noncash assets acquired:

  

Loans receivable

   $ 76,444   

Other securities

     716   

Accrued interest receivable

     194   

Premises and equipment, net

     1,738   

Core deposit intangible

     1,009   

Other assets

     472   
  

 

 

 

Total non cash assets acquired

     80,573   

Liabilities assumed:

  

Deposits

     86,869   

Other liabilities

     5   
  

 

 

 

Total liabilities assumed

     86,874   

Net noncash liabilities acquired

   $ 6,301   
  

 

 

 

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 September 30, 2015 and its results of operations and changes in cash flows for the periods ended September 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 September 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 $215,807, or 21.7 percent of total loans, as of September 30, 2015 and the other to Lessors of Residential Buildings and Dwellings totaling $134,752, or 13.6 percent of total loans, as of September 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 September 30, 2015. Revenue from Water St. was less than 1.0% of total revenue through September 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)

 

 

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.

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

 

Page 11


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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 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 12


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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 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 August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update.

In August 2015, the FASB issued ASU 2015-15, Interest-Imputation of Interest (Subtopic 835-30) Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting. This ASU adds SEC

 

Page 13


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015 Emerging Issues Task Force meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including 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 fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

Page 14


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 $5,375 was recorded as goodwill and will be evaluated for impairment on an annual basis.

The following table presents financial information for the former TCNB included in the Consolidated Statements of Income from the date of acquisition through September 30, 2015 and for the three-month period ended September 30, 2015.

 

     Actual From
Acquisition Date
Through September 30,
2015
(in thousands)
     For the Three-Month
Period Ended
September 30, 2015
(in thousands)
 

Net interest income after provision for loan losses

   $ 2,291       $ 987   

Noninterest income

     71         —     

Net income

     859         396   

 

Page 15


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 nine and three-month periods ended September 30, 2015 and 2014 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      Pro Formas  
     Nine months ended
September 30,
     Three months ended
September 30,
 
     2015      2014      2015      2014  

Net interest income after provision for loan losses

   $ 36,951       $ 32,799       $ 12,974       $ 30,677   

Noninterest income

     11,624         11,376         3,076         3,093   

Net income

     9,645         7,820         3,599         2,418   

Pro forma earnings per share:

           

Basic

   $ 1.13       $ 0.88       $ 0.41       $ 0.26   

Diluted

   $ 0.88       $ 0.69       $ 0.33       $ 0.22   

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

     76,444      

Other securities

     716      

Premises and equipment

     1,738      

Accrued interest receivable

     194      

Core deposit intangible

     1,009      

Other assets

     472      

Noninterest-bearing deposits

     (18,263   

Interest-bearing deposits

     (68,606   

Other liabilities

     (5   
        11,851   
     

 

 

 

Goodwill

      $ 5,375   
     

 

 

 

 

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 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 $76.4 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. Additionally, certain loans were valued based on their observable sales price. Loans acquired with credit deterioration of $831 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.

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.

 

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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)

 

 

(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:

 

September 30, 2015

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  
           

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

   $ 39,271       $ 234       $ (13    $ 39,492   

Obligations of states and political subdivisions

     87,971         4,551         (143      92,379   

Mortgage-backed securities in government sponsored entities

     65,192         1,079         (74      66,197   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     192,434         5,864         (230      198,068   

Equity securities in financial institutions

     481         106         —           587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,915       $ 5,970       $ (230    $ 198,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

 

 

The amortized cost and fair value of securities at September 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

   $ 4,716       $ 4,731   

Due after one year through five years

     26,519         26,734   

Due after five years through ten years

     30,616         32,110   

Due after ten years

     65,391         68,296   

Mortgage-backed securities

     65,192         66,197   

Equity securities

     481         587   
  

 

 

    

 

 

 

Total securities available for sale

   $ 192,915       $ 198,655   
  

 

 

    

 

 

 

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

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2015      2014      2015      2014  

Sale proceeds

   $ —         $ —         $ —         $ 18,088   

Gross realized gains

     —           —           —           113   

Gross realized losses

     —           —           —           —     

Gains (losses) from securities called or settled by the issuer

     (5      1         (5      1   

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $148,557 and $137,898 as of September 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 September 30, 2015 and December 31, 2014 not recognized in income are as follows:

 

September 30, 2015

   12 Months or less     More than 12 months     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

Description of Securities

   Value      Loss     Value      Loss     Value      Loss  

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

   $ 2,037       $ —        $ 1,192       $ (13   $ 3,229       $ (13

Obligations of states and political subdivisions

     7,866         (93     1,466         (50     9,332         (143

Mortgage-backed securities in gov’t sponsored entities

     6,156         (37     7,649         (37     13,805         (74
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 16,059       $ (130   $ 10,307       $ (100   $ 26,366       $ (230
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

   12 Months or less     More than 12 months     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

Description of Securities

   Value      Loss     Value      Loss     Value      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 September 30, 2015, there were thirty 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:

 

     September 30,      December 31,  
     2015      2014  

Commercial and agriculture

   $ 129,119       $ 114,186   

Commercial real estate- owner occupied

     160,457         143,014   

Commercial real estate- non-owner occupied

     340,702         308,666   

Residential real estate

     284,899         268,510   

Real estate construction

     67,461         65,452   

Consumer and other

     17,637         15,029   
  

 

 

    

 

 

 

Total loans

     1,000,275         914,857   

Allowance for loan losses

     (14,760      (14,268
  

 

 

    

 

 

 

Net loans

   $ 985,515       $ 900,589   
  

 

 

    

 

 

 

Included in total loans above are deferred loan fees of $63 at September 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

     4,404   
  

 

 

 

Net loans

   $ 76,444   
  

 

 

 

 

Page 21


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 and lease losses, the Company has segmented certain loans in the portfolio by product type. Loss migration rates for each risk category are and calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments, except for the segment consisting of purchased automobile loans which is calculated over a two-year period. The use of a three-year period for loss migration analysis is a change in methodology for this period. Previously, a two-year loss migration analysis had been used for the entire portfolio. With continued improvement and stability in economic conditions, regulatory guidance recommends a longer look-back period. In addition, Civista made significant changes to consumer and commercial lending policies in the first quarter of 2012. Combined, the stable economy and now seasoned policy changes indicate a three year period is more reflective of future expectations. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve. 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

