10-Q 1 d221456d10q.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: June 30, 2016

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Shares, no par value, outstanding at August 5, 2016 - 8,027,381 shares

 

 

 


Table of Contents

CIVISTA BANCSHARES, INC.

Index

 

PART I.

 

Financial Information

  

Item 1.

 

Financial Statements:

  
 

Consolidated Balance Sheets (Unaudited) June 30, 2016 and December 31, 2015

     3   
 

Consolidated Statements of Operations (Unaudited) Three and six months ended June 30, 2016 and 2015

     4   
 

Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended June 30, 2016 and 2015

     5   
 

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) Six months ended June 30, 2016

     6   
 

Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2016 and 2015

     7-8   
 

Notes to Interim Consolidated Financial Statements (Unaudited)

     9-52   

Item 2.

 

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

     53-68   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     69-71   

Item 4.

 

Controls and Procedures

     72   

PART II.

 

Other Information

  

Item 1.

 

Legal Proceedings

     73   

Item 1A.

 

Risk Factors

     73   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     73   

Item 3.

 

Defaults upon Senior Securities

     73   

Item 4.

 

Mine Safety Disclosures

     73   

Item 5.

 

Other Information

     73   

Item 6.

 

Exhibits

     73   

Signatures

       74   


Table of Contents

Part I – Financial Information

ITEM 1. Financial Statements

CIVISTA BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

     June 30,
2016
    December 31,
2015
 

ASSETS

    

Cash and due from financial institutions

   $ 41,772      $ 35,561   

Securities available for sale

     200,643        196,249   

Loans held for sale

     5,167        2,698   

Loans, net of allowance of $14,547 and $14,361

     1,014,375        987,166   

Other securities

     13,734        13,452   

Premises and equipment, net

     16,711        16,944   

Accrued interest receivable

     3,798        3,902   

Goodwill

     27,095        27,095   

Other intangibles

     2,091        2,409   

Bank owned life insurance

     24,255        20,104   

Other assets

     10,270        9,461   
  

 

 

   

 

 

 

Total assets

   $ 1,359,911      $ 1,315,041   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest-bearing

   $ 353,386      $ 300,615   

Interest-bearing

     761,621        751,418   
  

 

 

   

 

 

 

Total deposits

     1,115,007        1,052,033   

Federal Home Loan Bank advances

     47,300        71,200   

Securities sold under agreements to repurchase

     17,725        25,040   

Subordinated debentures

     29,427        29,427   

Accrued expenses and other liabilities

     14,249        12,168   
  

 

 

   

 

 

 

Total liabilities

     1,223,708        1,189,868   
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Preferred shares, no par value, 200,000 shares authorized, Series B Preferred stock, $1,000 liquidation preference, 23,911 shares issued at June 30, 2016 and 24,072 shares issued at December 31, 2015, net of issuance costs

     22,124        22,273   

Common shares, no par value, 20,000,000 shares authorized, 8,655,324 shares issued at June 30, 2016 and 8,591,542 shares issued at December 31, 2015

     115,750        115,330   

Retained earnings

     13,640        5,300   

Treasury shares, 747,964 common shares at cost

     (17,235     (17,235

Accumulated other comprehensive income (loss)

     1,924        (495
  

 

 

   

 

 

 

Total shareholders’ equity

     136,203        125,173   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,359,911      $ 1,315,041   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 3


Table of Contents

CIVISTA BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016     2015      2016     2015  

Interest and dividend income

         

Loans, including fees

   $ 12,170      $ 11,270       $ 23,487      $ 21,516   

Taxable securities

     821        796         1,622        1,629   

Tax-exempt securities

     661        640         1,315        1,264   

Federal funds sold and other

     87        34         367        94   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest income

     13,739        12,740         26,791        24,503   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense

         

Deposits

     485        533         974        1,075   

Federal Home Loan Bank advances

     91        94         201        215   

Subordinated debentures

     218        193         430        373   

Other

     5        4         11        9   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     799        824         1,616        1,672   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     12,940        11,916         25,175        22,831   

Provision (credit) for loan losses

     (1,300     400         (1,300     800   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision (credit) for loan losses

     14,240        11,516         26,475        22,031   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest income

         

Service charges

     1,391        1,170         2,520        2,225   

Net gain on sale of securities

     6        —           1        —     

Net gain on sale of loans

     406        415         800        619   

ATM fees

     535        515         1,043        964   

Trust fees

     666        734         1,300        1,501   

Bank owned life insurance

     151        116         266        233   

Tax refund processing fees

     550        400         2,750        2,000   

Other

     370        302         655        511   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest income

     4,075        3,652         9,335        8,053   
  

 

 

   

 

 

    

 

 

   

 

 

 

Noninterest expense

         

Salaries, wages and benefits

     6,354        5,809         12,678        11,708   

Net occupancy expense

     670        615         1,301        1,239   

Equipment expense

     368        365         664        728   

Contracted data processing

     395        545         750        993   

FDIC assessment

     179        225         431        462   

State franchise tax

     240        217         458        456   

Professional services

     517        663         1,019        1,119   

Amortization of intangible assets

     172        192         355        334   

ATM expense

     75        162         196        445   

Marketing

     275        308         561        544   

Other operating expenses

     1,805        1,832         3,544        3,509   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total noninterest expense

     11,050        10,933         21,957        21,537   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before taxes

     7,265        4,235         13,853        8,547   

Income tax expense

     2,084        1,113         3,947        2,255   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net Income

     5,181        3,122         9,906        6,292   

Preferred stock dividends

     391        391         782        795   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income available to common shareholders

   $ 4,790      $ 2,731       $ 9,124      $ 5,497   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, basic

   $ 0.61      $ 0.35       $ 1.16      $ 0.70   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per common share, diluted

   $ 0.47      $ 0.29       $ 0.91      $ 0.58   
  

 

 

   

 

 

    

 

 

   

 

 

 

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
June 30,
    Six months ended
June 30,
 
     2016     2015     2016     2015  

Net income

   $ 5,181      $ 3,122      $ 9,906      $ 6,292   

Other comprehensive income (loss):

        

Unrealized holding gains (loss) on available for sale securities

     1,593        (1,982     3,498        (1,096

Tax effect

     (542     674        (1,189     373   

Pension liability adjustment

     83        70        166        140   

Tax effect

     (28     (24     (56     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,106        (1,262     2,419        (631
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 6,287      $ 1,860      $ 12,325      $ 5,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 5


Table of Contents

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share data)

 

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

Balance, December 31, 2015

    24,072      $ 22,273        7,843,578      $ 115,330      $ 5,300      $ (17,235   $ (495   $ 125,173   

Net Income

    —          —          —          —          9,906        —          —          9,906   

Other comprehensive income

    —          —          —          —          —          —          2,419        2,419   

Conversion of Series B preferred shares into common shares

    (161     (149     20,569        149        —          —          —          —     

Stock-based compensation

    —          —          43,213        271        —          —          —          271   

Common stock dividends ($0.10 per share)

    —          —          —          —          (784     —          —          (784

Preferred stock dividend

    —          —          —          —          (782     —          —          (782
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2016

    23,911      $ 22,124        7,907,360      $ 115,750      $ 13,640      $ (17,235   $ 1,924      $ 136,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 6


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CIVISTA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

    

Six months ended

June 30,

 
     2016     2015  

Net cash from operating activities

   $ 7,866      $ 13,323   
  

 

 

   

 

 

 

Cash flows used for investing activities:

    

Maturities and calls of securities, available-for-sale

     14,684        14,870   

Purchases of securities, available-for-sale

     (18,295     (16,194

Sale of securities available for sale

     1,994        —     

Redemption of Federal Reserve stock

     —          138   

Purchase of Federal Reserve stock

     (282     (97

Purchase of bank owned life insurance

     (3,885     —     

Net loan originations

     (23,919     (8,603

Loans purchased

     (1,884     (2,975

Proceeds from sale of other real estate owned properties

     106        179   

Net cash from acquisition

     —          926   

Premises and equipment purchases

     (367     (727
  

 

 

   

 

 

 

Net cash used for investing activities

     (31,848     (12,483
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Repayment of long-term FHLB advances

     —          (5,000

Net change in short-term FHLB advances

     (23,900     (4,900

Increase in deposits

     62,974        20,019   

Decrease in securities sold under repurchase agreements

     (7,315     (4,153

Common dividends paid

     (784     (777

Preferred dividends paid

     (782     (795
  

 

 

   

 

 

 

Net cash provided by financing activities

     30,193        4,394   
  

 

 

   

 

 

 

Increase in cash and due from financial institutions

     6,211        5,234   

Cash and due from financial institutions at beginning of period

     35,561        29,858   
  

 

 

   

 

 

 

Cash and due from financial institutions at end of period

   $ 41,772      $ 35,092   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements

 

Page 7


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CIVISTA BANCSHARES, INC.

