10-K 1 civb-10k_20191231.htm 10-K civb-10k_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2019

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

 

 

(IRS Employer

incorporation or organization

 

 

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

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common shares, no par value

 

CIVB

 

The NASDAQ Stock Market LLC (NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes      No  

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      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

Emerging Growth Company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing market price as of June 30, 2019 was $336,720,623. For this purpose, shares held by non-affiliates include all outstanding common shares except those beneficially owned by the directors and executive officers of the registrant.

As of February 28, 2020, there were 16,541,000 common shares, no par value, of the registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2019 (the “2019 Annual Report”) are incorporated by reference into Parts I and II of this Form 10-K. Portions of the registrant’s Proxy Statement for the registrant’s 2020 Annual Meeting of Shareholders to be held on April 21, 2020 (the “2020 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 


INDEX

 

Part I

  

 

 

 

 

 

 

 

Item 1.

  

Business

 

3

 

 

 

 

Item 1A.

  

Risk Factors

 

20

 

 

 

 

Item 1B.

  

Unresolved Staff Comments

 

32

 

 

 

 

Item 2.

  

Properties

 

32

 

 

 

 

Item 3.

  

Legal Proceedings

 

32

 

 

 

 

Item 4.

  

Mine Safety Disclosures

 

32

 

 

 

 

Part II

  

 

 

 

 

 

 

 

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

33

 

 

 

 

Item 6.

  

Selected Financial Data

 

33

 

 

 

 

Item 7.

  

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

 

34

 

 

 

 

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

Item 8.

  

Financial Statements and Supplementary Data

 

34

 

 

 

 

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

35

 

 

 

 

Item 9A.

  

Controls and Procedures

 

35

 

 

 

 

Item 9B.

  

Other Information

 

35

 

 

 

 

Part III

  

 

 

 

 

 

 

 

Item 10.

  

Directors, Executive Officers and Corporate Governance

 

36

 

 

 

 

Item 11.

  

Executive Compensation

 

36

 

 

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

36

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

36

 

 

 

 

 

Item 14.

 

Principal Accountant Fees and Services

 

36

 

 

 

 

 

Part IV

 

 

 

 

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

37

 

 

 

 

 

Item 16

 

Form 10-K Summary

 

39

 

 

 

 

 

Signatures

 

40

 

 

 


 

PART I

Item 1.  Business

 

General Development of Business

CIVISTA BANCSHARES, INC. (“CBI”) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Act of 1999, as amended (the “GLBA”). CBI’s office is located at 100 East Water Street, Sandusky, Ohio. CBI and its subsidiaries are sometimes referred to together as the “Company”. The Company had total consolidated assets of $2,309,557 at December 31, 2019.

CIVISTA BANK (“Civista”), owned by the Company since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Civista was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Civista surrendered its trust charter and began operation as The Citizens Banking Company. The name Civista Bank was introduced during the first quarter of 2015 to solidify our dual Citizens/Champaign brand and distinguish ourselves from the many other banks using the “Citizens” name in our existing and prospective markets. Civista maintains its main office at 100 East Water Street, Sandusky, Ohio and operates branch banking offices in the following Ohio communities: Sandusky (2), Norwalk (2), Berlin Heights, Huron, Port Clinton, Castalia, New Washington, Shelby (2), Willard, Greenwich, Plymouth, Shiloh, Akron, Dublin, Plain City, Russells Point, Urbana (2), West Liberty, Quincy, Dayton (3), Beachwood, and in the following Indiana communities: Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles. Civista also operates loan production offices in Westlake, Ohio and Fort Mitchell, Kentucky. Civista and its consolidated subsidiaries as discussed below, accounted for 99.7% of the Company’s consolidated assets at December 31, 2019.

On September 14, 2018, the Company completed its acquisition of United Community Bancorp (“UCB”), pursuant to a previously announced definitive merger agreement.  Under the terms of the agreement, UCB shareholders received 1.027 shares of the Company’s common stock and $2.54 cash in exchange for each share of UCB common stock they owned immediately prior to the merger.  The Company issued 4,277,430 shares of its common stock and paid approximately $12.7 million in cash in the merger for an aggregate merger consideration of approximately $117.3 million.  Upon closing, UCB’s banking subsidiary, United Community Bank, was merged into CBI’s banking subsidiary, Civista Bank and its eight offices in the Indiana communities of Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles and a loan production office in Fort Mitchell, Kentucky, became offices of Civista.  The systems integration of United Community Banks into Civista was completed on September 14, 2018.

FIRST CITIZENS INSURANCE AGENCY, INC. (“FCIA”) was formed in 2001 to allow the Company to participate in commission revenue generated through its third party insurance agreement. Assets of FCIA were not significant as of December 31, 2019.

WATER STREET PROPERTIES (“WSP”) was formed in 2003 to hold properties repossessed by CBI subsidiaries. Assets of WSP were not significant as of December 31, 2019.

FC REFUND SOLUTIONS, INC. (“FCRS”) was formed in 2012 to facilitate payment of individual state and federal income tax refunds.  The operations of FCRS were discontinued June 30, 2019 as a result of inactivity. The discontinued operations of FCRS will not affect the Company’s participation in the tax refund processing program.

FIRST CITIZENS INVESTMENTS, INC. (“FCI”) was formed in the fourth quarter of 2007 as a wholly-owned subsidiary of Civista to hold and manage its securities portfolio. The operations of FCI are located in Wilmington, Delaware.

FIRST CITIZENS CAPITAL LLC (“FCC”) was also formed in the fourth quarter of 2007 as a wholly-owned subsidiary of Civista to hold inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware.