 

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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)

 

 

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 $14,760 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and nine months ended September 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 nine months ended September 30, 2015

               

Allowance for loan losses:

               

Beginning balance

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

Charge-offs

    (187     (363     (81     (779     —          (114     —          (1,524

Recoveries

    157        223        105        289        4        38        —          816   

Provision

    (405     506        512        964        (4     245        (618     1,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 1,387      $ 2,946      $ 5,334      $ 4,221      $ 428      $ 365      $ 79      $ 14,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans of $625. The decrease in specific reserves for impaired loans was the result of the resolution of an impaired loan. The Company did not incur losses with this resolution. In addition, criticized commercial & agriculture loan balances have decreased. 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, which is attributable to the change in the lookback period to a three-year period. The increase in the allowance for Commercial Real Estate – Non–Owner Occupied loans was the result of an increase in loss migration rates, which is attributable to the change in the lookback period to a three-year period. The ending reserve balance for Residential Real Estate loans increased from the end of the previous year due to an increase in loss migration rates, which is attributable to the change in the look-back period to a three-year period. The increase in the allowance for Consumer and other loans increased due to an increase in loss migration rates. Unallocated reserves declined due to a change in the Company’s look-back period. The Company changed from a two-year look-back period to a three-year look-back period when calculating all but one segment’s loss migration rates during the third quarter of 2015. The change in

 

Page 23


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

methodology is reflected in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances are up, loss rates continue to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans in total have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio.

 

    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 nine months ended September 30, 2014

                 

Allowance for loan losses:

                 

Beginning balance

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

Charge-offs

    (326     (1,615     (105     (1,329     —           (65     —           (3,440

Recoveries

    238        316        34        216        5         48        —           857   

Provision

    (1,148     902        753        201        176         18        598         1,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance

  $ 1,605      $ 2,866      $ 4,978      $ 4,312      $ 365       $ 215      $ 1,104       $ 15,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the nine months ended September 30, 2014, the allowance for Commercial & 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, which was driven by a decrease in the volume of impaired loans. 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 and a significant decline in past-dues and nonaccrual loans. The net result of these changes was represented as a decrease in the allowance. The allowance for Consumer and Other loans increased slightly from the beginning of the year. While loan balances and past-dues are up, loss rates continue to decrease resulting in the allowance being relatively unchanged. Overall, we have seen continued improvement in asset quality and loss rates. However, since the process of

 

Page 24


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

estimating probable credit losses requires considerable judgment, management decided to increase unallocated reserves. Unallocated reserves remain within policy guidelines as a percent of total reserves at 7.1 percent.

 

    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 September 30, 2015

               

Allowance for loan losses:

               

Beginning balance

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

Charge-offs

    (187     (164     (18     (237     —          (28     —          (634

Recoveries

    127        13        14        124        1        8        —          287   

Provision

    52        (286     (89     864        (7     195        (329     400   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

  $ 1,387      $ 2,946      $ 5,334      $ 4,221      $ 428      $ 365      $ 79      $ 14,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2015, the decrease in the allowance for Commercial Real Estate – Owner Occupied was the result of a significant change in the Special Mention loss migration rate that had been adversely effected by a specific loss on one relationship that occurred in 2014. The effect of this loss as of this quarter end migrated to the Substandard pool and has less of an impact to the reserve. The ending reserve balance for Residential Real Estate loans increased due an increase in criticized loan balances and an increase in loss migration rates. The increase in the allowance for Consumer and other loans increased due to an increase in loss rates. Unallocated reserves declined due to a change in the Company’s lookback period. The Company changed from a two-year lookback period to a three-year lookback period when calculating all but one segment’s loss migration rates during the third quarter of 2015. The change in methodology is reflected in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances are up, loss rates continue to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio.

 

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 September 30, 2014

                  

Allowance for loan losses:

                  

Beginning balance

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

Charge-offs

    (13     (146     —           (275     —           (22     —           (456

Recoveries

    143        241        10         95        2         15        —           506   

Provision

    (592     (364     115         53        76         26        686         —     
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Ending Balance

  $ 1,605      $ 2,866      $ 4,978       $ 4,312      $ 365       $ 215      $ 1,104       $ 15,445   
 

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

For the three months ended September 30, 2014, the allowance for Commercial and Agriculture loans was reduced not only by charge-offs, but also due to a decrease in the loan balances outstanding, the balance of impaired loans in this segment and decreases in both the specific and general reserves required for this type. The allowance for Commercial Real Estate loans was reduced not only by charge-offs, but also due to a decrease in both the specific and general reserves required for this type. The result of these changes for each loan type was represented as a decrease in the provision. 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 allowance. We have seen continued improvement in asset quality and loss rates. However, since the process of estimating probable credit losses requires considerable judgment, management decided to increase unallocated reserves. Unallocated reserves remain within policy guidelines as a percent of total reserves at 7.1 percent.

 

Page 26


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 September 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  

September 30, 2015

               

Allowance for loan losses:

               

Loans acquired with credit deterioration

  $ —        $ —        $ —        $ 131      $ —        $ —        $ —        $ 131   

Ending balance:

               

Individually evaluated for impairment

  $ 16      $ 4      $ —        $ 164      $ —        $ —        $ —        $ 184   

Ending balance:

               

Collectively evaluated for impairment

  $ 1,371      $ 2,942      $ 5,334      $ 3,926      $ 428      $ 365      $ 79      $ 14,445   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,387      $ 2,946      $ 5,334      $ 4,221      $ 428      $ 365      $ 79      $ 14,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loan balances outstanding:

               

Loans acquired with credit deterioration

  $ 16      $ 30      $ —        $ 381      $ —        $ —          $ 427   

Ending balance:

               

Individually evaluated for impairment

  $ 894      $ 2,626      $ 1,828      $ 1,746      $ —        $ 4        $ 7,098   

Ending balance:

               

Collectively evaluated for impairment

  $ 128,209      $ 157,801      $ 338,874      $ 282,772      $ 67,461      $ 17,633        $ 992,750   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Ending balance