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

(In thousands)

 

    

Six months ended

June 30,

 
     2016      2015  

Cash paid during the period for:

     

Interest

   $ 1,615       $ 1,662   

Income taxes

   $ 2,550       $ 350   

Supplemental cash flow information:

     

Transfer of loans from portfolio to other real estate owned

   $ 73       $ 76   

Conversion of preferred shares to common shares

   $ 149       $ 859   

Acquisition of TCNB Financial Corp.

     

Noncash assets acquired:

     

Loans receivable

      $ 76,830   

Other securities

        716   

Accrued interest receivable

        194   

Premises and equipment, net

        1,739   

Core deposit intangible

        1,009   

Other assets

        1,265   
     

 

 

 

Total non cash assets acquired

        81,753   

Liabilities assumed:

     

Deposits

        86,869   

Other liabilities

        5   
     

 

 

 

Total liabilities assumed

        86,874   

Net noncash liabilities acquired

      $ 5,121   
     

 

 

 

See notes to interim unaudited consolidated financial statements

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

(1) Consolidated Financial Statements

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

The Consolidated Financial Statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2016 and its results of operations and changes in cash flows for the periods ended June 30, 2016 and 2015 have been made. The accompanying Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended June 30, 2016 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 audited financial statements contained in the Company’s 2015 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 is to Lessors of Non-Residential Buildings and Dwellings totaling $239,029, or 23.3% of total loans, as of June 30, 2016 and the other is to Lessors of Residential Buildings and Dwellings totaling $129,834, or 12.7% of total loans, as of June 30, 2016. These segments of the portfolio are stable and have been conservatively underwritten, monitored and managed by experienced commercial bankers. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area.

Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions and Federal Funds sold that are in excess of federally insured limits. First Citizens Insurance Agency, Inc. was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue was less than 1.0% of total revenue through June 30, 2016. Revenue from Water St. was less than 1.0% of total revenue through June 30, 2016. 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 Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Operations 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.

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

 

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Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

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, 2017, including interim periods within that reporting period. However, In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) to 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. 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 11


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-04, Liabilities Extinguishments of Liabilities (Subtopic 405-20). The standard provides that liabilities related to the sale of prepaid stored-value products within the scope of this Update are financial liabilities. The amendments in the Update provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage for those liabilities be accounted for consistent with the breakage guidance in Topic 606. The amendments in this Update are effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815). The amendments in this Update apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815. The standards in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, 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, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815). The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments in this Update that are determined to have a debt host) with embedded call (put) options. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options

 

Page 12


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt host. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-07, Investments Equity Method and Joint Ventures (Topic 323). The Update affects all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The amendments in this Update affect all entities that issue share-based payment awards to their employees. The standards in this Update provide simplification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as with equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. In addition to those simplifications, the amendments eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. This should not result in a change in practice because the guidance that is being superseded was never effective. For public business entities, the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. This Update is not expected to have a significant impact on the Company’s financial statements.

 

Page 13


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. 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) Securities

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

 

                                                           

June 30, 2016

  Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

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

  $ 41,272      $ 326      $ (20   $ 41,578   

Obligations of states and political subdivisions

    87,990        7,240        (12     95,218   

Mortgage-backed securities in government sponsored entities

    62,016        1,244          (13     63,247   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

    191,278        8,810        (45     200,043   

Equity securities in financial institutions

    481        119        —          600   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 191,759      $ 8,929      $ (45   $ 200,643   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                           

December 31, 2015

  Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

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

  $ 40,992      $ 74      $ (129   $ 40,937   

Obligations of states and political subdivisions

    87,255        4,959        (62     92,152   

Mortgage-backed securities in government sponsored entities

    62,135        681        (243     62,573   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

    190,382        5,714        (434     195,662   

Equity securities in financial institutions

    481        106        —          587   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 190,863      $ 5,820      $ (434   $ 196,249   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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 amortized cost and fair value of securities at June 30, 2016, 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

   $ 9,728       $ 9,744   

Due after one year through five years

     27,019         27,398   

Due after five years through ten years

     31,857         34,003   

Due after ten years

     60,658         65,651   

Mortgage-backed securities

     62,016         63,247   

Equity securities

     481         600   
  

 

 

    

 

 

 

Total securities available for sale

   $ 191,759       $ 200,643   
  

 

 

    

 

 

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016      2015      2016      2015  

Sale proceeds

   $ 1,994       $ —         $ 1,994       $ —     

Gross realized gains

     —           —           —           —     

Gross realized losses

     —           —           —           —     

Gains from securities called or settled by the issuer

     6         —           1         —     

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $150,444 and $142,888 as of June 30, 2016 and December 31, 2015, respectively.

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Securities with unrealized losses at June 30, 2016 and December 31, 2015 not recognized in income are as follows:

 

                                                                                                     

June 30, 2016

   12 Months or less     More than 12 months     Total  

Description of Securities

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

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

   $ 727       $ (1   $ 979       $ (19   $ 1,706       $ (20

Obligations of states and political subdivisions

     —           —          531         (12     531         (12

Mortgage-backed securities in gov’t sponsored entities

     —           —          1,882         (13     1,882         (13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $      727       $ (1   $ 3,392       $ (44   $ 4,119       $ (45
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

                                                                                                     

December 31, 2015

   12 Months or less     More than 12 months     Total  

Description of Securities

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

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

   $ 25,464       $ (112   $ 1,132       $ (17   $ 26,596       $ (129

Obligations of states and political subdivisions

     2,932         (20     1,469         (42     4,401         (62

Mortgage-backed securities in gov’t sponsored entities

     27,263         (172     5,041         (71     32,304         (243
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 55,659       $ (304   $ 7,642       $ (130   $ 63,301       $ (434
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2016, there were nine 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.

 

Page 17


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(4) Loans

Loan balances were as follows:

 

     June 30,
2016
     December 31,
2015
 

Commercial and agriculture

   $ 126,540       $ 124,402   

Commercial real estate- owner occupied

     167,894         167,897   

Commercial real estate- non-owner occupied

     369,876         348,439   

Residential real estate

     245,941         236,338   

Real estate construction

     56,274         58,898   

Farm Real Estate

     43,289         46,993   

Consumer and other

     19,108         18,560   
  

 

 

    

 

 

 

Total loans

     1,028,922         1,001,527   

Allowance for loan losses

     (14,547      (14,361
  

 

 

    

 

 

 

Net loans

   $ 1,014,375       $ 987,166   
  

 

 

    

 

 

 

Included in total loans above are deferred loan fees of $101 at June 30, 2016 and $78 at December 31, 2015.

(5) 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 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 and one-half year period. The use of a three-year period for loss migration analysis is a change in methodology as of the third quarter of 2015. 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 qualitative 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

 

Page 18


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    Changes in nature and volume of the loan portfolio

 

    Changes in past due, classified and nonaccrual loans and TDRs

 

    Changes in economic and business conditions

 

    Changes in competition or legal and regulatory requirements

 

    Changes in concentrations within the loan portfolio

 

    Changes in the underlying collateral for collateral dependent loans

 

Page 19


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 $14,547 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2016. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and six months ended June 30, 2016 and 2015.