CIVB RISK MANAGEMENT, INC. (“CRMI”), a wholly-owned subsidiary of the Company which was formed and began operations on December 26, 2017, is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.  CRMI pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.  CRMI is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance. 

3

 


 

Industry Segments

CBI is a financial holding company. Through its subsidiary bank, the Company is primarily engaged in the business of community banking, which accounts for substantially all of its revenue, operating income and assets.  Refer to Consolidated Financial Statements on pages 24 through 29 of the 2019 Annual Report.

Narrative Description of Business

General

The Company’s primary business is incidental to the subsidiary bank and its subsidiaries. Civista, located in the Ohio counties of Erie, Crawford, Champaign, Cuyahoga, Franklin, Huron, Logan, Madison, Montgomery, Ottawa, Richland and Summit, in the Indiana counties of Dearborn and Ripley and in the Kentucky county of Kenton, conducts a general banking business that involves collecting customer deposits, making loans, purchasing securities, and offering Trust services.

Interest and fees on loans accounted for 70% of total revenue for 2019, 70% of total revenue for 2018, and 68% of total revenue for 2017. The Company’s primary focus of lending continues to be real estate loans, both residential and commercial in nature. Residential real estate mortgages comprised 27% of the total loan portfolio in 2019, 29% of the total loan portfolio in 2018 and 23% of the total loan portfolio in 2017. Commercial real estate loans comprised 49% of the total loan portfolio in 2019, 47% in 2018, and 51% in 2017. Commercial and agriculture loans comprised 12% of the total loan portfolio in 2019, 11% in 2018, and 13% in 2017. Civista’s loan portfolio does not include any foreign-based loans, loans to lesser-developed countries or loans to CBI.

On a parent company only basis, CBI’s primary source of funds is the receipt of dividends paid by its subsidiaries, principally Civista. The ability of Civista to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, Civista may declare a dividend without the approval of the State of Ohio Division of Financial Institutions unless the total of the dividends in a calendar year exceeds the total net profits of the bank for the year combined with the retained profits of the bank for the two preceding years. At December 31, 2019, Civista had $53,609 of accumulated net profits available to pay dividends to CBI without approval of the Ohio Division of Financial Institutions.

The Company’s business is not seasonal, nor is it dependent on a single or small group of customers.

Competition

The market area for Civista is Erie, Crawford, Champaign, Cuyahoga, Franklin, Huron, Logan, Madison, Montgomery, Ottawa, Richland and Summit Counties in Ohio, Dearborn and Ripley Counties in Indiana and Kenton County in Kentucky. Traditional financial service competition for Civista consists of large national and regional financial institutions, community banks, thrifts and credit unions operating within Civista’s market area. Nontraditional sources of competition for loan and deposit dollars come from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds.

Civista experiences intense competition within several of its markets due to the presence of several national, regional and local financial institutions and other service providers. Civista primarily competes based on client service, convenience and responsiveness to customer needs, availability and selection of products, and rates of interest on loans and deposits. However, some of Civista’ competitors have greater resources and, as such, higher lending limits, which may adversely affect the ability of Civista to compete.

Employees

CBI has no employees. Civista employs approximately 457 full-time equivalent employees to whom a variety of benefits are provided. CBI and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good.

4

 


Supervision and Regulation

CBI and its subsidiaries are subject to extensive supervision and regulation by federal and state agencies. The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the federal Deposit Insurance Fund and the banking system as a whole, and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary and other customers, as well as the federal Deposit Insurance Fund. These laws and regulations also may restrict the ability of CBI to repurchase its common shares or to receive dividends from Civista, and impose capital adequacy and liquidity requirements. The following is a summary of the regulatory agencies that supervise and regulate CBI and Civista and the statutes and regulations that have, or could have, a material impact on the Company’s business. This discussion is qualified in its entirety by reference to such statutes and regulations.

The Bank Holding Company Act: As a financial holding company, CBI is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, CBI is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require. The Federal Reserve Board also has extensive enforcement authority over financial and bank holding companies, including the ability to assess civil money penalties, issue cease and desist and removal orders, and require that a financial or bank holding company divest subsidiaries, including its subsidiary banks.

Under applicable law and Federal Reserve Board policy, a financial or bank holding company is expected to act as a source of strength to each of its subsidiary banks. The Federal Reserve Board may require a financial or bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.

The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring all or substantially all of the assets of any bank or another financial or bank holding company, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank not already majority-owned by it, or merging or consolidating with another financial or bank holding company.

Gramm-Leach-Bliley Act (“GLBA)”: The GLBA permits qualifying bank holding companies to elect to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature if the holding company is well capitalized and well managed and each of its subsidiary banks is well capitalized under the FDIC’s Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act. In March, 2000, CBI became a financial holding company. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or a savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The GLBA defines “financial in nature” to include:

 

securities underwriting, dealing and market making;

 

sponsoring mutual funds and investment companies;

 

insurance underwriting and agency;

 

merchant banking; and

 

activities that the Federal Reserve Board has determined to be closely related to banking.

5

 


If a financial holding company or a subsidiary bank fails to maintain all requirements for the holding company to maintain financial holding company status, material restrictions may be placed on the activities of the financial holding company and its subsidiaries and on the ability of the holding company to enter into certain transactions and obtain regulatory approvals for new activities and transactions.  The financial holding company could also be required to divest of subsidiaries that engage in activities that are not permitted for bank holding companies that are not financial holding companies.  If restrictions are imposed on the activities of a financial holding company, the existence of such restrictions may not be made publicly available pursuant to confidentiality regulations of the bank regulatory agencies.