  $ 129,119      $ 160,457      $ 340,702      $ 284,899      $ 67,461      $ 17,637        $ 1,000,275   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

 

Page 27


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 28


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 September 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 29


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  

September 30, 2015

                    

Pass

   $ 124,065       $ 147,049       $ 326,014       $ 111,857       $ 58,947       $ 8,201       $ 776,133   

Special Mention

     862         5,180         10,998         1,783         18         —           18,841   

Substandard

     4,192         8,228         3,690         8,208         30         32         24,380   

Doubtful

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 129,119       $ 160,457       $ 340,702       $ 121,848       $ 58,995       $ 8,233       $ 819,354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     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 30


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 September 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  

September 30, 2015

           

Performing

   $ 163,051       $ 8,466       $ 9,404       $ 180,921   

Nonperforming

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 163,051       $ 8,466       $ 9,404       $ 180,921   
  

 

 

    

 

 

    

 

 

    

 

 

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

 

September 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
 

Commercial & Agriculture

   $ 34       $ 941       $ 286       $ 1,261       $ 127,858       $ 129,119       $ —     

Commercial Real Estate—Owner Occupied

     161         37         393         591         159,866         160,457         —     

Commercial Real Estate—Non-Owner Occupied

     4         —           1,496         1,500         339,202         340,702         —     

Residential Real Estate

     912         1,788         1,971         4,671         280,228         284,899         —     

Real Estate Construction

     199         —           —           199         67,262         67,461         —     

Consumer and Other

     490         18         24         532         17,105         17,637         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,800       $ 2,784       $ 4,170       $ 8,754       $ 991,521       $ 1,000,275       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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
 

Commercial & 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 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 table presents loans on nonaccrual status as of September 30, 2015 and December 31, 2014.

 

     2015      2014  

Commercial & Agriculture

   $ 2,146       $ 1,264   

Commercial Real Estate—Owner Occupied

     1,219         3,403   

Commercial Real Estate—Non-Owner Occupied

     1,519         2,134   

Residential Real Estate

     5,602         6,674   

Real Estate Construction

     30         41   

Consumer and Other

     29         42   
  

 

 

    

 

 

 

Total

   $ 10,545       $ 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

 

Page 33


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

dependent. Management exercises significant judgment in developing these estimates. As of September 30, 2015, TDRs accounted for $184 of the allowance for loan losses. As of December 31, 2014, TDRs accounted for $895 of the allowance for loan losses. The decrease is mainly the result of pay-offs.

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

 

    For the Nine-Month Period Ended
September 30, 2015
    For the Nine-Month Period Ended
September 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
 

Commercial & Agriculture

    —        $ —        $ —          —        $ —        $ —     

Commercial Real Estate—Owner Occupied

    —          —          —          —          —          —     

Commercial Real Estate—Non-Owner Occupied

    —          —          —          —          —          —     

Residential Real Estate

    —          —          —          5        245        245   

Real Estate Construction

    1        41        41        —          —          —     

Consumer and Other

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loan Modifications

    1      $ 41      $ 41        5      $ 245      $ 245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 quarter ended September 30, 2015 and September 30, 2014 were as follows:

 

    For the Three-Month Period Ended
September 30, 2015
    For the Three-Month Period Ended
September 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
 

Commercial & Agriculture

    —        $ —        $ —          —        $ —        $ —     

Commercial Real Estate

    —          —          —          —          —          —     

Residential Real Estate

    —          —          —          3        97        97   

Real Estate Construction

    —          —          —          —          —          —     

Consumer and Other

    —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Loan Modifications

    —        $ —        $ —          3      $ 97      $ 97   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 origination loans, so modified loans present a higher risk of loss than do new origination loans. During both the three and nine-month periods ended September 30, 2015 and September 30, 2014, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

Impaired Loans: Larger (greater than $500) Commercial & Agricultural 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 on a quarterly basis. 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 35


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 September 30, 2015 and December 31, 2014.

 

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

With no related allowance recorded:

                 

Commercial & Agriculture

   $ 871       $ 1,036          $ 1,377       $ 1,504      

Commercial Real Estate - Owner Occupied

     2,368         2,583            2,961         3,327      

Commercial Real Estate - Non-Owner Occupied

     1,828         2,094            92         140      

Residential Real Estate

     960         1,505            1,893         3,487      

Consumer and Other

     4         4            5         5      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     6,031         7,222            6,328         8,463      

With an allowance recorded:

                 

Commercial & Agriculture

     23         23       $ 16         927         1,056       $ 641   

Commercial Real Estate - Owner Occupied

     258         258         4         596         643         57   

Commercial Real Estate - Non-Owner Occupied

     —           —           —           2,083         2,287         20   

Residential Real Estate

     1,145         1,162         295         1,215         1,223         305   

Real Estate Construction

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,426         1,443         315         4,821         5,209         1,023   

Total:

                 

Commercial & Agriculture

     894         1,059         16         2,304         2,560         641   

Commercial Real Estate - Owner Occupied

     2,626         2,841         4         3,557         3,970         57   

Commercial Real Estate - Non-Owner Occupied

     1,828         2,094         —           2,175         2,427         20   

Residential Real Estate

     2,105         2,667         295         3,108         4,710         305   

Real Estate Construction

     —           —           —           —           —           —     

Consumer and Other

     4         4         —           5         5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,457       $ 8,665       $ 315       $ 11,149       $ 13,672       $ 1,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 average recorded investment and interest income recognized for impaired financing receivables for the three and nine-month periods ended September 30, 2015 and 2014.