Allowance for loan losses:

For the six months ended June 30, 2016

 

     Beginning
balance
     Charge-
offs
    Recoveries      Provision     Ending
Balance
 

Commercial & Agriculture

   $ 1,478       $ (42   $ 35       $ 86      $ 1,557   

Commercial Real Estate:

            

Owner Occupied

     2,467         (42     52         (84     2,393   

Non-Owner Occupied

     4,657         —          1,359         (1,047     4,969   

Residential Real Estate

     4,086         (225     361         (323     3,899   

Real Estate Construction

     371         —          2         (7     366   

Farm Real Estate

     538         —          —           (62     476   

Consumer and Other

     382         (47     33         (10     358   

Unallocated

     382         —          —           147        529   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 14,361       $ (356   $ 1,842       $ (1,300   $ 14,547   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

For the six months ended June 30, 2016, the increase in allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher balances and higher loss rates in criticized loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced not only by a decrease in specific reserves required for this type, but also by decreases in past due, classified and non-accrual loans for this type. The result of these changes was represented as a decrease in the provision. The increase in allowance for Commercial Real Estate – Non-Owner Occupied loans was the result of an increase in general reserves required as a result of higher balances. Offsetting this was a payoff on a previously charged down loan was received resulting in a recovery of approximately $1,303. The net result was represented as a decrease in the provision. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances and a decrease in loss rates. The result of these changes was represented as a decrease in the provision. 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 20


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Allowance for loan losses:

For the six months ended June 30, 2015

 

     Beginning
balance
     Charge-
offs
    Recoveries      Provision     Ending
Balance
 

Commercial & Agriculture

   $ 1,819       $ —        $ 31       $ (455   $ 1,395   

Commercial Real Estate:

            

Owner Occupied

     2,221         (198     159         2,891        5,073   

Non-Owner Occupied

     4,334         (64     90         (1,207     3,153   

Residential Real Estate

     3,747         (541     165         99        3,470   

Real Estate Construction

     428         —          3         3        434   

Farm Real Estate

     822         —          51         (289     584   

Consumer and Other

     200         (87     30         47        190   

Unallocated

     697         —          —           (289     408   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 14,268       $ (890   $ 529       $ 800      $ 14,707   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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

 

Page 21


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Allowance for loan losses:

For the three months ended June 30, 2016

 

     Beginning
balance
     Charge-
offs
    Recoveries      Provision     Ending
Balance
 

Commercial & Agriculture

   $ 1,446       $ (20   $ 30       $ 101      $ 1,557   

Commercial Real Estate:

            

Owner Occupied

     2,372         (42     3         60        2,393   

Non-Owner Occupied

     4,711         —          1,319         (1,061     4,969   

Residential Real Estate

     4,114         (129     272         (358     3,899   

Real Estate Construction

     408         —          1         (43     366   

Farm Real Estate

     496         —          —           (20     476   

Consumer and Other

     358         (39     19         20        358   

Unallocated

     528         —          —           1        529   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 14,433       $ (230   $ 1,644       $ (1,300   $ 14,547   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

For the three months ended June 30, 2016, the increase in allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher loss rates in criticized loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased as the result of an increase in general reserves required as a result of higher balances. Offsetting this was a payoff on a previously charged down loan that was received resulting in a recovery of approximately $1,303. The net result was represented as a decrease in the provision. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans was reduced by a decrease in general reserves required for this type as result of decreased loan balances, represented by a decrease in the provision. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances, represented as a decrease in the provision. 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 22


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Allowance for loan losses:

For the three months ended June 30, 2015

 

     Beginning
balance
     Charge-
offs
    Recoveries      Provision     Ending
Balance
 

Commercial & Agriculture

   $ 1,795       $ —        $ 12       $ (412   $ 1,395   

Commercial Real Estate:

            

Owner Occupied

     1,808         —          157         3,108        5,073   

Non-Owner Occupied

     4,926         (55     76         (1,794     3,153   

Residential Real Estate

     3,666         (213     34         (17     3,470   

Real Estate Construction

     498         —          2         (66     434   

Farm Real Estate

     799         —          —           (215     584   

Consumer and Other

     190         (37     16         21        190   

Unallocated

     633         —          —           (225     408   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 14,315       $ (305   $ 297       $ 400      $ 14,707   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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

 

Page 23


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of June 30, 2016 and December 31, 2015.

 

June 30, 2016    Loans acquired
with credit
deterioration
     Loans
individually
evaluated for
impairment
     Loans
collectively
evaluated for
impairment
     Total  

Allowance for loan losses:

           

Commercial & Agriculture

   $ —         $ —         $ 1,557       $ 1,557   

Commercial Real Estate:

           

Owner Occupied

     —           4         2,389         2,393   

Non-Owner Occupied

     —           23         4,946         4,969   

Residential Real Estate

     105         162         3,632         3,899   

Real Estate Construction

     —           —           366         366   

Farm Real Estate

     —           —           476         476   

Consumer and Other

     —           —           358         358   

Unallocated

     —           —           529         529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 105       $ 189       $ 14,253       $ 14,547   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding loan balances:

           

Commercial & Agriculture

   $ 110       $ 2,417       $ 124,013       $ 126,540   

Commercial Real Estate:

           

Owner Occupied

     —           1,609         166,285         167,894   

Non-Owner Occupied

     —           744         369,132         369,876   

Residential Real Estate

     190         1,891         243,860         245,941   

Real Estate Construction

     —           —           56,274         56,274   

Farm Real Estate

     —           1,398         41,891         43,289   

Consumer and Other

     —           2         19,106         19,108   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 300       $ 8,061       $ 1,020,561       $ 1,028,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 24


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

December 31, 2015    Loans
acquired with
credit
deterioration
     Loans
individually
evaluated for
impairment
     Loans
collectively
evaluated for
impairment
     Total  

Allowance for loan losses:

           

Commercial & Agriculture

   $ —         $ 23       $ 1,455       $ 1,478   

Commercial Real Estate:

           

Owner Occupied

     —           103         2,364         2,467   

Non-Owner Occupied

     —           —           4,657         4,657   

Residential Real Estate

     123         137         3,826         4,086   

Real Estate Construction

     —           —           371         371   

Farm Real Estate

     —           —           538         538   

Consumer and Other

     —           —           382         382   

Unallocated

     —           —           382         382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 123       $ 263       $ 13,975       $ 14,361   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding loan balances:

           

Commercial & Agriculture

   $ 132       $ 873       $ 123,397       $ 124,402   

Commercial Real Estate:

           

Owner Occupied

     —           2,141         165,756         167,897   

Non-Owner Occupied

     —           1,742         346,697         348,439   

Residential Real Estate

     131         1,642         234,565         236,338   

Real Estate Construction

     —           —           58,898         58,898   

Farm Real Estate

     —           953         46,040         46,993   

Consumer and Other

     —           3         18,557         18,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 263       $ 7,354       $ 993,910       $ 1,001,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present credit exposures by internally assigned grades for the periods ended June 30, 2016 and December 31, 2015. 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.

 

Page 25


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

    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.

 

June 30, 2016

   Pass      Special
Mention
     Substandard      Doubtful      Ending
Balance
 

Commercial & Agriculture

   $ 119,406       $ 3,332       $ 3,802       $ —         $ 126,540   

Commercial Real Estate:

              

Owner Occupied

     160,119         1,584         6,191         —           167,894   

Non-Owner Occupied

     363,558         4,305         2,013         —           369,876   

Residential Real Estate

     59,615         1,587         7,473         —           68,675   

Real Estate Construction

     50,656         340         27         —           51,023   

Farm Real Estate

     33,597         6,612         3,080         —           43,289   

Consumer and Other

     1,991         —           122         —           2,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 788,942       $ 17,760       $ 22,708       $ —         $ 829,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

   Pass      Special
Mention
     Substandard      Doubtful      Ending
Balance
 

Commercial & Agriculture

   $ 117,739       $ 3,090       $ 3,573       $ —         $ 124,402   

Commercial Real Estate:

              

Owner Occupied

     156,622         5,571         5,704         —           167,897   

Non-Owner Occupied

     339,734         6,100         2,605         —           348,439   

Residential Real Estate

     62,147         1,671         7,435         —           71,253   

Real Estate Construction

     52,399         216         29         —           52,644   

Farm Real Estate

     39,787         4,024         3,182         —           46,993   

Consumer and Other

     1,987         3         111         —           2,101   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 770,415       $ 20,675       $ 22,639       $ —         $ 813,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 performing and nonperforming loans based solely on payment activity for the periods ended June 30, 2016 and December 31, 2015 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

 

     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

June 30, 2016

           

Performing

   $ 177,266       $ 5,251       $ 16,983       $ 199,500   

Nonperforming

     —           —           12         12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 177,266       $ 5,251       $ 16,995       $ 199,512   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Residential
Real Estate
     Real Estate
Construction
     Consumer
and Other
     Total  

December 31, 2015

           

Performing

   $ 165,048       $ 6,254       $ 16,458       $ 187,760   

Nonperforming

     37         —           1         38   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 165,085       $ 6,254       $ 16,459       $ 187,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 27


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2016 and December 31, 2015.