Transactions with Affiliates, Directors, Executive Officers and Shareholders: Transactions between Civista and its affiliates, including CBI, are subject to Sections 23A and 23B of the Federal Reserve Act, and Federal Reserve Board Regulation W, which generally limit the extent to which Civista may engage in “covered transactions” with affiliates and require that the terms of such transactions be the same, or at least as favorable, to Civista as the terms provided in a similar transaction between Civista and an unrelated party. The term “covered transaction” includes the making of loans to an affiliate, the purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate, the purchase of securities issued by an affiliate and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these affiliated persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Privacy Provisions: Under the GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These rules contain extensive provisions on a customer’s right to privacy of non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The privacy provisions of the GLBA affect how consumer information is conveyed to outside vendors. CBI and its subsidiaries are also subject to certain state laws that govern the use and distribution of non-public personal information.

Federal Deposit Insurance Corporation (“FDIC”): The FDIC is an independent federal agency which insures the deposits of federally-insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States Government.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by insured institutions, including Civista, to prohibit any insured institution from engaging in any activity the FDIC determines to pose a threat to the Deposit Insurance Fund (the “DIF”), and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any institution if the FDIC finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or other regulatory agency.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations. The premiums fund the “DIF”. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. As of September 30, 2018, the DRR met the statutory minimum of 1.35%.  As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted.  In addition, preliminary assessment credits have been determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%.  These credits may be redeemed beginning in the quarterly assessment period in which the DRR reaches a minimum of 1.38%, and is not to exceed the total quarterly assessment due.

6

 


In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the DIF. These assessments continued until the Financing Corporation bonds matured in September 2019.  The final assessment was collected on the [March] 2019 FDIC invoice.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

Consumer Financial Protection Bureau: The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive and abusive acts or practices and seeks to ensure consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products and services. Since it was established the CFPB has exercised extensive rulemaking and interpretive authority.

 

Consumer Protection Laws and Regulations: Banks are subject to regular examination to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:

 

The Equal Credit Opportunity Act (prohibiting discrimination in any credit transaction on the basis of any of various criteria);

 

The Truth in Lending Act (requiring that credit terms are disclosed in a manner that permits a consumer to  understand and compare credit terms more readily and knowledgeably);

 

The Fair Housing Act (making it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of certain criteria);

 

The Home Mortgage Disclosure Act (requiring financial institutions to collect data that enables regulatory agencies to determine whether financial institutions are serving the housing credit needs of the communities in which they are located); and

 

The Real Estate Settlement Procedures Act (requiring that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs).

The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.

 

Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting the credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practice. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depositary institution’s efforts to assist in its community’s credit needs. Depositary institutions are periodically examined for compliance and assigned one of four ratings: outstanding, satisfactory, needs improvement, or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by a financial institution or its holding company to its banking regulators, including applications to acquire another financial institution or to open a new branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities.

USA Patriot Act of 2001: The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“the USA Patriot Act”) gives the United States Government greater powers over financial institutions to combat money laundering and terrorist access to the financial system in our country. The USA Patriot Act requires the Company to establish a program for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity.

7

 


Office of Foreign Assets Control Regulation.  The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Civista is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market LLC ("Nasdaq").  CBI is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities.  CBI is subject to the registration, disclosure, reporting and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations promulgated under each of the Securities Act and the Exchange Act, as administered by the SEC.  CBI’s common shares are listed with Nasdaq under the symbol "CIVB" and CBI is subject to the rules for Nasdaq listed companies.

Corporate Governance: As mandated by the Sarbanes-Oxley Act of 2002, the SEC has adopted rules and regulations governing, among other matters, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. Nasdaq has also adopted corporate governance rules. The Board of Directors of the Company has taken a series of actions to strengthen and improve the Company’s governance practices in light of the rules of the SEC and Nasdaq. The Board of Directors has adopted charters for the Audit Committee, the Compensation Committee and the Nominating Committee, as well as a Code of Conduct (Ethics) applicable to all directors, officers and employees of the Company. In addition, in accordance with Section 302(a) of the Sarbanes-Oxley Act, written certifications by CBI’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that CBI’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. See Item 9A “Controls and Procedures” in Part II of this Form 10-K for CBI’s evaluation of its disclosure controls and procedures.

Regulation of Bank Subsidiary: As an Ohio chartered bank, Civista is subject to supervision and regulation by the State of Ohio Department of Commerce, Division of Financial Institutions (the “ODFI”). In addition, Civista is a member of the Federal Reserve System and, therefore, is subject to supervision and regulation by the Federal Reserve Board. Civista is subject to periodic examinations by the ODFI, and Civista is additionally subject to periodic examinations by the Federal Reserve Board. These examinations are designed primarily for the protection of the depositors of the bank and not shareholders.

Banking subsidiaries of financial and bank holding companies are also subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of its own securities, limitations on the payment of dividends and other aspects of banking operations.

Regulatory Capital Requirements: The Federal Reserve Board has adopted risk-based guidelines for financial holding companies and other bank holding companies as well as state member banks, and the FDIC has adopted risk-based capital guidelines for state non-member banks. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”). In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including CBI and Civista, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.

8

 


The Basel III Capital Rules include (a) a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4.0%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).  The deductions phased in beginning in 2015 and were fully phased in as of January 1, 2019.