 

For the nine months ended:    September 30, 2015      September 30, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial & Agriculture

   $ 1,680       $ 54       $ 3,570       $ 104   

Commercial Real Estate - Owner Occupied

     3,507         168         6,313         208   

Commercial Real Estate - Non-Owner Occupied

     1,997         31         2,913         31   

Residential Real Estate

     2,640         128         3,559         220   

Real Estate Construction

     20         —           —           —     

Consumer and Other

     5         —           7         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,849       $ 381       $ 16,362       $ 563   
  

 

 

    

 

 

    

 

 

    

 

 

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

Commercial & Agriculture

   $ 1,058       $ 9       $ 2,829       $ 25   

Commercial Real Estate - Owner Occupied

     3,263         39         5,115         21   

Commercial Real Estate - Non-Owner Occupied

     1,870         12         2,770         (4

Residential Real Estate

     2,450         49         3,336         74   

Real Estate Construction

     20         —           —           —     

Consumer and Other

     4         —           6         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,665       $ 109       $ 14,056       $ 116   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 37


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 September 30, 2015 and December 31, 2014, a total of $494 and $560, respectively of foreclosed assets were included with other assets. As of September 30, 2015, included within the foreclosed assets is $494 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of September 30, 2015, the Company had initiated formal foreclosure procedures on $669 of consumer residential mortgages.

 

Page 38


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 nine-month periods ended September 30, 2015 and 2014:

 

     For the Nine-Month Period Ended     For the Nine-Month Period Ended  
     September 30, 2015     September 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 before reclassifications

     57         —          57        2,916        2,666        5,582   

Amounts reclassified from accumulated other comprehensive income (loss)

     —           138        138        (75     146        71   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     57         138        195        2,841        2,812        5,653   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,787       $ (3,639   $ 148      $ 3,182      $ (1,776   $ 1,406   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

Page 39


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 nine-month periods ended September 30, 2015 and 2014:

 

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

Details about Accumulated Other Comprehensive

(Loss) Components

   For the nine
months ended
September 30,
2015
    For the nine
months ended
September 30,
2014
    Affected Line Item in the
Statement Where Net Income is
Presented

Unrealized gains and losses on available-for-sale securities

   $ —        $ 114      Net gain on sale of securities

Tax effect

     —          (39   Income tax expense
  

 

 

   

 

 

   
     —          75          Net of tax
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Actuarial gains/(losses)

     (210 ) (b)      (222 ) (b)    Salaries, wages and benefits

Tax effect

     72        76      Income tax expense
  

 

 

   

 

 

   
     (138     (146       Net of tax
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (138   $ (71       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 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 changes in each component of accumulated other comprehensive income (loss), net of tax, for the three-month periods ended September 30, 2015 and 2014:

 

     For the Three-Month Period Ended
September 30, 2015
    For the Three-Month Period Ended
September 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

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

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     780         —          780        406        —          406   

Amounts reclassified from accumulated other comprehensive income (loss)

     —           46        46        (1     58        57   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     780         46        826        405        58        463   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,787       $ (3,639   $ 148      $ 3,182      $ (1,776   $ 1,406   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

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

 

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

Details about Accumulated Other Comprehensive

(Loss) Components

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

Affected Line Item in the
Statement Where Net Income

is Presented

Unrealized gains and losses on available-for-sale securities

   $ —        $ 1      Net gain on sale of securities

Tax effect

     —          —        Income tax expense
  

 

 

   

 

 

   
     —          1          Net of tax
  

 

 

   

 

 

   

Amortization of defined benefit pension items

      

Actuarial gains/(losses)

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

Tax effect

     24        31      Income tax expense
  

 

 

   

 

 

   
     (46     (58       Net of tax
  

 

 

   

 

 

   

Total reclassifications for the period

   $ (46   $ (57       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 42


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 $5,375 since December 31, 2014 as a result of the TCNB acquisition. The balance of goodwill was $27,095 at September 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
September 30,
 
     2015      2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Core deposit and other intangibles

   $ 7,274       $ 5,264       $ 9,378       $ 7,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Aggregate amortization expense was $522 and $604 for September 30, 2015 and 2014, respectively.

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

 

2015

   $ 188   

2016

     699   

2017

     587   

Thereafter

     536   
  

 

 

 
   $ 2,010   
  

 

 

 

 

Page 43


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

 

 

   

 

 

   

 

 

   

 

 

 

Outstanding balance

   $ —        $ 54,700      $ —        $ 42,700   

Maximum indebtedness

     25,000        64,700        —          42,700   

Average balance

     93        21,938        41        1,951   

Average rate paid

     0.54     0.18     0.54     0.19

Interest rate on balance

     0.00     0.19     —          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 September 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 September 30, 2015 and December 31, 2014. All of the repurchase agreements are overnight agreements.

 

     September 30, 2015      December 31, 2014  

Securities pledged for repurchase agreements:

     

U.S. Treasury securities

   $ 813       $ 876   

Obligations of U.S. government agencies

     20,074         20,737   
  

 

 

    

 

 

 

Total securities pledged

   $ 20,887       $ 21,613   
  

 

 

    

 

 

 

Gross amount of recognized liabilities for repurchase agreements

   $ 20,887       $ 21,613   
  

 

 

    

 

 

 

Amounts related to agreements not included in offsetting disclosures above

   $ —         $ —     
  

 

 

    

 

 

 

 

Page 44


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
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Basic

           

Net income

   $ 3,253       $ 2,306       $ 9,546       $ 7,257   

Preferred stock dividends

     391         406         1,186         1,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders - basic

   $ 2,862       $ 1,900       $ 8,360       $ 5,790   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - basic

     7,843,578         7,707,917         7,815,222         7,707,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.36       $ 0.25       $ 1.07       $ 0.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

           

Net income available to common shareholders - basic

   $ 2,862       $ 1,900       $ 8,360       $ 5,790   

Preferred stock dividends on convertible preferred stock

     391         406         1,186         1,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders - diluted

   $ 3,253       $ 2,306       $ 9,546       $ 6,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     7,843,578         7,707,917         7,815,222         7,707,917   

Add: Dilutive effects of convertible preferred shares

     3,078,245         3,196,931         3,101,937         3,196,931   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average shares and dilutive potential common shares outstanding - diluted

     10,921,823         10,904,848         10,917,159         10,904,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.30       $ 0.21       $ 0.87       $ 0.64   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 45


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 and nine-month periods ended September 30, 2015 there were 3,078,245 and 3,101,937, respectively, dilutive shares related to the Company’s convertible preferred stock. For the three- and nine-month periods ended September 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- and nine-month periods ended September 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 September 30, 2014, there was no unvested restricted stock outstanding. There were no stock options outstanding during the three- and nine-month periods ended September 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 September 30, 2015 and December 31, 2014:

 

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

Commitment to extend credit:

           

Lines of credit and construction loans

   $ 5,835       $ 196,931       $ 9,405       $ 160,718   

Overdraft protection

     4         25,208         4         22,122   

Letters of credit

     200         727         200         1,007   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 6,039       $ 222,866       $ 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 September 30, 2015 and December 31, 2014, respectively. Maturities extend up to 30 years.