 

June 30, 2016

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

Commercial & Agriculture

   $ 111       $ 905       $ 233       $ 1,249       $ 125,181       $ 110       $ 126,540       $ —     

Commercial Real Estate:

                       

Owner Occupied

     136         248         382         766         167,128         —           167,894         —     

Non-Owner Occupied

     218         —           339         557         369,319         —           369,876         —     

Residential Real Estate

     238         894         1,117         2,249         243,502         190         245,941         —     

Real Estate Construction

     —           —           —           —           56,274         —           56,274         —     

Farm Real Estate

     —           —           784         784         42,505         —           43,289         —     

Consumer and Other

     57         26         12         95         19,013         —           19,108         12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 760       $ 2,073       $ 2,867       $ 5,700       $ 1,022,922       $ 300       $ 1,028,922       $ 12   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2015

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

Commercial & Agriculture

   $ 9       $ 32       $ 37       $ 78       $ 124,192       $ 132       $ 124,402       $ —     

Commercial Real Estate:

                       

Owner Occupied

     982         36         284         1,302         166,595         —           167,897         —     

Non-Owner Occupied

     269         330         123         722         347,717         —           348,439         —     

Residential Real Estate

     2,640         404         1,725         4,769         231,438         131         236,338         —     

Real Estate Construction

     8         —           —           8         58,890         —           58,898         —     

Farm Real Estate

     —           —           —           —           46,993         —           46,993         —     

Consumer and Other

     98         68         8         174         18,386         —           18,560         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,006       $ 870       $ 2,177       $ 7,053       $ 994,211       $ 263       $ 1,001,527       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 table presents loans on nonaccrual status as of June 30, 2016 and December 31, 2015.

 

     2016      2015  

Commercial & Agriculture

   $ 1,975       $ 1,185   

Commercial Real Estate:

     

Owner Occupied

     1,380         1,645   

Non-Owner Occupied

     705         1,428   

Residential Real Estate

     3,751         3,911   

Real Estate Construction

     27         29   

Farm Real Estate

     789         961   

Consumer and Other

     110         100   
  

 

 

    

 

 

 

Total

   $ 8,737       $ 9,259   
  

 

 

    

 

 

 

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

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of June 30, 2016, TDRs accounted for $237 of the allowance for loan losses. As of December 31, 2015, TDRs accounted for $286 of the allowance for loan losses.

 

Page 29


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 periods ended June 30, 2016 and June 30, 2015 were as follows:

 

     For the Six-Month Period Ended June 30,
2016
 
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commercial & Agriculture

     4       $ 529       $ 529   

Commercial Real Estate - Owner Occupied

     —           —           —     

Commercial Real Estate - Non-Owner Occupied

     —           —           —     

Residential Real Estate

     2         308         308   

Real Estate Construction

     —           —           —     

Farm Real Estate

     2         614         614   

Consumer and Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     8       $ 1,451       $ 1,451   
  

 

 

    

 

 

    

 

 

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

Commercial & Agriculture

     1       $ 6       $ 6   

Commercial Real Estate - Owner Occupied

     —           —           —     

Commercial Real Estate - Non-Owner Occupied

     —           —           —     

Residential Real Estate

     3         374         374   

Real Estate Construction

     1         41         41   

Farm Real Estate

     —           —           —     

Consumer and Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     5       $ 421       $ 421   
  

 

 

    

 

 

    

 

 

 

 

Page 30


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

     For the Three-Month Period Ended June 30,
2016
 
     Number
of
Contracts
     Pre-
Modification
Outstanding
Recorded
Investment
     Post-
Modification
Outstanding
Recorded
Investment
 

Commercial & Agriculture

     1       $ 47       $ 47   

Commercial Real Estate - Owner Occupied

     —           —           —     

Commercial Real Estate - Non-Owner Occupied

     —           —           —     

Residential Real Estate

     1         76         76   

Real Estate Construction

     —           —           —     

Farm Real Estate

     —           —           —     

Consumer and Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     2       $ 123       $ 123   
  

 

 

    

 

 

    

 

 

 
     For the Three-Month Period Ended June 30,
2015
 
     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

     —           —           —     

Real Estate Construction

     —           —           —     

Farm Real Estate

     —           —           —     

Consumer and Other

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Loan Modifications

     —         $ —         $ —     
  

 

 

    

 

 

    

 

 

 

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 six-month periods ended June 30, 2016 and June 30, 2015, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

 

Page 31


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Impaired Loans: Larger (greater than $350) Commercial & Agricultural and Commercial Real Estate loan relationships, 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.

The following tables include the recorded investment and unpaid principal balances for impaired loans with the related allowance amount, if applicable, as of June 30, 2016 and December 31, 2015.

 

     June 30, 2016      December 31, 2015  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

  

              

Commercial & Agriculture

   $ 2,417       $ 2,966          $ 851       $ 1,034      

Commercial Real Estate:

                 

Owner Occupied

     1,363         1,398            1,224         1,343      

Non-Owner Occupied

     683         687            1,742         1,826      

Residential Real Estate

     1,328         1,865            965         1,591      

Farm Real Estate

     1,398         1,398            953         1,026      

Consumer and Other

     2         2            3         3      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     7,191         8,316            5,738         6,823      

With an allowance recorded:

                 

Commercial & Agriculture

     —           —         $ —           22         23       $ 23   

Commercial Real Estate:

                 

Owner Occupied

     246         246         4         917         999         103   

Non-Owner Occupied

     61         61         23         —           —           —     

Residential Real Estate

     563         582         162         808         683         260   

Farm Real Estate

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     870         889         189         1,747         1,705         386   

Total:

                 

Commercial & Agriculture

     2,417         2,966         —           873         1,057         23   

Commercial Real Estate:

                 

Owner Occupied

     1,609         1,644         4         2,141         2,342         103   

Non-Owner Occupied

     744         748         23         1,742         1,826         —     

Residential Real Estate

     1,891         2,447         162         1,773         2,274         260   

Farm Real Estate

     1,398         1,398         —           953         1,026         —     

Consumer and Other

     2         2         —           3         3         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,061       $ 9,205       $ 189       $ 7,485       $ 8,528       $ 386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 includes the average recorded investment and interest income recognized for impaired loans.

 

For the six months ended:    June 30, 2016      June 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial & Agriculture

   $ 1,937       $ 80       $ 1,943       $ 37   

Commercial Real Estate - Owner Occupied

     1,800         50         3,300         97   

Commercial Real Estate - Non-Owner Occupied

     1,489         26         2,053         19   

Residential Real Estate

     1,799         60         2,752         66   

Real Estate Construction

     —           —           27         —     

Farm Real Estate

     1,250         31         566         28   

Consumer and Other

     3         —           5         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,278       $ 247       $ 10,646       $ 247   
  

 

 

    

 

 

    

 

 

    

 

 

 
For the three months ended:    June 30, 2016      June 30, 2015  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Commercial & Agriculture

   $ 2,469       $ 41       $ 1,762       $ 11   

Commercial Real Estate - Owner Occupied

     1,630         24         3,277         50   

Commercial Real Estate - Non-Owner Occupied

     1,363         13         1,992         10   

Residential Real Estate

     1,878         29         2,471         39   

Real Estate Construction

     —           —           40         —     

Farm Real Estate

     1,398         15         848         14   

Consumer and Other

     2         —           5         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,740       $ 122       $ 10,395       $ 124   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Page 33


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Changes in the amortizable yield for purchased credit-impaired (PCI) loans were as follows, since acquisition:

 

     For the Six-Month
Period Ended
June 30, 2016
     For the Six-Month
Period Ended
June 30, 2015
 
     (In Thousands)      (In Thousands)  

Balance at beginning of period

   $ 82       $ —     

Acquisition of PCI loans

     —           140   

Accretion

     (16      —     
  

 

 

    

 

 

 

Balance at end of period

   $ 66       $ 140   
  

 

 

    

 

 

 
     For the Three-Month
Period Ended
June 30, 2016
     For the Three-Month
Period Ended
June 30, 2015
 
     (In Thousands)      (In Thousands)  

Balance at beginning of period

   $ 74       $ 140   

Acquisition of PCI loans

     —           —     

Accretion

     (8      —     
  

 

 

    

 

 

 

Balance at end of period

   $ 66       $ 140   
  

 

 

    

 

 

 

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30:

 

     At June 30, 2016      At December 31, 2015  
     Acquired Loans with
Specific Evidence of
Deterioration of Credit
Quality (ASC 310-30)
     Acquired Loans with
Specific Evidence of
Deterioration of Credit
Quality (ASC 310-30)
 
     (In Thousands)  

Outstanding balance

   $ 911       $ 965   

Carrying amount

     300         263   

There has been $105 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of June 30, 2016.