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital conservation buffer began to phase in starting on January 1, 2016, at 0.625% of risk-weighted assets, and was increased by that amount each year until fully phased in effective January 1, 2019, at 2.5%.

In September 2019, the Federal Reserve Board, along with other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gives community banks, including the Company, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks meet certain requirements.  Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio ("CBLR") framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%.  Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies' generally applicable capital rules and to have met the well-capitalized ratio requirements.  It is the Company’s intent to opt out of the simplified framework and continue to follow existing capital rules.

In December 2018, the federal banking agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard).  The rule revises the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model.  The Company currently anticipates recording a one-time cumulative effect adjustment upon adoption, and does not anticipate utilizing the three year phase in.  The Company expects to maintain risk-based capital ratios in excess of "well-capitalized" after the impact of the one-time cumulative effect adjustment.

At December 31, 2019, both CBI and Civista were in compliance with all of the regulatory capital requirements to which they are subject. For CBI’s and Civista’s capital ratios, see Note 19 to the Company’s 2019 Consolidated Financial Statements.

9

 


The Federal Reserve Board has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled state-chartered member banks. At each successively lower defined capital category, a bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the Federal Reserve Board has less flexibility in determining how to resolve the problems of the institution. In addition, the Federal Reserve Board generally can downgrade a bank’s capital category, notwithstanding its capital level, if, after notice and opportunity for hearings, the bank is deemed to be engaged in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. Civista’s capital at December 31, 2019, met the standards for the highest capital category, a “well-capitalized” bank.

Federal Reserve Board regulations also limit the payment of dividends by Civista to CBI. Civista may not pay a dividend if it would cause Civista not to meet its capital requirements. In addition, the dividends that Civista may pay to CBI without prior approval of the Federal Reserve Board is limited to net income for the year plus its retained net income for the preceding two years.

Volcker Rule

In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the "Volcker Rule").  The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions.  The trading activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such instruments in order to benefit from short-term price movements or to realize short-term profits.  The Volcker Rule exempts specified U.S. Government, agency and/or municipal obligations, and it excepts trading conducted in certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a fiduciary on behalf of customers, to satisfy a debt previously contracted, repurchase and securities lending agreements and risk-mitigating hedging activities.

The Volcker Rule also prohibits a banking entity from having an ownership interest in, or substantial relationships with, a hedge fund or private equity fund, with a number of exceptions.  To the extent that Civista engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Civista believes that its activities and relationships fall within the scope of one or more of the exceptions provided in the Volcker Rule.

In July 2019, the five federal agencies that adopted the Volcker Rule adopted a final rule to exempt certain community banks, including Civista, from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act.  Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets are excluded from the restrictions of the Volcker Rule.

Non-Banking Subsidiaries.  The Company’s non-banking subsidiaries are also subject to regulation by the Federal Reserve Board and other applicable federal and state agencies.  FCIA, as a licensed insurance agency, is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it conducts business.  CRMI, as a Delaware-chartered captive insurance company, is subject to the laws and regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

Executive and Incentive Compensation

In June 2010, the Federal Reserve Board, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (“Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (a) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (b) be compatible with effective internal controls and risk management and (c) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

10

 


In 2011, federal banking regulatory agencies jointly issued proposed rules on incentive-based compensation arrangements under applicable provisions of the Dodd-Frank Act (“First Proposed Rules”). The First Proposed Rules generally would have applied to financial institutions with $1.0 billion or more in assets that maintain incentive-based compensation arrangements for certain covered employees.

In May 2016, the federal bank regulatory agencies approved a second joint notice of proposed rules (the “Second Proposed Joint Rules”) designed to prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions. The Second Proposed Joint Rules would apply to covered financial institutions with total assets of $1 billion or more, and are still in proposed rule status. The requirements of the Second Proposed Joint Rules would differ for each of three categories of financial institutions:

 

Level 1 consists of institutions with assets of $250 billion or more;

 

Level 2 consists of institutions with assets of at least $50 billion and less than $250 billion; and

 

Level 3 consists of institutions with assets of at least $1 billion and less than $50 billion.

Some of the requirements would apply only to Level 1 and Level 2 institutions. For all covered institutions, including Level 3 institutions like us, the Second Proposed Joint Rules would:

 

prohibit incentive-based compensation arrangements that are “excessive” or “could lead to material financial loss;”

 

require incentive-based compensation that is consistent with a balance of risk and reward, effective management and control of risk, and effective governance; and

 

require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.

Level 1 and Level 2 institutions would have additional requirements, including deferrals of awards to certain covered persons; potential downward adjustments, forfeitures or clawbacks; and additional risk-management and control standards, policies and procedures. In addition, certain practices and types of incentive compensation would be prohibited.

Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-Frank Act, public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee.  A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.

Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement "clawback" procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements.  This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards. The Company has implemented a clawback policy and it is posted under the “Corporate Overview” tab on the “Governance Documents” page of CBI’s Internet website.

SEC regulations require public companies such as CBI to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the finanical institution or its critical service providers fall victim to this type of cyber-attack. If Civista fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

11

 


In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue, and is continually monitoring developments in the states in which our customers are located.

In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its operations and to store sensitive data.  The Company employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Effect of Environmental Regulation

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company.  In the opinion of management, the Company does not have exposure to material costs associated with compliance with environmental laws and regulations or material expenditures related to environmental hazardous waste mitigation or cleanup.