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 $2,980 on September 30, 2015 and $3,259 on December 31, 2014.

 

Page 46


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(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
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  

Service cost

   $ —         $ 94       $ —         $ 264   

Interest cost

     156         201         468         581   

Expected return on plan assets

     (283      (312      (848      (903

Other components

     70         89         210         222   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension cost (benefit)

   $ (57    $ 72       $ (170    $ 164   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

(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 September 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.

 

Page 47


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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

During the three and nine months ended September 30, 2015, the Company recorded $18 and $43, respectively, of share-based compensation expense for restricted shares granted under the 2014 Incentive Plan. Expected future compensation expense relating to the 16,983 restricted shares at September 30, 2015, is $141 over the remaining vesting period of 2.25 years.

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

 

     Three months ended
September 30, 2015
     Nine months ended
September 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 September 30, 2015

     16,983         10.82         16,983         10.82   
  

 

 

       

 

 

    

(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).

 

Page 48


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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.

Assets measured at fair value are summarized below.

 

     Fair Value Measurements at September 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

   $ —         $ 39,492       $ —     

Obligations of states and political subdivisions

     —           92,379         —     

Mortgage-backed securities in government sponsored entities

     —           66,197         —     

Equity securities in financial institutions

     —           587         —     

Fair value of swap asset

     —           2,379         —     

Liabilities:

        

Fair value of swap liability

     —           2,379         —     

Assets measured at fair value on a nonrecurring basis:

        

Impaired loans

   $ —         $ —         $ 7,142   

Other real estate owned

     —           —           494   

 

Page 49


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

     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         —     

Liabilities:

        

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   

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 September 30, 2015.

 

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

Impaired loans

   $ 7,142       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

   $ 494       Appraisal of collateral    Appraisal adjustments    10% - 30%
         Liquidation expense    0% - 10%

 

Page 50


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 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 51


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.

 

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

Financial Assets:

              

Cash and due from financial institutions

   $ 33,619       $ 33,619       $ 33,619       $ —         $ —     

Securities available for sale

     198,655         198,655         —           198,655         —     

Other securities

     13,324         13,324         13,324         —           —     

Loans, held for sale

     1,223         1,223         1,223         —           —     

Loans, net of allowance for loan losses

     985,515         991,870         —           —           991,870   

Bank owned life insurance

     19,987         19,987         19,987         —           —     

Accrued interest receivable

     4,880         4,880         4,880         —           —     

Fair value swap asset

     2,379         2,379         —           2,379         —     

Financial Liabilities:

              

Nonmaturing deposits

     839,822         839,822         839,822         —           —     

Time deposits

     216,137         216,839         —           —           216,839   

Short-term FHLB advances

     54,700         54,700         54,700         —           —     

Long-term FHLB advances

     17,500         17,644         —           —           17,644   

Securities sold under agreement to repurchase

     20,887         20,887         20,887         —           —     

Subordinated debentures

     29,427         24,949         —           —           24,949   

Accrued interest payable

     152         152         152         —           —     

Fair value swap liability

     2,379         2,379         —           2,379         —     

 

Page 52


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   

Short-term FHLB advances

     42,700         42,700         42,700         —           —     

Long-term FHLB advances

     22,500         22,699         —           —           22,699   

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         —     

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.

 

Page 53


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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.

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.

 

Page 54


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(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 55


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 September 30, 2015.

 

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

Derivative Assets

   $ 30,802         5.41   $ 18       Monthly

Derivative Liabilities

     (30,802      -5.41     (18    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

 

     Notional
Amount
     Weighted
Average Rate
Received/(Paid)
    Impact of a
1 basis point change
in interest rates
     Repricing
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 56


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 September 30, 2015 compared to December 31, 2014, and the consolidated results of operations for the three- and nine-month periods ended September 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.

 

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)

 

 

Financial Condition

Total assets of the Company at September 30, 2015 were $1,313,331 compared to $1,213,191 at December 31, 2014, an increase of $100,140, or 8.3 percent. The increase in total assets was mainly attributable to an increase in cash and due from financial institutions, loans, other assets and the merger of TCNB Financial Corp. (“TCNB”) with the Company on March 31, 2015. Total liabilities at September 30, 2015 were $1,189,994 compared to $1,097,282 at December 31, 2014, an increase of $92,712, or 8.4 percent. The increase in total liabilities was mainly attributable to an increase in total deposits and FHLB overnight advances.

Loans outstanding as of September 30, 2015 and December 31, 2014 are as follows.

 

     September 30,
2015
     December 31,
2014
 

Commercial & Agriculture

   $ 129,119       $ 114,186   

Commercial Real Estate - Owner Occupied

     160,457         143,014   

Commercial Real Estate - Non-Owner Occupied

     340,702         308,666   

Residential Real Estate

     284,899         268,510   

Real Estate Construction

     67,461         65,452   

Consumer and Other

     17,637         15,029   
  

 

 

    

 

 

 

Total loans

     1,000,275         914,857   

Allowance for loan losses

     (14,760      (14,268
  

 

 

    

 

 

 

Net loans

   $ 985,515       $ 900,589   
  

 

 

    

 

 

 

Net loans have increased $84,926 or 9.4 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 $76,444 from TCNB. Commercial & Agriculture loans increased $14,933, with a total of $13,799 of these being acquired as part of the TCNB acquisition. Commercial Real Estate – Owner Occupied loans increased $17,443, with a total of $23,029 being acquired as part of the TCNB acquisition. Commercial Real Estate – Non-Owner Occupied loans increased $32,036, with a total of $13,808 of these loans being acquired as part of the TCNB acquisition. Residential Real Estate loans increased $16,389, with a total of $17,541 being acquired as part of the TCNB acquisition. Real estate construction loans increased $2,009, with a total of $3,863 being acquired as part of the TCNB acquisition. Consumer and other loans increased $2,608, with a total of $4,404 being acquired as part of the TCNB acquisition.