 

Page 34


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of June 30, 2016 and December 31, 2015, a total of $107 and $116, respectively of foreclosed assets were included with other assets. As of June 30, 2016, included within the foreclosed assets is $107 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2016, the Company had initiated formal foreclosure procedures on $586 of consumer residential mortgages.

(6) Other Comprehensive Income

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax.

 

     For the Six-Month Period Ended
June 30, 2016
    For the Six-Month Period Ended
June 30, 2015
 
     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

   $ 3,554       $ (4,049   $ (495   $ 3,730      $ (3,777   $ (47
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     2,308         —          2,308        (723     —          (723

Amounts reclassified from accumulated other comprehensive income (loss)

     1         110        111        —          92        92   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     2,309         110        2,419        (723     92        (631
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,863       $ (3,939   $ 1,924      $ 3,007      $ (3,685   $ (678
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

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 table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss).

 

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

Details about Accumulated Other Comprehensive (Loss)
Components

  For the six
months ended
June 30, 2016
    For the six
months ended
June 30, 2015
   

Affected Line Item in the

Statement Where Net Income is

Presented

Unrealized gains and losses on available-for-sale securities

  $ (1   $ —       

Net gain on securities available for sale

Tax effect

    —          —       

Income tax expense

 

 

 

   

 

 

   
    (1     —       

Net of tax

 

 

 

   

 

 

   

Amortization of defined benefit pension items

     

Actuarial gains/(losses)

    (166 ) (b)      (140 ) (b)   

Salaries, wages and benefits

Tax effect

    56        48     

Income tax expense

 

 

 

   

 

 

   
    (110     (92  

Net of tax

 

 

 

   

 

 

   

Total reclassifications for the period

  $ (111   $ (92  

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 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 table presents the changes in each component of accumulated other comprehensive income (loss), net of tax.

 

     For the Three-Month Period Ended
June 30, 2016
     For the Three-Month Period Ended
June 30, 2015
 
     Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
     Defined
Benefit
Pension
Items
    Total      Unrealized
Gains and
Losses on
Available-
for-Sale
Securities
    Defined
Benefit
Pension
Items
    Total  

Beginning balance

   $ 4,812       $ (3,994   $ 818       $ 4,315      $ (3,731   $ 584   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) before reclassifications

     1,047         —          1,047         (1,308     —          (1,308

Amounts reclassified from accumulated other comprehensive income (loss)

     4         55        59         —          46        46   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

     1,051         55        1,106         (1,308     46        (1,262
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 5,863       $ (3,939   $ 1,924       $ 3,007      $ (3,685   $ (678
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Amounts in parentheses indicate debits on the consolidated balance sheets.

 

Page 37


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss).

 

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

Details about Accumulated Other Comprehensive (Loss)
Components

  For the three
months ended
June 30, 2016
    For the three
months ended
June 30, 2015
   

Affected Line Item in the

Statement Where Net Income is

Presented

Unrealized gains and losses on available-for-sale securities

  $ (6   $ —       

Net gain on securities available for sale

Tax effect

    2        —       

Income tax expense

 

 

 

   

 

 

   
    (4     —       

Net of tax

 

 

 

   

 

 

   

Amortization of defined benefit pension items

     

Actuarial gains/(losses)

    (83 ) (b)      (70 ) (b)   

Salaries, wages and benefits

Tax effect

    28        24     

Income tax expense

 

 

 

   

 

 

   
    (55     (46  

Net of tax

 

 

 

   

 

 

   

Total reclassifications for the period

  $ (59   $ (46  

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.

(7) Goodwill and Intangible Assets

The balance of goodwill was $27,095 at both June 30, 2016 and December 31, 2015. 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 2015 and concluded that the Company’s goodwill was not impaired at December 31, 2015.

 

Page 38


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

The change in the carrying amount of goodwill for the periods ended June 30, 2016 and 2015 is as follows:

 

     Six months ended
June 30,
 
     2016      2015  

Beginning of year

   $ 27,095       $ 21,720   

Acquired goodwill

     —           5,121   

Impairment

     —           —     

Other adjustments

     —           —     
  

 

 

    

 

 

 

End of period

   $ 27,095       $ 26,841   
  

 

 

    

 

 

 

Acquired intangible assets as of June 30, 2016 and June 30, 2015 were as follows:

 

     2016      2015  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Amortized intangible assets(1):

                 

MSRs

   $ 819       $ 195       $ 624       $ 692       $ 124       $ 568   

Core deposit intangibles

     7,274         5,807         1,467         7,697         5,498         2,199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total amortized intangible assets

   $ 8,093       $ 6,002       $ 2,091       $ 8,389       $ 5,622       $ 2,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes fully amortized intangible assets

Aggregate amortization expense was $355 and $334 for June 30, 2016 and 2015, respectively.

Estimated amortization expense for each of the next five years and thereafter is as follows:

 

     MSRs      Core deposit
intangibles
     Total  

2016

     17         344         361   

2017

     35         587         622   

2018

     35         111         146   

2019

     35         88         123   

2020

     35         71         106   

Thereafter

     467         266         733   
  

 

 

    

 

 

    

 

 

 
   $ 624       $ 1,467       $ 2,091   
  

 

 

    

 

 

    

 

 

 

 

Page 39


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(8) Short-Term Borrowings

Short-term borrowings are included in Federal Home Loan Bank advances on the Consolidated Balance Sheets and are summarized as follows:

 

     At June 30, 2016     At December 31, 2015  
     Federal
Funds
Purchased
     Short-term
Borrowings
    Federal
Funds
Purchased
    Short-term
Borrowings
 

Outstanding balance

   $ —         $ 29,800      $ —        $ 53,700   

Maximum indebtedness

     —           70,400        —          64,700   

Average balance

     —           10,860        69        26,880   

Average rate paid

     —           0.40     0.53     0.20

Interest rate on balance

     —           0.42     —          0.35

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

These borrowing transactions can range from overnight to six months in maturity. The average maturity was one day at June 30, 2016 and December 31, 2015.

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

The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of June 30, 2016 and December 31, 2015. All of the repurchase agreements are overnight agreements.

 

     June 30, 2016      December 31, 2015  

Securities pledged for repurchase agreements:

     

U.S. Treasury securities

   $ 657       $ 894   

Obligations of U.S. government agencies

     17,068         24,146   
  

 

 

    

 

 

 

Total securities pledged

   $ 17,725       $ 25,040   
  

 

 

    

 

 

 

Gross amount of recognized liabilities for repurchase agreements

   $ 17,725       $ 25,040   
  

 

 

    

 

 

 

Amounts related to agreements not included in offsetting disclosures above

   $ —         $ —     
  

 

 

    

 

 

 

 

Page 40


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(9) Earnings per Common Share

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

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2016     2015     2016     2015  

Basic

       

Net income

  $ 5,181      $ 3,122      $ 9,906      $ 6,292   

Preferred stock dividends

    391        391        782        795   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders - basic

  $ 4,790      $ 2,731      $ 9,124      $ 5,497   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding - basic

    7,877,119        7,842,159        7,861,444        7,800,808   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

  $ 0.61      $ 0.35      $ 1.16      $ 0.70   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

       

Net income available to common shareholders - basic

  $ 4,790      $ 2,731      $ 9,124      $ 5,497   

Preferred stock dividends

    391        391        782        795   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common shareholders - diluted

  $ 5,181      $ 3,122      $ 9,906      $ 6,292   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    7,877,119        7,842,159        7,861,444        7,800,808   

Add: Dilutive effects of convertible preferred shares

    3,074,402        3,079,665        3,076,323        3,113,980   
 

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares outstanding - diluted

    10,951,521        10,921,824        10,937,767        10,914,788   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

  $ 0.47      $ 0.29      $ 0.91      $ 0.58   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

Page 41


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

For the three-month period ended June 30, 2016 there were 3,074,402 dilutive shares related to the Company’s convertible preferred stock. For the six-month period ended June 30, 2016 there were 3,076,324 dilutive shares related to the Company’s convertible preferred stock. For the three-month period ended June 30, 2015 there were 3,079,665 dilutive shares related to the Company’s convertible preferred stock. For the six-month period ended June 30, 2015 there were 3,113,980 dilutive shares related to the Company’s convertible preferred stock. 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.