The Company believes its primary exposure to environmental risk is through the lending activities of Civista.  In cases where management believes environmental risk potentially exists, Civista mitigates its environmental risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites.  In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress, as evidenced by the sweeping reforms in the Dodd-Frank Act adopted in 2010, and the rollback of the Dodd-Frank Act that began in 2018.  Many of the regulations mentioned above were adopted or amended pursuant to the Dodd-Frank Act.  Such legislation may continue to change banking statutes and regulations, and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways, and such legislation could significantly increase or decrease costs of doing business, limit or expand permissible activities, and/or affect the competitive balance among financial institutions.  The enactment of the Dodd-Frank Act, the subsequent rollback and the continuing implementation of final rules and regulations thereunder, and continuing political change makes the nature and extent of future legislative and regulatory changes affecting financial institutions unpredictable.

12

 


Effects of Government Monetary Policy

The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including Civista, and are expected to continue to do so in the future.

Available Information

CBI maintains an Internet website at www.civb.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate CBI’s website into this Annual Report on Form 10-K). CBI makes available free of charge on or through its Internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as CBI’s definitive proxy statements filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after CBI electronically files such material with, or furnishes it to, the SEC.

Statistical Information

The following section contains certain financial disclosures related to the Company as required under the Securities and Exchange Commission’s Industry Guide 3, “Statistical Disclosures by Bank Holding Companies”, or a specific reference as to the location of the required disclosures in the Registrant’s 2019 Annual Report to Shareholders, portions of which are incorporated in this Form 10-K by reference.

I.

Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

Average balance sheet information and the related analysis of net interest income for the years ended December 31, 2019, 2018 and 2017 is included on pages 12 through 14—“Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate”, within Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2019 Annual Report to Shareholders and is incorporated into this Item I by reference.

II.

Investment Portfolio

The following table sets forth the carrying amount of securities at December 31.

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

Available for sale (1)

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

   U.S. Government agencies

 

$

19,601

 

 

$

30,685

 

 

$

30,358

 

Obligations of states and political subdivisions

 

 

206,034

 

 

 

172,071

 

 

 

118,056

 

Mortgage-backed securities in government

   sponsored entities

 

 

132,864

 

 

 

143,538

 

 

 

81,816

 

Total debt securities

 

$

358,499

 

 

$

346,294

 

 

$

230,230

 

 

(1)

The Corporation had no securities of an “issuer” where the aggregate carrying value of such securities exceeded ten percent of shareholders’ equity.

13

 


The following table sets forth the maturities of securities at December 31, 2019 and the weighted average yields of such debt securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions.

 

 

 

Within one year

 

 

After one

but within five

years

 

 

After five but

within ten years

 

 

After ten years

 

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

Amount

 

 

Yield

 

 

 

(Dollars in thousands)

 

Available for Sale (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

   obligations of U.S. government

   agencies

 

$

10,031

 

 

 

2.07

%

 

$

8,525

 

 

 

2.35

%

 

$

185

 

 

 

1.38

%

 

$

861

 

 

 

1.34

%

Obligations of states and political

   subdivisions (1)

 

 

1,135

 

 

 

2.40

 

 

 

6,537

 

 

 

3.96

 

 

 

26,988

 

 

 

3.63

 

 

 

171,373

 

 

 

3.40

 

Mortgage-backed securities in

   government sponsored entities

 

 

2

 

 

3.83

 

 

 

20,447

 

 

 

2.99

 

 

 

23,060

 

 

 

2.24

 

 

 

89,355

 

 

 

2.87

 

Total

 

$

11,168

 

 

 

2.10

%

 

$

35,509

 

 

 

3.01

%

 

$

50,233

 

 

 

2.98

%

 

$

261,589

 

 

 

3.21

%

 

(1)

Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security.

(2)

The weighted average yield has been computed using the historical amortized cost for available-for-sale securities.

 

 

III.

Loan Portfolio

Types of Loans

The amounts of gross loans outstanding at December 31 are shown in the following table according to types of loans.

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Commercial and Agriculture

 

$

203,110

 

 

$

177,101

 

 

$

152,473

 

 

$

135,462

 

 

$

124,402

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner occupied

 

 

245,606

 

 

 

210,121

 

 

 

164,099

 

 

 

161,364

 

 

 

167,897

 

Non-owner occupied

 

 

592,222

 

 

 

523,598

 

 

 

425,623

 

 

 

395,931

 

 

 

348,439

 

Residential Real Estate

 

 

463,032

 

 

 

457,850

 

 

 

268,735

 

 

 

247,308

 

 

 

236,338

 

Real Estate Construction

 

 

155,825

 

 

 

135,195

 

 

 

97,531

 

 

 

56,293

 

 

 

58,898

 

Farm Real Estate

 

 

34,114

 

 

 

38,513

 

 

 

39,461

 

 

 

41,170

 

 

 

46,993

 

Consumer and other

 

 

15,061

 

 

 

19,563

 

 

 

16,739

 

 

 

17,978

 

 

 

18,560

 

Total

 

$

1,708,970

 

 

$

1,561,941

 

 

$

1,164,661

 

 

$

1,055,506

 

 

$

1,001,527

 

 

Commercial loans are those made for commercial, industrial and professional purposes to individuals, sole proprietorships, partnerships, corporations and other business enterprises. Agriculture loans are for financing agricultural production, including all costs associated with growing crops or raising livestock. Commercial and Agriculture loans may be secured, other than by real estate, or unsecured, requiring one single repayment or on an installment repayment schedule. Commercial and Agriculture loans involve certain risks relating to changes in local and national economic conditions and the resulting effect on the borrowing entities. Secured loans not collateralized by real estate mortgages maintain a loan-to-value ratio ranging from 50% in the case of certain stocks, to 100% in the case of savings or time deposit accounts. Unsecured credits rely on the financial strength and previous credit experience of the borrower and in many cases the financial strength of the principals when such credit is extended to a corporation.

