CIVISTA BANCSHARES, INC. 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, 2022 compared to December 31, 2021 , and the consolidated
results of operations for the three-and six-month periods ended June 30, 2022 ,
compared to the same periods in 2021. This discussion should be read in
conjunction with the Consolidated Financial Statements and footnotes included in
this Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), relating to such matters as the Company's
financial condition, anticipated operating results, cash flows, business line
results, credit quality expectations, prospects for new lines of business,
economic trends (including interest rates) and similar matters. Forward-looking
statements reflect our expectations, estimates or projections concerning future
results or events. These statements are generally identified by the use of
forward-looking words or phrases such as "believe," "belief," "expect,"
"anticipate," "may," "could," "intend," "intent," "estimate," "plan," "foresee,"
"likely," "will," "should" or other similar words or phrases. Forward-looking
statements are not guarantees of performance and are inherently subject to known
and unknown risks, uncertainties and assumptions that are difficult to predict
and could cause our actual results, performance or achievements to differ
materially from those expressed in or implied by the forward-looking statements.
Factors that could cause actual results, performance or achievements to differ
from those discussed in the forward-looking statements include, but are not
limited to:
• effects of the continuing novel coronavirus (COVID-19) pandemic on national,
regional and local economies, and on our customers, counterparties,
employees and third-party service providers, as well as the effects of
various responses of governmental and nongovernmental authorities to the
COVID-19 pandemic, including public health actions directed toward the
containment of the COVID-19 pandemic (such as quarantines, shut downs andother restrictions on travel and commercial, social or other activities),
the development, availability and effectiveness of vaccines, and the
implementation of fiscal stimulus packages;
• current and future economic and financial market conditions, eithernationally or in the states in which we do business, including the effects
of inflation,
matters (including the conflict in
economic growth, in addition to the continuing impact of the COVID-19
pandemic on our customers' operations and financial condition, any of which
may result in adverse impacts on our deposit levels and composition, the
quality of investment securities available for purchase, demand for loans,
the ability of our borrowers to repay their loans, and the value of the
collateral securing loans;
• changes in unemployment levels in our market area, including as a result of
the continuing COVID-19 pandemic;
• changes in customers', suppliers', and other counterparties' performance and
creditworthiness may be different than anticipated due to the continuing
impact of and the various responses to the COVID-19 pandemic;
• changes in interest rates resulting from national and local economic
conditions and the policies of regulatory authorities, including monetary
policies of the
adversely affect interest rates, interest margins, loan demand and interest
rate sensitivity;
• the transition away from LIBOR as a reference rate for financial contracts,
which could negatively impact our income and expenses and the value of
various financial contracts;
• operational risks, reputational risks, legal and compliance risks, and
other risks related to potential fraud or theft by employees or outsiders,
unauthorized transactions by employees or operational errors, or failures,
disruptions or breaches in security of our systems, including those
resulting from computer viruses or cyber-attacks;
• our ability to secure sensitive or confidential client information against
unauthorized disclosure or access through computer systems and
telecommunication networks, including those of our third-party vendors and
other service providers, which may prove inadequate;
• a failure in or breach of our operational or security systems or
infrastructure, or those of our third-party vendors and other service
providers, resulting in failures or disruptions in customer accountmanagement, general ledger, deposit, loan, or other systems, including as a
result of cyber-attacks;
• competitive pressures and factors among financial services organizations
could increase significantly, including product and pricing pressures,
changes to third-party relationships and our ability to recruit and retain
qualified management and banking personnel;
• unexpected losses of services of our key management personnel, or the
inability to recruit and retain qualified personnel in the future;
• the lack of assurances regarding the future revenues of our tax refund
program;
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
• risks inherent in pursuing strategic growth initiatives, includingintegration and other risks involved in past, pending and possible future
acquisitions;
• uncertainty regarding the nature, timing, cost and effect of legislative or
regulatory changes in the banking industry or otherwise affecting the
Company, including major reform of the regulatory oversight structure of the
financial services industry and changes in laws and regulations concerning
taxes,
protection, rent regulation and housing, financial accounting and reporting,
environmental protection, insurance, bank products and services, bank and
bank holding company capital and liquidity standards, fiduciary standards,
securities and other aspects of the financial services industry, as well as
the reforms provided for in the Coronavirus Aid, Relief and Economic
Security (CARES) Act and the follow-up legislation in the Consolidated
Appropriations Act, 2021 and the American Rescue Plan Act of 2021;
• changes in federal, state and/or local tax laws;
• the effect of changes in accounting policies and practices, as may be
adopted by the
adversely affect our reported financial condition or results of operations;
• litigation and regulatory compliance exposure, including the costs and
effects of any adverse developments in legal proceedings or other claims and
the costs and effects of unfavorable resolution of regulatory and other
governmental examinations or inquiries;