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

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amounts of financial instruments with off-balance-sheet risk were as follows for June 30, 2016 and December 31, 2015:

 

     Contract Amount  
     June 30, 2016      December 31, 2015  
     Fixed
Rate
     Variable
Rate
     Fixed
Rate
     Variable
Rate
 

Commitment to extend credit:

           

Lines of credit and construction loans

   $ 7,610       $ 194,874       $ 9,416       $ 195,732   

Overdraft protection

     5         27,053         5         22,122   

Letters of credit

     600         320         200         750   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 8,215       $ 222,247       $ 9,621       $ 218,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 3.25% to 8.00% at June 30, 2016 and from 3.25% to 8.75% at December 31, 2015. 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 $8,365 on June 30, 2016 and $2,448 on December 31, 2015.

 

Page 42


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

(11) Pension Information

The Company 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 benefit was as follows:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2016      2015      2016      2015  

Service cost

   $ —         $ —         $ —         $ —     

Interest cost

     170         156         340         312   

Expected return on plan assets

     (274      (283      (548      (566

Other components

     83         70         166         140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic pension benefit

   $ (21    $ (57    $ (42    $ (114
  

 

 

    

 

 

    

 

 

    

 

 

 

The total amount of pension contributions expected to be paid by the Company in 2016 is $500, compared to $700 in 2015.

(12) 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 314,138 shares available for future grants under this plan at June 30, 2016.

During each of the last two years, the Board of Directors has awarded restricted common shares to senior officers of the Company. The restricted shares vest ratably over a three-year period following the grant date. 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.

Senior officers were awarded an aggregate of 16,130 restricted common shares on March 11, 2016. The 2016 restricted shares vest over a three-year service period, with one third each vesting on January 2 of 2017, 2018 and 2019. On March 17, 2015, certain officers were awarded an aggregate of 16,983 restricted common shares, of which 5,657 shares vested on January 2, 2016.

 

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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)

 

 

On January 15, 2016, certain of the Company’s lending officers were awarded an aggregate of 12,734 restricted common shares under the 2014 Incentive Plan. These restricted shares vest over a 5-year service period, with 20% each vesting on January 2 of 2017, 2018, 2019, 2020 and 2021.

On January 4, 2016, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 2,730 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2016 Annual Meeting.

Finally, on May 17, 2016, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 12,285 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2017 Annual Meeting.

No options had been granted under the 2014 Incentive Plan as of June 30, 2016 and 2015.

The Company classifies share-based compensation for employees with “Salaries, wages and benefits” in the consolidated statements of operations. 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.

The following is a summary of the status of the Company’s restricted shares and changes therein:

 

     Three months ended
June 30, 2016
     Six months ended
June 30, 2016
 
     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

     40,190       $ 10.77         16,983       $ 10.82   

Granted

     —           —           28,864         10.75   

Vested

     —           —           (5,657      10.82   

Forfeited

     (666      10.71         (666      10.71   
  

 

 

       

 

 

    

Nonvested at June 30, 2016

     39,524         10.77         39,524         10.77   
  

 

 

       

 

 

    

During the six-month period ended June 30, 2016, the Company recorded $271 of share-based compensation expense for shares granted under the 2014 Incentive Plan. Additionally, during the three months ended June 30, 2016, the Company recorded $159 of share-based compensation expense for the shares granted under the 2014 Incentive Plan. At June 30, 2016, the expected future compensation expense relating to the 16,983 restricted shares awarded in 2015 is $56 over the remaining vesting period of 1.5 years. The expected future compensation expense relating to the 16,130 restricted shares awarded in 2016 to the officers and Civista directors is $90 over the remaining vesting period of 2.5 years. The

 

Page 44


Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

expected future compensation expense relating to the 12,734 restricted common shares awarded to lending officers of the Company in 2016 is $128 over the remaining vesting period of 4.5 years. Finally, on May 13, 2016, an agreement was signed thereby ending the employment of a grantee of restricted shares. As a result, a total of 666 restricted shares granted, but unvested, were forfeited.

(13) 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).

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 Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level 3 measurement.

 

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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)

 

 

Other real estate owned: OREO is carried at the lower of cost or fair value, which is measured at the date of foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. Management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the properties are categorized in the below table as Level 3 measurements since these adjustments are considered to be unobservable inputs. Income and expenses from operations are included in other operating expenses. Further declines in the fair value of the collateral subsequent to foreclosure are included in net gain on sale of other real estate owned.

Assets measured at fair value are summarized below.

 

        Fair Value Measurements at June 30, 2016 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

  $ —        $ 41,578      $ —     

Obligations of states and political subdivisions

    —          95,218        —     

Mortgage-backed securities in government sponsored entities

    —          63,247        —     

Equity securities in financial institutions

    —          600        —     

Swap asset

    —          3,757        —     

Liabilities:

     

Swap liability

    —          3,757        —     

Assets measured at fair value on a nonrecurring basis:

     

Impaired loans

  $ —        $ —        $ 391   

Other real estate owned

    —          —          73   

 

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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)

 

 

        Fair Value Measurements at December 31, 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

  $ —        $ 40,937      $ —     

Obligations of states and political subdivisions

    —          92,152        —     

Mortgage-backed securities in government sponsored entities

    —          62,573        —     

Equity securities in financial institutions

    —          587        —     

Swap asset

    —          1,962        —     

Liabilities:

     

Swap liability

    —          1,962        —     

Assets measured at fair value on a nonrecurring basis:

     

Impaired loans

  $ —        $ —        $ 759   

Other real estate owned

    —          —          109   

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2016.

 

     Quantitative Information about Level 3 Fair Value Measurements
June 30, 2016    Fair Value      Valuation Technique    Unobservable Input    Range    Weighted
Average

Impaired loans

   $ 391       Appraisal of collateral    Appraisal
adjustments
   10% - 30%    10%
         Liquidation expense    0% - 10%    10%
         Holding period    0 - 30 months    18 months

Other real estate owned

   $ 73       Appraisal of collateral    Appraisal
adjustments
   10% - 30%    10%
         Liquidation expense    0% - 10%    10%

 

Page 47


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, 2015.

 

     Quantitative Information about Level 3 Fair Value Measurements
December 31, 2015    Fair Value      Valuation Technique    Unobservable Input    Range    Weighted
Average

Impaired loans

   $ 759       Appraisal of collateral    Appraisal
adjustments
   10% - 30%    10%
         Liquidation expense    0% - 10%    10%
         Holding period    0 - 30 months    17 months

Other real estate owned

   $ 109       Appraisal of collateral    Appraisal
adjustments
   10% - 30%    10%
         Liquidation expense    0% - 10%    10%

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

 

June 30, 2016       Carrying    
Amount
    Total
    Fair Value    
        Level 1             Level 2             Level 3      

Financial Assets:

         

Cash and due from financial institutions

  $ 41,772      $ 41,772      $ 41,772      $ —        $ —     

Securities available for sale

    200,643        200,643        —          200,643        —     

Loans, held for sale

    5,167        5,167        5,167        —          —     

Loans, net of allowance for loan losses

    1,014,375        1,011,073        —          —          1,011,073   

Other securities

    13,734        13,734        13,734        —          —     

Bank owned life insurance

    24,255        24,255        24,255        —          —     

Accrued interest receivable

    3,798        3,798        3,798        —          —     

Swap asset

    3,757        3,757        —          3,757        —     

Financial Liabilities:

         

Nonmaturing deposits

    917,274        917,274        917,274        —          —     

Time deposits

    197,733        198,256        —          —          198,256   

Short-term FHLB advances

    29,800        29,471        29,471        —          —     

Long-term FHLB advances

    17,500        17,657        —          —          17,657   

Securities sold under agreement to repurchase

    17,725        17,725        17,725        —          —     

Subordinated debentures

    29,427        28,964        —          —          28,964   

Accrued interest payable

    121        121        121        —          —     

Swap liability

    3,757        3,757        —          3,757        —     

 