Loans held for sale have decreased $1,187 or 49.3 percent since December 31, 2014, due to a decrease in the amount of time originations remained on the Company’s books before they were sold during the first nine months of 2015. In the third quarter of 2015, the Company sold loans it had acquired in the acquisition by merger of TCNB. The loans were collateralized by manufactured housing and totaled $3,566. The Company realized a loss on the sale of $75. At September 30, 2015, the net loan to deposit ratio was 93.3 percent compared to 93.0 percent at December 31, 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)

 

 

For the nine months of operations in 2015, $1,200 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 nine 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 $708, compared to $2,583 in 2014. For the first nine months of 2015, the Company charged off a total of fifty-nine loans. Twenty-eight real estate mortgage loans totaling $490 net of recoveries, nine commercial real estate – owner occupied loans totaling $140 net of recoveries, four commercial real estate – non-owner occupied loans totaling $(24) net of recoveries, two commercial and agriculture loans totaling $30 net of recoveries and zero real estate construction loans totaling ($4) net of recoveries were charged off in the first nine months of the year. In addition, sixteen Consumer and Other loans totaling $76, 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 $2,989 since December 31, 2014, which was due to a decrease in loans on nonaccrual status of $3,013, offset by an increase of $24 in loans past due 90 days but still accruing. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance. Management specifically evaluates loans that are impaired for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. Loss migration rates are calculated over a three-year period for all portfolio segments, except for the segment consisting of purchased automobile loans which is calculated over a two-year period. The use of a three-year period for loss migration analysis is a change in methodology for this period. Previously, a two-year loss migration analysis had been used for the entire portfolio. With continued improvement and stability in economic conditions, regulatory guidance recommends a longer look-back period. In addition, Civista made significant changes to consumer and commercial lending policies in the first quarter of 2012. Combined, the stable economy and now seasoned policy changes indicate a three year period is more reflective of future expectations. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve.

Management analyzes each 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 1.48 percent at September 30, 2015 and 1.56 percent at December 31, 2014.

The available for sale security portfolio increased by $750, from $197,905 at December 31, 2014 to $198,655 at September 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 September 30, 2015, the Company was in compliance with all pledging requirements.

 

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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)

 

 

Premises and equipment, net, have increased $1,800 from December 31, 2014 to September 30, 2015. The increase is attributed to the acquisition of TCNB assets of $1,738, consisting of branch offices and equipment within those branches. The remaining difference resulted from new purchases of $933, offset by depreciation of $871.

Goodwill increased by $5,375, from $21,720 at December 31, 2014 to $27,095 at September 30, 2015. The increase is due to the goodwill created from the merger with TCNB. Other intangible assets increased $563 from year-end 2014. The increase includes $1,009 of core deposit intangibles from the merger with TCNB, offset by amortization of $446.

Other assets increased $2,036 from December 31, 2014 to September 30, 2015. The increase is mainly due to increases in low income housing investment, bank owned life insurance, swap assets and deferred tax assets.

Total deposits as of September 30, 2015 and December 31, 2014 are as follows.

 

     September 30,
2015
     December 31,
2014
 

Noninterest-bearing demand

   $ 296,863       $ 250,701   

Interest-bearing demand

     184,622         179,388   

Savings and money market

     358,337         318,859   

Time deposits

     216,137         219,970   
  

 

 

    

 

 

 

Total Deposits

   $ 1,055,959       $ 968,918   
  

 

 

    

 

 

 

Total deposits at September 30, 2015 increased $87,041 from year-end 2014. Noninterest-bearing deposits increased $46,162 from year-end 2014, while interest-bearing deposits, including savings and time deposits, increased $40,879 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 $84,684 compared to the average balance of the same period in 2014. The increase in average balance is due to increases of $43,657 in demand deposit accounts, $13,514 in brokered deposits, $23,126 in money market savings, $8,588 in interest-bearing demand, $3,111 in public fund money market savings and $5,754 in statement saving accounts, offset by decreases of $15,144 in time certificates and $978 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 increased $7,000 from December 31, 2014 to September 30, 2015. The increase is mainly due to an increase in overnight funds of $12,000. In addition, the Company had one FHLB advance mature during the nine months ended September 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 $726 from December 31, 2014 to September 30, 2015.

Shareholders’ equity at September 30, 2015 was $123,337, or 9.4 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 $9,546, a decrease in the Company’s pension liability, net of tax, of $138, an increase in the fair value of securities available for sale, net of tax, of $57 and offset by dividends on preferred stock and common stock of $1,186 and $1,170, respectively. Additionally, $43 was recognized as stock-based compensation in connection with the grant of restricted shares. Total outstanding common shares at September 30, 2015 were 7,843,578. 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 of the company’s previously issued preferred shares into 118,678 common shares and the grant of 16,983 restricted common shares to certain officers under the Company’s 2014 Incentive Plan.

Results of Operations

Nine Months Ended September 30, 2015 and 2014

The Company had net income of $9,546 for the nine months ended September 30, 2015, an increase of $2,289 from net income of $7,257 for the same nine months of 2014. Basic earnings per common share were $1.07 for the nine months ended September 30, 2015, compared to $0.75 for the same period in 2014. Diluted earnings per common share were $0.87 for the nine months ended September 30, 2015, compared to $0.64 for the same period in 2014. The primary reasons for the changes in net income are explained below.