• continued availability of earnings and dividends from Civista and excess
capital sufficient for us to service our debt and pay dividends to our
shareholders in compliance with applicable legal and regulatory
requirements;
• our ability to anticipate and successfully keep pace with technological
changes affecting the financial services industry: and
• other risks identified from time-to-time in the Company's other public
documents on file with the
1A. Risk Factors" of Part I of the Company's Annual Report on Form 10-K for
the fiscal year ended
The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law. Financial Condition Total assets of the Company atJune 30, 2022 were$3,039,099 compared to$3,012,905 atDecember 31, 2021 , an increase of$26,194 , or 0.9%. The increase in total assets was due to increases in loans of$65,548 , accompanied by increases in other securities, loans held for sale, and other assets of$1,500 ,$2,195 and$14,861 , respectively, partially offset by decreases in cash and cash equivalents and securities available-for-sale of$30,958 and$29,057 , respectively. Total liabilities atJune 30, 2022 were$2,737,037 compared to$2,657,693 atDecember 31, 2021 , an increase of$79,344 , or 3.0%. The increase in total liabilities was primarily attributable to an increase in noninterest-bearing demand accounts of$53,630 , accompanied by an increase in accrued expenses and other liabilities of$48,752 , partially offset by decreases in interest-bearing deposits and securities sold under agreements to repurchase of$14,829 and$8,016 , respectively. Page 38 -------------------------------------------------------------------------------- Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Loans outstanding as ofJune 30, 2022 andDecember 31, 2021 were as follows: June 30, 2022 December 31, 2021 $ Change % Change Commercial & Agriculture$ 226,540 $ 246,502$ (19,962 ) -8.1 % Commercial Real Estate-Owner Occupied 304,472 295,452 9,020 3.1 % Commercial Real Estate-Non-Owner Occupied 876,695 829,310 47,385 5.7 % Residential Real Estate 452,628 430,060 22,568 5.2 % Real Estate Construction 170,633 157,127 13,506 8.6 % Farm Real Estate 23,295 28,419 (5,124 ) -18.0 % Consumer and Other 9,958 11,009 (1,051 ) -9.5 % Total loans 2,064,221 1,997,879 66,342 3.3 % Allowance for loan losses (27,435 ) (26,641 ) (794 ) 3.0 % Net loans$ 2,036,786 $ 1,971,238$ 65,548 3.3 %
Included in Commercial & Agriculture loans above were
Loans held for sale increased$2,195 , or 111.3%, sinceDecember 31, 2021 . The increase was due to an increase in the average loan balance held for sale. AtJune 30, 2022 , 18 loans totaling$4,167 were held for sale as compared to 14 loans totaling$1,972 atDecember 31, 2021 . Net loans have increased$65,548 , or 3.3% sinceDecember 31, 2021 . TheCommercial Real Estate - Owner Occupied,Commercial Real Estate - Non-Owner Occupied,Residential Real Estate andReal Estate Construction loan portfolios increased$9,020 ,$47,385 ,$22,568 and$13,506 , respectively, sinceDecember 31, 2021 , while the Commercial & Agriculture,Farm Real Estate and Consumer and Other loan portfolios decreased$19,962 ,$5,124 and$1,051 , respectively, sinceDecember 31, 2021 . AtJune 30, 2022 , the net loan to deposit ratio was 82.9% compared to 81.6% atDecember 31, 2021 . The increase in the net loan to deposit ratio is primarily the result of an increase in loans, partially offset by an increase in deposits. During the first six months of 2022, provisions made to the allowance for loan losses totaled$700 , compared to a provision of$830 during the same period in 2021. The decrease in provision was due to the improvement of our credit quality metrics, offset by strong loan growth during the second quarter of 2022. To address the challenges of the international, national, regional and local economic conditions adversely impacted by the prior economic shutdown and restrictions in response to the ongoing COVID-19 pandemic, management maintained a strong provision in the first quarter of 2021. When conditions stabilized and criticized loans peaked, management reduced the provision. We continue to be optimistic that asset quality will continue to improve despite ongoing headwinds. We remain cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry. However, we are encouraged by strong loan growth. Our Commercial andCommercial Real Estate portfolios have been and are expected to continue to be impacted the most. Net recoveries for the first six months of 2022 totaled$94 , compared to net recoveries of$339 in the first six months of 2021. For the first six months of 2022, the Company charged off a total of nine loans. FourResidential Real Estate loan totaling$58 and five Consumer and Other loans totaling$32 were charged off in the first six months of the year. In addition, during the first six months of 2022, the Company had recoveries on previously charged-off Commercial and Agriculture loans of$4 ,Commercial Real Estate - Owner Occupied loans of$27 ,Commercial Real Estate - Non-Owner Occupied loans of$52 ,Residential Real Estate loans of$76 ,Farm Real Estate loans of$4 and Consumer and Other loans of$21 . For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans decreased by$286 sinceDecember 31, 2021 , which was due to a$286 decrease in loans on nonaccrual status. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance. Management specifically evaluates loans that are impaired for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve. Page 39 --------------------------------------------------------------------------------Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Management analyzes each impaired Commercial andCommercial Real Estate loan relationship with a balance of$350 or larger, on an individual basis and designates a loan as impaired when it is in nonaccrual status or when an analysis of the borrower's operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for loan losses as a percent of total loans was 1.33% atJune 30, 2022 and 1.33% atDecember 31, 2021 . The available-for-sale security portfolio decreased by$29,057 , from$559,874 atDecember 31, 2021 to$530,817 atJune 30, 2022 . 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 ofJune 30, 2022 , the Company was in compliance with all pledging requirements. Other securities increased$1,500 fromDecember 31, 2021 toJune 30, 2022 . The increase is the result of additional investments in theFederal Reserve Bank of Cleveland .