Commercial Real Estate mortgage loans are made predicated on having a security interest in real property and are secured wholly or substantially by that lien on real property. Commercial Real Estate mortgage loans are generally underwritten with a maximum loan-to-value ratio of 80%.

14

 


Residential Real Estate mortgage loans and home equity lines of credit are made predicated on security interests in real property and secured wholly or substantially by those liens on real property. Such real estate mortgage loans are primarily loans secured by one-to-four family real estate. Residential Real Estate mortgage loans generally pose less risk to the Company due to the nature of the collateral being less susceptible to sudden changes in value.

Real Estate Construction loans are for the construction of residential homes, new buildings or additions to existing buildings. Generally, these loans are secured by one-to-four family real estate or commercial real estate. The Company controls disbursements in connection with construction loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, the Company must take control of the project and attempt either to arrange for completion of construction or to dispose of the unfinished project. Additional risk exists with respect to a loan made to a developer who does not have a project pre-leased or has a buyer for the property, as the developer may lack funds to pay the loan if the property does not have sufficient occupancy levels or is not sold upon completion. The Company attempts to reduce such risks on loans to developers by normally requiring that Real Estate development and construction loan projects be at least 50% pre-leased or pre-sold and that the co-borrower/guarantor has significant net worth, liquidity, and historical income to help support the project.

Consumer loans are made to individuals for household, family and other personal expenditures. These expenditures include the purchase of vehicles or furniture, educational expenses, medical expenses, taxes or vacation expenses. Consumer loans may be secured, other than by real estate, or unsecured, generally requiring repayment on an installment repayment schedule. Consumer loans pose a relatively higher credit risk. This higher risk is moderated by the use of certain loan to value limits on secured credits and aggressive collection efforts. The collectability of consumer loans is influenced by local and national economic conditions.

Letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the Company’s consolidated financial statements. As of December 31, 2019 and 2018, the Company was contingently liable for $1,400 and $1,474, respectively, with respect to outstanding letters of credit. In addition, Civista had issued lines of credit to customers. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 2019 and 2018, Civista had commitments to extend credit, excluding letters of credit, in the aggregate amounts of approximately $448,962 and $411,408, respectively. Of these amounts, $411,671 and $374,204 represented lines of credit and construction loans, and $37,291 and $37,204 represented overdraft protection commitments at December 31, 2019 and 2018, respectively. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 2019 and 2018.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table shows the amount of commercial and agriculture, commercial real estate, residential real estate, real estate construction, farm real estate and consumer and other loans outstanding as of December 31, 2019, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates.

 

 

 

Maturing

 

 

 

Within

one year

 

 

After one

but within

five years

 

 

After five

years

 

 

Total

 

 

 

(Dollars in thousands)

 

Commercial and Agriculture

 

$

72,587

 

 

$

75,988

 

 

$

54,535

 

 

$

203,110

 

Commercial Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owner Occupied

 

 

4,388

 

 

 

23,909

 

 

 

217,309

 

 

 

245,606

 

Non-Owner Occupied

 

 

30,148

 

 

 

138,419

 

 

 

423,655

 

 

 

592,222

 

Residential Real Estate

 

 

6,742

 

 

 

23,654

 

 

 

432,636

 

 

 

463,032

 

Real Estate Construction

 

 

22,056

 

 

 

62,990

 

 

 

70,779

 

 

 

155,825

 

Farm Real Estate

 

 

915

 

 

 

4,444

 

 

 

28,755

 

 

 

34,114

 

Consumer and Other

 

 

4,510

 

 

 

9,388

 

 

 

1,163

 

 

 

15,061

 

Total

 

$

141,346

 

 

$

338,792

 

 

$

1,228,832

 

 

$

1,708,970

 

15

 


 

 

 

Interest

Sensitivity

 

 

 

Fixed

rate

 

 

Variable

rate

 

 

 

(Dollars in thousands)

 

Due after one but within five years

 

$

158,851

 

 

$

179,940

 

Due after five years

 

 

191,359

 

 

 

1,037,474

 

 

 

$

350,210

 

 

$

1,217,414

 

 

The preceding maturity information is based on contract terms at December 31, 2019 and does not include any possible “rollover” at maturity date. In the normal course of business, Civista considers and acts on the borrowers’ requests for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower’s credit history, the collateral securing the loan and the purpose for such request.

 

Risk Elements

The following table presents information concerning the amount of loans at December 31 that contain certain risk elements, excluding purchase credit impaired loans.

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Loans accounted for on a nonaccrual basis (1)

 

$

5,599

 

 

$

5,869

 

 

$

6,132

 

 

$

6,943

 

 

$

9,259

 

Accruing loans which are contractually past due

   90 days or more as to principal or interest

   payments

 

 

 

 

 

 

 

 

16

 

 

 

9

 

 

 

 

Loans that have been modified in a troubled

   debt restructuring (2)

 

 

3,004

 

 

 

3,024

 

 

 

2,888

 

 

 

4,180

 

 

 

5,085

 

Total

 

$

8,603

 

 

$

8,893

 

 

$

9,036

 

 

$

11,132

 

 

$

14,344

 

Impaired loans included in above totals

 

$

3,597

 

 

$

2,857

 

 

$

3,460

 

 

$

6,539

 

 

$

7,386

 

Impaired loans not included in above totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99

 

Total impaired loans

 

$

3,597

 

 

$

2,857

 

 

$

3,460

 

 

$

6,539

 

 

$

7,485

 

 

(1)

A loan is placed on nonaccrual status when doubt exists as to the collectability of the loan, including any accrued interest. With a few immaterial exceptions, commercial and agriculture, commercial real estate, residential real estate and construction loans past due 90 days are placed on nonaccrual unless they are well collateralized and in the process of collection. Generally, consumer loans are charged-off by the time they become past due 120 days unless they are well collateralized and in the process of collection. Once a loan is placed on nonaccrual, interest is only recognized on a cash basis where future collections of principal is probable.