Net interest income for the nine months ended September 30, 2015 was $35,231, an increase of $4,116 from $31,115 in the same nine months of 2014. Total interest income for the nine months ended September 30, 2015 was $37,725, an increase of $3,378 from $34,347 in the same nine months of 2014. Average earning assets increased 8.1 percent during the period ended September 30, 2015 as compared to the same period in 2014. Average loans and non-taxable securities for the first nine months of 2015 increased 12.7 percent and 13.2 percent, respectively, compared to the first nine 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 7 basis points for the first nine months of 2015 compared to the first nine months of last year. Total interest expense for the nine months ended September 30, 2015 was $2,494, a decrease of $738 from $3,232 in the same nine months of 2014. Interest expense on time deposits and FHLB borrowings decreased $185 and $561, respectively in the first nine months of 2015 compared to the same period in 2014. Average time deposits for the first nine months of 2015 decreased 1.3 percent compared to the first nine months of 2014, while average

 

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)

 

 

FHLB borrowings for the first nine months of 2015 increased 14.7 percent compared to the first nine months of 2014. The increase in FHLB borrowings is due to an increase in overnight borrowings, which are paying a low interest rate. The interest rate paid on time deposits during the first nine months of 2015 decreased by 10 basis points as compared to the same period in 2014. The interest rate paid on FHLB borrowings during the first nine months of 2015 decreased 225 basis points as compared to the same period in 2014. The Company’s net interest margin for the nine months ended September 30, 2015 and 2014 was 3.91% and 3.73%, 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 nine months ended September 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.

 

     Nine Months Ended September 30,  
     2015     2014  
     Average
balance
    Interest      Yield/
rate *
    Average
balance
    Interest      Yield/
rate *
 

Assets:

              

Interest-earning assets:

              

Loans

   $ 976,290      $ 33,271         4.56   $ 866,424      $ 29,850         4.61

Taxable securities

     140,311        2,439         2.36     152,311        2,610         2.31

Non-taxable securities

     70,779        1,917         5.73     62,544        1,750         5.83

Interest-bearing deposits in other banks

     56,499        98         0.23     69,728        137         0.26
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,243,879        37,725         4.18     1,151,007        34,347         4.11
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-earning assets:

              

Cash and due from financial institutions

     38,735             40,540        

Premises and equipment, net

     15,807             16,186        

Accrued interest receivable

     4,261             4,070        

Intangible assets

     28,214             24,218        

Other assets

     10,282             8,513        

Bank owned life insurance

     19,795             19,318        

Less allowance for loan losses

     (14,676          (16,224     
  

 

 

        

 

 

      

Total assets

   $ 1,346,297           $ 1,247,628        
  

 

 

        

 

 

      

Liabilities and Shareholders Equity:

              

Interest-bearing liabilities:

              

Demand and savings

   $ 544,569      $ 315         0.08   $ 500,560      $ 282         0.08

Time

     226,109        1,273         0.75     229,091        1,458         0.85

FHLB

     40,922        326         1.07     35,671        887         3.32

Federal funds purchased

     92        —           0.00     55        —           0.00

Subordinated debentures

     29,427        565         2.57     29,427        590         2.68

Repurchase agreements

     19,183        15         0.10     19,167        15         0.10
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     860,302        2,494         0.39     813,971        3,232         0.53
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     353,002             309,345        

Other liabilities

     13,881             10,865        

Shareholders’ equity

     119,112             113,447        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 1,346,297           $ 1,247,628        
  

 

 

        

 

 

      

Net interest income and interest rate spread

     $ 35,231         3.79     $ 31,115         3.58

Net interest margin

          3.91          3.73

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

 

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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)

 

 

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the nine months ended September 30, 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

   $ 3,747       $ (326    $ 3,421   

Taxable securities

     (212      41         (171

Nontaxable securities

     233         (66      167   

Interest-bearing deposits in other banks

     (24      (15      (39
  

 

 

    

 

 

    

 

 

 

Total interest income

   $ 3,744       $ (366    $ 3,378   
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Demand and savings

   $ 25       $ 8       $ 33   

Time

     (19      (166      (185

FHLB

     115         (676      (561

Subordinated debentures

     —           (25      (25

Repurchase agreements

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 121       $ (859    $ (738
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 3,623       $ 493       $ 4,116   
  

 

 

    

 

 

    

 

 

 

 

(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 $1,200 for the nine months ended September 30, 2015, compared to $1,500 for the same period in 2014. The decrease in provision for loan losses in the first nine 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 nine-month periods ended September 30, 2015 and 2014 are as follows.

 

     Nine months ended
September 30,
 
     2015      2014  

Service charges

   $ 3,487       $ 3,184   

Net gain on sale of securities

     (5      114   

Net gain on sale of loans

     888         470   

ATM fees

     1,484         1,388   

Trust fees

     2,159         2,396   

Bank owned life insurance

     350         373   

Tax refund processing fees

     2,000         2,321   

Other

     769         770   
  

 

 

    

 

 

 

Total noninterest income

   $ 11,132       $ 11,016   
  

 

 

    

 

 

 

Noninterest income for the nine months ended September 30, 2015 was $11,132, an increase of $116 or 1.1 percent from $11,016 for the same period of 2014. The primary reasons for the increase follow.

Service charge fee income for the period ended September 30, 2015 was $3,487, up $303 or 9.5 percent over the same period of 2014. The increase is primarily due to increases in business service charges and overdraft fees.

Gain on the sale of securities decreased $119 during the period ended September 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 $418 or 88.9 percent during the period ended September 30, 2015 compared to the same period of 2014. The increase is due to an increase in volume of loans sold during the first nine months of 2015 as compared to the same period in 2014, as well as an increase in the premium earned.

ATM fee income increased $96 or 6.9 percent during the period ended September 30, 2015 compared to the same period of 2014. The increase is due to increased interchange 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 $237 or 9.9 percent during the period ended September 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.

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. In 2015, a new fee structure was agreed upon between the Company and its’ vendors. The new fee calls

 

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)

 

 

for a flat processing fee, whereas in 2014, the Company received a per transaction fee. As a result of this change, tax refund processing fees decreased $321 or 13.8 percent during the period ended September 30, 2015 compared to the same period in 2014. This fee income is seasonal in nature, the majority of which is received in the first quarter of the year.

Noninterest expense for the nine-month periods ended September 30, 2015 and 2014 are as follows.