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Table of Contents

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

 

 

December 31, 2015       Carrying    
Amount
    Total
    Fair Value    
        Level 1             Level 2             Level 3      

Financial Assets:

         

Cash and due from financial institutions

  $ 35,561      $ 35,561      $ 35,561      $ —        $ —     

Securities available for sale

    196,249        196,249        —          196,249        —     

Loans, held for sale

    2,698        2,698        2,698        —          —     

Loans, net of allowance for loan losses

    987,166           986,848        —          —             986,848   

Other securities

    13,452        13,452        13,452        —          —     

Bank owned life insurance

    20,104        20,104        20,104        —          —     

Accrued interest receivable

    3,902        3,902        3,902        —          —     

Swap asset

    1,962        1,962        —          1,962        —     

Financial Liabilities:

         

Nonmaturing deposits

    840,984        840,984        840,984        —          —     

Time deposits

    211,049        212,006        —          —          212,006   

Short-term FHLB advances

    53,700        52,906        52,906        —          —     

Long-term FHLB advances

    17,500        17,687        —          —          17,687   

Securities sold under agreement to repurchase

    25,040        25,040        25,040        —          —     

Subordinated debentures

    29,427        25,572        —          —          25,572   

Accrued interest payable

    120        120        120        —          —     

Swap liability

    1,962        1,962        —          1,962        —     

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

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

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

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

 

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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)

 

 

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.

 

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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)

 

 

(14) 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.

The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of June 30, 2016.

 

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

Derivative Assets

   $ 44,996         5.16   $ 26         Monthly   

Derivative Liabilities

     (44,996      -5.16     (26      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, 2015.

 

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

Derivative Assets

   $ 35,534         5.31   $ 20         Monthly   

Derivative Liabilities

     (35,534      -5.31     (20      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.

 

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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)

 

 

(15) Qualified Affordable Housing Project Investments

The Company invests in qualified affordable housing projects. At June 30, 2016 and December 31, 2015, the balance of the investment for qualified affordable housing projects was $2,501 and $2,177, respectively. These balances are reflected in the other assets line on the consolidated balance sheet. The unfunded commitments related to the investments in qualified affordable housing projects totaled $1,716 and $2,195 at June 30, 2016 and December 31, 2015, respectively.

During the six months ended June 30, 2016 and 2015, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $154 and $139, respectively. During the quarters ended June 30, 2016 and 2015, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $77 and $70, respectively, which was included within pretax income on the consolidated statements of operations.

Additionally, during the six months ended June 30, 2016 and 2015, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $295 and $233, respectively. During the quarters ended June 30, 2016 and 2015, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $148 and $116, respectively. During the three and six months ended June 30, 2016 and 2015, the Company did not incur impairment losses related to its investment in qualified affordable housing projects.

 

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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)

 

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

Introduction

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2016 compared to December 31, 2015, and the consolidated results of operations for the three- and six-month periods ended June 30, 2016, compared to the same periods in 2015. 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, 2015. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

 

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Table of Contents

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

 

 

Financial Condition

Total assets of the Company at June 30, 2016 were $1,359,911 compared to $1,315,041 at December 31, 2015, an increase of $44,870, or 3.4%. The increase in total assets was mainly attributable to an increase in cash and due from financial institutions, securities available for sale, loans held for sale, net loans and bank owned life insurance. Total liabilities at June 30, 2016 were $1,223,708 compared to $1,189,868 at December 31, 2015, an increase of $33,840, or 2.8%. The increase in total liabilities was mainly attributable to an increase in total deposits and accrued interest, taxes and other expenses offset by a decrease in FHLB overnight advances and securities sold under agreements to repurchase.

Cash and due from financial institutions have increased $6,211 or 17.5% since December 31, 2015, due primarily to temporary additional cash balances related to the tax refund processing program.

Loans outstanding as of June 30, 2016 and December 31, 2015 were as follows:

 

     June 30,
2016
     December 31,
2015
 

Commercial & Agriculture

   $ 126,540       $ 124,402   

Commercial Real Estate - Owner Occupied

     167,894         167,897   

Commercial Real Estate - Non-Owner Occupied

     369,876         348,439   

Residential Real Estate

     245,941         236,338   

Real Estate Construction

     56,274         58,898   

Farm Real Estate

     43,289         46,993   

Consumer and Other

     19,108         18,560   
  

 

 

    

 

 

 

Total loans

     1,028,922         1,001,527   

Allowance for loan losses

     (14,547      (14,361
  

 

 

    

 

 

 

Net loans

   $ 1,014,375       $ 987,166   
  

 

 

    

 

 

 

Net loans have increased $27,209 or 2.8% since December 31, 2015. The Commercial & Agriculture, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate and Consumer and Other loan portfolios increased $2,138, $21,437, $9,603 and $548, respectively, since December 31, 2015, while the Commercial Real Estate – Owner Occupied, Real Estate Construction and Farm Real Estate loan portfolios have decreased $3, $2,624 and $3,704, respectively, since December 31, 2015.

Loans held for sale have increased $2,469 or 91.5% since December 31, 2015, due to an increase in loans originated during the first six months of 2016. At June 30, 2016, the net loan to deposit ratio was 91.0% compared to 93.8% at December 31, 2015. The decrease in the net loan to deposit ratio is the result of an increase in deposits.

During the first six months of 2016, the Company received a payoff on a nonperforming loan. This particular loan had been analyzed previously and had been charged down based on a deterioration of real estate collateral values during the recent recession. As a result of the payoff of the loan, the Company recovered the charged down amount of approximately $1,303. The result of the transaction

 

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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)

 

 

was a credit of $1,300 from the allowance for loan losses during the six months of operations in 2016, compared to an $800 provision for loan losses in the same period of 2015. Additionally, the allowance for loan losses was affected by a decrease in net charge-offs compared to a year ago. Net charge-offs have decreased to a net recovery of $1,486, compared to net charge-offs of $361 during the first six months of 2015. For the first six months of 2016, the Company charged off a total of thirty loans. Two Commercial and Agriculture loans totaling $7 net of recoveries and eight Consumer and Other loans totaling $14, net of recoveries were charged off in the first six months of the year. In addition, the Company had net recoveries of $10, $1,359, $136 and $2 on previously charged-off Commercial Real Estate – Owner Occupied loans, Commercial Real Estate – Non-Owner Occupied loans, Residential Real Estate loans and Real Estate Construction loans, respectively, in the first six months of 2016. 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 $522 since December 31, 2015, which was due to a decrease in loans on nonaccrual status of $522. 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 reflected a change in methodology beginning in the third quarter of 2015. 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 1.41% at June 30, 2016 and 1.43% at December 31, 2015.

The available for sale security portfolio increased by $4,394, from $196,249 at December 31, 2015 to $200,643 at June 30, 2016. Management continually evaluates our securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which the Company is exposed. These evaluations may cause the Company to change the level of funds it deploys into investment securities and change the composition of its investment securities portfolio. As of June 30, 2016, 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 decreased $233 from December 31, 2015 to June 30, 2016. The decrease is the result of new purchases of $202, offset by depreciation of $600. In addition, $165 was added to construction in progress.

Bank owned life insurance (BOLI) increased $4,151 from December 31, 2015 to June 30, 2016. In the first six months of 2016, the Company purchased an additional $3,885 of BOLI. The remaining difference is the result of increases in the cash surrender value of the underlying insurance policies.

Total deposits as of June 30, 2016 and December 31, 2015 are as follows:

 

     June 30,
2016
     December 31,
2015
 

Noninterest-bearing demand

   $ 353,386       $ 300,615   

Interest-bearing demand

     190,434         176,303   

Savings and money market

     373,454         364,066   

Time deposits

     197,733         211,049   
  

 

 

    

 

 

 

Total Deposits

   $ 1,115,007       $ 1,052,033   
  

 

 

    

 

 

 

Total deposits at June 30, 2016 increased $62,974 from year-end 2015. Noninterest-bearing deposits increased $52,771 from year-end 2015, while interest-bearing deposits, including savings and time deposits, increased $10,203 from December 31, 2015. The increase in noninterest-bearing deposits was primarily due to an increase in commercial accounts related to the Company’s participation in a tax refund processing program, which added temporary noninterest-bearing deposits of $46,814. The interest-bearing deposit increase was mainly due to increases in interest-bearing demand and savings and money market accounts. The year-to-date average balance of total deposits increased $133,620 compared to the average balance of the same period in 2015 due to a large increase in temporary cash related to the tax refund processing program. The increase in average balance is due to increases of $136,952 in demand deposit accounts, $11,792 in money market savings, $2,394 in public fund money market savings and $9,320 in statement saving accounts, offset by decreases of $13,884 in time certificates, $6,447 in brokered deposits and $9,274 in interest-bearing public funds.