(2)

Excludes loans accounted for on a nonaccrual basis and loans contractually past due 90 days or more as to principal or interest payments.

There were no loans as of December 31, 2019, other than those disclosed above, where known information about probable credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. There were no other interest-bearing assets that would be required to be disclosed in the table above, if such assets were loans as of December 31, 2019. The gross interest income that would have been recorded on nonaccrual loans and restructured loans in 2019 if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $571. The amount of cash-basis interest income on such loans actually included in net income in 2019 was $379.

Interest income recognition associated with impaired loans was as follows.

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Interest income on impaired loans, all of which

   was recognized on a cash basis

 

$

172

 

 

$

167

 

 

$

216

 

 

$

1,256

 

 

$

384

 

 

At December 31, 2019, Civista had two concentrations of loans exceeding 10% of total loans: one to Lessors of Non-Residential Buildings and Dwellings totaling $459,273, or 26.9 percent of total loans, as of December 31, 2019,

16

 


and the other to Lessors of Residential Buildings and Dwellings totaling $172,463, or 10.1 percent of total loans, as of December 31, 2019.

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. There were no foreign loans outstanding at December 31, 2019.

IV.

Summary of Loan Loss Experience

Analysis of the Allowance for Loan Losses

The following table shows the daily average loan balances and changes in the allowance for loan losses for the years indicated.

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(Dollars in thousands)

 

Daily average amount of loans net of

   unearned income

 

$

1,612,975

 

 

$

1,274,779

 

 

$

1,109,069

 

 

$

1,025,908

 

 

$

981,475

 

Allowance for loan losses at beginning

   of year

 

$

13,679

 

 

$

13,134

 

 

$

13,305

 

 

$

14,361

 

 

$

14,268

 

Loan charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Agriculture

 

 

114

 

 

 

249

 

 

 

11

 

 

 

880

 

 

 

190

 

Commercial Real Estate—Owner

   Occupied

 

 

161

 

 

 

193

 

 

 

328

 

 

 

228

 

 

 

523

 

Commercial Real Estate—Non-Owner

   Occupied

 

 

 

 

 

153

 

 

 

38

 

 

 

23

 

 

 

81

 

Real Estate Mortgage

 

 

294

 

 

 

105

 

 

 

400

 

 

 

455

 

 

 

1,135

 

Real Estate Construction

 

 

24

 

 

 

 

 

 

 

 

 

115

 

 

 

 

Farm Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and Other

 

 

183

 

 

 

203

 

 

 

165

 

 

 

125

 

 

 

120

 

Total charge-offs

 

 

776

 

 

 

903

 

 

 

942

 

 

 

1,826

 

 

 

2,049

 

Recoveries of loans previously charged-off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Agriculture

 

 

86

 

 

 

169

 

 

 

372

 

 

 

105

 

 

 

182

 

Commercial Real Estate—Owner

   Occupied

 

 

289

 

 

 

158

 

 

 

69

 

 

 

56

 

 

 

187

 

Commercial Real Estate—Non-Owner

   Occupied

 

 

102

 

 

 

28

 

 

 

46

 

 

 

1,372

 

 

 

115

 

Real Estate Mortgage

 

 

259

 

 

 

208

 

 

 

194

 

 

 

479

 

 

 

331

 

Real Estate Construction

 

 

3

 

 

 

 

 

 

44

 

 

 

12

 

 

 

5

 

Farm Real Estate

 

 

5

 

 

 

5

 

 

 

3

 

 

 

 

 

 

76

 

Consumer and Other

 

 

85

 

 

 

100

 

 

 

43

 

 

 

46

 

 

 

46

 

Total recoveries

 

 

829

 

 

 

668

 

 

 

771

 

 

 

2,070

 

 

 

942

 

Net recoveries (charge-offs) (1)

 

 

53

 

 

 

(235

)

 

 

(171

)

 

 

244

 

 

 

(1,107

)

Provision (credit) for loan losses (2)

 

 

1,035

 

 

 

780

 

 

 

 

 

 

(1,300

)

 

 

1,200

 

Allowance for loan losses at year end

 

$

14,767

 

 

$

13,679

 

 

$

13,134

 

 

$

13,305

 

 

$

14,361

 

Allowance for loan losses as a percent of

   loans at year-end

 

 

0.86

%

 

 

0.88

%

 

 

1.13

%

 

 

1.26

%

 

 

1.43

%

Ratio of net charge-offs (recoveries) during

   the year to average loans outstanding

 

 

(0.00

)%

 

 

0.02

%

 

 

0.02

%

 

 

(0.02

)%

 

 

0.11

%

 

(1)

The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy, decline in market values of collateral and deterioration of specific businesses.

(2)

The determination of the balance of the allowance for loan losses is based on a detailed analysis of the loan portfolio and reflects an amount that, in management’s judgment, is adequate to provide for probable incurred loan losses. Such analysis is based on a review of specific loans, the character of the loan portfolio, current economic conditions, risk management practices and such other factors as management believes require current recognition in estimating probable incurred loan losses.