 

     Nine months ended
September 30,
 
     2015      2014  

Salaries, Wages and benefits

   $ 17,732       $ 16,661   

Net occupancy expense

     1,833         1,771   

Equipment expense

     1,030         1,023   

Contracted data processing

     1,392         1,080   

FDIC assessment

     654         700   

State franchise tax

     661         680   

Professional services

     1,716         1,332   

Amortization of intangible assets

     522         604   

ATM expense

     563         606   

Marketing

     842         1,227   

Other

     5,258         5,384   
  

 

 

    

 

 

 

Total noninterest expense

   $ 32,203       $ 31,068   
  

 

 

    

 

 

 

Noninterest expense for the nine months ended September 30, 2015 was $32,203, an increase of $1,135, from $31,068 reported for the same period of 2014. The primary reasons for the increase follow.

Salary and other employee costs were $17,732, up $1,071 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 $1,392, up $312 or 28.9 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.

Professional service costs were $1,716, up $384 or 28.8 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 related to the Company’s filing of a Form S-3 shelf registration statement with the SEC and matters related to the Special Meeting of Shareholders called to be held on November 4, 2015 for the purpose of voting to eliminate preemptive rights and cumulative voting in the election of directors, as well as the previously disclosed litigation related to a proposed sale of real estate that the Company owns near one of its branches.

 

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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)

 

 

Amortization expense decreased $82, or 13.6 percent from the same period of 2014, as a result of scheduled amortization of intangible assets associated with mergers.

ATM costs were $563, down $43 or 7.1 percent compared to the same period in 2014. The decrease is due to vendor credits that began in the second quarter of 2015.

Marketing costs were $842, down $385 or 31.4 percent compared to the same period in 2014. In 2014, the Company increased marketing expenses as part of its rebranding effort.

Other operating expenses were $5,258, down $126 or 2.3 percent compared to the same period in 2014. The decrease is mainly due to a decreased in donation expenses. In 2014, the Company donated property it was no longer using to a municipality.

Income tax expense for the nine months ended September 30, 2015 totaled $3,414, up $1,108 compared to the same period in 2014. The effective tax rates for the nine-month periods ended September 30, 2015 and September 30, 2014 were 26.3% and 24.1%, 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 September 30, 2015 is the result of an increase in taxable income as compared to the same period in 2014.

Three Months Ended September 30, 2015 and 2014

The Company had net income of $3,253 for the three months ended September 30, 2015, an increase of $947 from net income of $2,306 for the same three months of 2014. Basic earnings per common share were $0.36 for the quarter ended September 30, 2015, compared to $0.25 for the same period in 2014. Diluted earnings per common share were $0.30 for the quarter ended September 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 September 30, 2015 was $12,402, an increase of $1,718 from $10,684 in the same three months of 2014. The Company’s net interest margin for the three months ended September 30, 2015 and 2014 was 4.13% and 3.94%, respectively. Total interest income for the three months ended September 30, 2015 was $13,223, an increase of $1,556 from $11,667 in the same three months of 2014. Average earning assets increased 10.8 percent during the quarter ended September 30, 2015 as compared to the same period in 2014. Average loans and non-taxable securities for the third quarter of 2015 increased 14.3 percent and 11.6 percent, respectively, compared to the third quarter of last year, offset by a decrease in average taxable securities of 5.4 percent. The yield on earning assets increased 9 basis points for the third quarter of 2015 compared to the third quarter of last year. Total interest expense for the three months ended September 30, 2015 was $821, a decrease of $162 from $983 in the same three months of 2014. Interest expense on time deposits and FHLB borrowings

 

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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)

 

 

decreased $53 and $125, respectively in the third quarter of 2015 compared to the same period in 2014. Average FHLB borrowings for the third quarter of 2015 increased 95.7 percent compared to the third quarter of 2014. The increase in FHLB borrowings is due to an increase in overnight borrowing, which are paying a low interest rate. The interest rate paid on time deposits and FHLB borrowings during the third quarter of 2015 also decreased by 7 and 224 basis points, respectively, 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)

 

 

The following table presents the condensed average balance sheets for the three months ended September 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 September 30,  
     2015     2014  
     Average
balance
    Interest      Yield/
rate *
    Average
balance
    Interest      Yield/
rate *
 

Assets:

              

Interest-earning assets:

              

Loans

   $ 1,009,372      $ 11,755         4.62   $ 883,459      $ 10,218         4.59

Taxable securities

     138,129        810         2.36     146,060        845         2.32

Non-taxable securities

     72,080        653         5.65     64,575        595         5.75

Interest-bearing deposits in other banks

     10,668        5         0.19     16,628        9         0.21
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

   $ 1,230,249        13,223         4.39   $ 1,110,722        11,667         4.30
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-earning assets:

              

Cash and due from financial institutions

     23,793             21,698        

Premises and equipment, net

     16,338             15,297        

Accrued interest receivable

     4,330             3,987        

Intangible assets

     29,589             24,026        

Other assets

     10,574             7,123        

Bank owned life insurance

     19,910             19,442        

Less allowance for loan losses

     (14,983          (15,721     
  

 

 

        

 

 

      

Total Assets

   $ 1,319,800           $ 1,186,574        
  

 

 

        

 

 

      

Liabilities and Shareholders Equity:

              

Interest-bearing liabilities:

              

Demand and savings

   $ 552,899      $ 108         0.08   $ 501,765      $ 94         0.08

Time

     220,726        405         0.73     226,483        458         0.80

FHLB

     62,057        111         0.71     31,705        236         2.95

Federal funds purchased

     272        —           0.00     162        —           0.00

Subordinated debentures

     29,427        192         2.59     29,427        190         2.56

Repurchase Agreements

     20,044        5         0.10     17,045        5         0.12
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

   $ 885,425        821         0.37   $ 806,587        983         0.48
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     300,305             257,903        

Other liabilities

     13,013             7,722        

Shareholders’ Equity

     121,057             114,362        
  

 

 

        

 

 

      

Total Liabilities and Shareholders’ Equity

   $ 1,319,800           $ 1,186,574        
  

 

 

        

 

 

      

Net interest income and interest rate spread

     $ 12,402         4.02     $ 10,684         3.82

Net interest margin

          4.13          3.94

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

 

Page 69


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 September 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

   $ 1,466       $ 71       $ 1,537   

Taxable securities

     (47      12         (35