FHLB advances decreased $23,900 from December 31, 2015 to June 30, 2016. The decrease is due to a decrease in overnight funds of $23,900. Securities sold under agreements to repurchase, which tend to fluctuate, have decreased $7,315 from December 31, 2015 to June 30, 2016.

Accrued expenses and other liabilities increased $2,081 from December 31, 2015 to June 30, 2016. The increase is primarily the result of an increase in the market value of swap liabilities.

Shareholders’ equity at June 30, 2016 was $136,203, or 10.0% of total assets, compared to $125,173, or 9.5% of total assets, at December 31, 2015. The increase in shareholders’ equity was primarily due to net

 

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Table of Contents

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

 

 

income of $9,906, a decrease in the Company’s pension liability, net of tax, of $110, an increase in the fair value of securities available for sale, net of tax, of $2,309 and offset by dividends on preferred stock and common stock of $784 and $782, respectively. Additionally, $271 was recognized as stock-based compensation in connection with the grant of restricted shares. Total outstanding common shares at June 30, 2016 were 7,907,360. Total outstanding common shares at December 31, 2015 were 7,843,578. The increase in common shares outstanding is the result of the conversion of 161 of the Company’s previously issued preferred shares into 20,569 common shares, the grant of 28,864 restricted common shares to certain officers under the Company’s 2014 Incentive Plan and the grant of 15,015 common shares were granted to directors of Civista. There were 666 previously granted restricted common shares forfeited during the six months ended June 30, 2016. In addition,

Results of Operations

Six Months Ended June 30, 2016 and 2015

The Company had net income of $9,906 for the six months ended June 30, 2016, an increase of $3,614 from net income of $6,292 for the same six months of 2015. Basic earnings per common share were $1.16 for the period ended June 30, 2016, compared to $0.70 for the same period in 2015. Diluted earnings per common share were $0.91 for the period ended June 30, 2016, compared to $0.58 for the same period in 2015. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2016 was $25,175, an increase of $2,344 from $22,831 in the same six months of 2015. Total interest income for the six months ended June 30, 2016 was $26,791, an increase of $2,288 from $24,503 in the same six months of 2015. Average earning assets increased 9.6% during the six months ended June 30, 2016 as compared to the same period in 2015. Average loans, non-taxable securities and interest-bearing deposits in other banks for the first six months of 2016 increased 5.1%, 7.0% and 86.8%, respectively, compared to the first six months of last year. The increases were partially offset by a decrease in taxable securities. Interest-bearing deposits in other banks increased due to our tax refund processing program. The timing of cash inflows and outflows leads to large, but temporary, increases in cash on deposit. Although the program was in place in both the first six months of 2015 and 2016, the volume of tax refunds processed, and therefore cash on deposit, increased dramatically. The yield on the loan portfolio increased 16 basis points for the first six months of 2016 compared to the first six months of last year. The yield on earning assets decreased 3 basis points for the first six months of 2016 compared to the first six months of last year. Total interest expense for the six months ended June 30, 2016 was $1,616, a decrease of $56 from $1,672 in the same six months of 2015. Interest expense on time deposits and FHLB borrowings decreased $121 and $14, respectively in the first six months of 2016 compared to the same period in 2015. Average time deposits for the first six months of 2016 decreased 10.0% compared to the first six months of 2015. The interest rate paid on time deposits during the first six months of 2016 decreased by 3 basis points as compared to the same period in 2015. The interest rate paid on FHLB borrowings during the first six months of 2016 decreased 2 basis points as compared to the same period in 2015. The Company’s net interest margin for the six months ended June 30, 2016 and 2015 was 3.81%.

 

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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 six months ended June 30, 2016 and 2015. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 34% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

 

     Six Months Ended June 30,  
     2016     2015  
     Average
balance
    Interest      Yield/
rate *
    Average
balance
    Interest      Yield/
rate *
 

Assets:

              

Interest-earning assets:

              

Loans, including fees

   $ 1,008,203      $ 23,487         4.69   $ 959,474      $ 21,516         4.53

Taxable securities

     138,517        1,622         2.39     141,420        1,629         2.37

Tax-exempt securities

     75,011        1,315         5.67     70,128        1,264         5.78

Interest-bearing deposits in other banks

     149,046        367         0.50     79,794        94         0.24
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

   $ 1,370,777        26,791         4.05   $ 1,250,816        24,503         4.08
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-earning assets:

              

Cash and due from financial institutions

     76,208             46,515        

Premises and equipment, net

     16,801             15,537        

Accrued interest receivable

     4,327             4,225        

Intangible assets

     29,366             27,513        

Other assets

     9,876             9,877        

Bank owned life insurance

     22,506             19,737        

Less allowance for loan losses

     (14,562          (14,520     
  

 

 

        

 

 

      

Total Assets

   $ 1,515,299           $ 1,359,700        
  

 

 

        

 

 

      

Liabilities and Shareholders Equity:

              

Interest-bearing liabilities:

              

Demand and savings

   $ 559,901      $ 227         0.08   $ 540,336      $ 207         0.08

Time

     205,949        747         0.73     228,846        868         0.76

FHLB

     28,537        201         1.42     30,179        215         1.44

Subordinated debentures

     29,427        430         2.94     29,427        373         2.56

Repurchase Agreements

     22,122        11         0.10     18,745        9         0.10
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

   $ 845,936        1,616         0.38   $ 847,533        1,672         0.40
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest-bearing deposits

     516,738             379,786        

Other liabilities

     23,004             14,258        

Shareholders’ Equity

     129,621             118,123        
  

 

 

        

 

 

      

Total Liabilities and Shareholders’ Equity

   $ 1,515,299           $ 1,359,700        
  

 

 

        

 

 

      

Net interest income and interest rate spread

     $ 25,175         3.67     $ 22,831         3.68

Net interest margin

          3.81          3.81

* - All yields and costs are presented on an annualized 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 six months ended June 30, 2016 and 2015. 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, including fees

   $ 1,117       $ 854       $ 1,971   

Taxable securities

     (34      27         (7

Tax-exempt securities

     91         (40      51   

Interest-bearing deposits in other banks

     121         152         273   
  

 

 

    

 

 

    

 

 

 

Total interest income

   $ 1,295       $ 993       $ 2,288   
  

 

 

    

 

 

    

 

 

 

Interest expense:

        

Demand and savings

   $ 8       $ 12       $ 20   

Time

     (84      (37      (121

FHLB

     (12      (2      (14

Subordinated debentures

     —           57         57   

Repurchase agreements

     2         —           2   
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $ (86    $ 30       $ (56
  

 

 

    

 

 

    

 

 

 

Net interest income

   $ 1,381       $ 963       $ 2,344   
  

 

 

    

 

 

    

 

 

 

 

(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. During the first six months of 2016, the Company received a payoff on a nonperforming loan. This particular loan had been analyzed previously and had been charged down based on a deterioration of real estate collateral values during the recent recession. As a result of the payoff of the loan, the Company recovered the charged down amount of approximately $1,303. The result of the transaction was a reversal of $1,300 from the allowance for loan losses during the six months of operations in 2016, compared to an $800 allowance for loan losses in the same period of 2015. The provision is also affected by net charge-offs on loans and changes in specific and general allocations required on the allowance for loan losses. The decrease in provision for loan losses in the first six months of 2016 is related to the decrease in net charge-offs compared to a year ago.

 

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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)

 

 

Noninterest income for the six-month periods ended June 30, 2016 and 2015 are as follows:

 

     Six months ended
June 30,
 
     2016      2015  

Service charges

   $ 2,520       $ 2,225   

Net gain on sale of securities

     1         —     

Net gain on sale of loans

     800         619   

ATM fees

     1,043         964