17

 


Allocation of Allowance for Loan Losses

The following tables allocate the allowance for loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses estimated to be incurred within the following categories of loans at the dates indicated.

 

 

 

2019

 

 

2018

 

 

 

Allowance

 

 

 

Percentage

Of loans to

Total loans

 

 

Allowance

 

 

Percentage

of loans to

total loans

 

 

 

(Dollars in thousands)

 

Commercial and Agriculture

 

$

2,219

 

 

 

11.9

%

 

$

1,747

 

 

 

11.3

%

Commercial Real Estate—Owner Occupied

 

 

2,541

 

 

 

14.4

 

 

 

1,962

 

 

 

13.5

 

Commercial Real Estate—Non-Owner Occupied

 

 

6,584

 

 

 

34.6

 

 

 

5,803

 

 

 

33.5

 

Real Estate Mortgage

 

 

1,582

 

 

 

27.1

 

 

 

1,531

 

 

 

29.3

 

Real Estate Construction

 

 

1,250

 

 

 

9.1

 

 

 

1,046

 

 

 

8.7

 

Farm Real Estate

 

 

344

 

 

 

2.0

 

 

 

397

 

 

 

2.5

 

Consumer and Other

 

 

247

 

 

 

0.9

 

 

 

284

 

 

 

1.2

 

Unallocated

 

 

 

 

 

 

 

 

909

 

 

 

 

 

 

$

14,767

 

 

 

100.0

%

 

$

13,679

 

 

 

100.0

%

 

 

 

2017

 

 

2016

 

 

 

Allowance

 

 

Percentage

of loans to

total loans

 

 

Allowance

 

 

Percentage

of loans to

total loans

 

 

 

(Dollars in thousands)

 

Commercial and Agriculture

 

$

1,562

 

 

 

13.1

%

 

$

2,018

 

 

 

12.8

%

Commercial Real Estate—Owner Occupied

 

 

2,043

 

 

 

14.1

 

 

 

2,171

 

 

 

15.3

 

Commercial Real Estate—Non-Owner Occupied

 

 

5,307

 

 

 

36.5

 

 

 

4,606

 

 

 

37.5

 

Real Estate Mortgage

 

 

1,910

 

 

 

23.1

 

 

 

3,089

 

 

 

23.4

 

Real Estate Construction

 

 

834

 

 

 

8.4

 

 

 

420

 

 

 

5.3

 

Farm Real Estate

 

 

430

 

 

 

3.4

 

 

 

442

 

 

 

3.9

 

Consumer and Other

 

 

290

 

 

 

1.4

 

 

 

314

 

 

 

1.7

 

Unallocated

 

 

758

 

 

 

 

 

 

245

 

 

 

 

 

 

$

13,134

 

 

 

100.0

%

 

$

13,305

 

 

 

100.0

%

 

 

 

2015

 

 

 

Allowance

 

 

Percentage

of loans to

total loans

 

 

 

(Dollars in thousands)

 

Commercial and Agriculture

 

$

1,478

 

 

 

12.4

%

Commercial Real Estate—Owner Occupied

 

 

2,467

 

 

 

16.8

 

Commercial Real Estate—Non-Owner Occupied

 

 

4,657

 

 

 

34.8

 

Real Estate Mortgage

 

 

4,086

 

 

 

23.6

 

Real Estate Construction

 

 

371

 

 

 

5.9

 

Farm Real Estate

 

 

538

 

 

 

4.7

 

Consumer and Other

 

 

382

 

 

 

1.9

 

Unallocated

 

 

382

 

 

 

 

 

 

$

14,361

 

 

 

100.0

%

 

18

 


Civista measures the adequacy of the allowance for loan losses by using both specific and general components. The specific component relates to the evaluation of each loan identified as impaired. The general component consists of a pooling of commercial credits risk graded as special mention and substandard, based on portfolio experience, and general reserves, which are based on a twelve quarter loss migration analysis, adjusted for current economic factors. Loss migration rates are calculated over a twelve quarter period for all portfolio segments. Factors in the determination of the economic reserve include items such as changes in the economic and business conditions of its market, changes in lending policies and procedures, changes in loan concentrations, as well as a few others. The allowance for loan losses to total loans decreased from 0.88% in 2018 to 0.86% in 2019. The unallocated reserve of Civista decreased to $0 in 2019 from $909 in 2018. Management considers both the decrease in unallocated and the end-of-period number to be insignificant and within the loan policy guidelines.

 

Deposits

The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated.

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Average

balance

 

 

Average

rate paid

 

 

Average

balance

 

 

Average

rate paid

 

 

Average

balance

 

 

Average

rate paid

 

 

 

(Dollars in thousands)

 

Noninterest-bearing demand deposits

 

$

550,638

 

 

N/A

 

 

$

466,763

 

 

N/A

 

 

$

450,648

 

 

N/A

 

Interest-bearing demand deposits

 

 

296,790

 

 

 

0.06

%

 

 

213,904

 

 

 

0.06

%

 

 

189,419

 

 

 

0.06

%

Savings, including Money Market deposit

   accounts

 

 

572,550

 

 

 

0.47

%

 

 

471,593

 

 

 

0.28

%

 

 

395,799

 

 

 

0.12

%

Certificates of deposit, including IRA’s

 

 

269,823

 

 

 

1.92

%

 

 

189,600

 

 

 

1.22

%

 

 

200,797