Premises and equipment, net, increased
Bank owned life insurance (BOLI) increased
Other assets increased
Total deposits as of
June 30, 2022 December 31, 2021 $ Change % Change
Noninterest-bearing demand $ 842,536 $ 788,906 $ 53,630 6.8 %
Interest-bearing demand 529,812 537,510 (7,698 ) -1.4 %
Savings and money market 861,368 843,837 17,531 2.1 %
Time deposits 221,786 246,448 (24,662 ) -10.0 %
Total Deposits $ 2,455,502 $ 2,416,701 $ 38,801 1.6 %
Total deposits at June 30, 2022 increased $38,801 from year-end 2021.
Noninterest-bearing deposits increased $53,630 from year-end 2021, while
interest-bearing deposits, including savings and time deposits, decreased
$14,829 from December 31, 2021 . The increase in noninterest-bearing deposits was
partially due to increases in cash balances related to the Company's
participation in a tax refund processing program, which added
noninterest-bearing deposits of $39,466 . This increase is temporary as
transactions are processed and is expected to return to levels more consistent
with December 31, 2021 over the next two quarters. In addition, public fund
demand deposit accounts increased $14,262 . The decrease in interest-bearing
deposits was primarily due to decreases in business interest-bearing demand and
JUMBO NOW accounts of $29,664 and $4,129 , respectively, accompanied by increases
in personal interest-bearing demand and public fund interest-bearing demand
accounts of $5,751 and $19,951 , respectively. Statement savings, money market
savings and public fund money market savings accounts increased by $27,861 ,
$16,040 and $9,433 , respectively, accompanied by decreases in business money
market savings and brokered money market savings accounts of $19,209 and
$19,002 , respectively. Time certificates over $250 , time certificates and Jumbo
time certificates decreased $10,194 , $7,905 and $7,256 , respectively. The
year-to-date average balance of total deposits decreased $1,794 , compared to the
average balance for the same period in 2021, mainly due to a decrease in the
average balance of noninterest-bearing demand accounts of $72,022 , accompanied
by increases in the average balances of interest-bearing demand and savings and
money markets accounts of $63,670 and $48,711 , respectively. In addition, the
average balance of time deposits decreased $42,153 as compared to the same
period in 2021.
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
Securities sold under agreements to repurchase, which tend to fluctuate based on
the liquidity needs of customers and short-term nature of the instrument,
decreased
Securities purchased payable increased
Tax refunds in process increased
Shareholders' equity atJune 30, 2022 was$302,062 , or 9.9% of total assets, compared to$355,212 , or 11.8% of total assets, atDecember 31, 2021 . The decrease was the result of a decrease in the fair value of securities available-for-sale, net of tax, of$55,172 , dividends on common shares of$4,133 and the purchase of treasury shares of$10,621 , offset by net income of$16,167 and a decrease in the Company's pension liability, net of tax, of$110 , offset by. Total outstanding common shares atJune 30, 2022 were 14,537,433, which decreased from 14,954,200 common shares outstanding atDecember 31, 2021 . Common shares outstanding decreased as a result of 453,627 common shares being repurchased by the Company at an average repurchase price of$23.41 . The Company repurchased 55,352 common shares pursuant to a stock repurchase program announced onMay 4, 2022 and 392,847 common shares pursuant to a stock repurchase program announced onAugust 12, 2021 . An additional 5,428 common shares were surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 2,138 restricted common shares were forfeited. The repurchase program announced onMay 4, 2022 authorized the Company to repurchase a maximum aggregate value of$13,500 of the Company's common shares untilMay 9, 2023 . The repurchase plan publicly announced onAugust 12, 2021 authorized the Company to repurchase a maximum aggregate value of$13,500 of the Company's common shares untilAugust 10, 2022 . The repurchase of common shares was offset by the grant of 31,774 restricted common shares to certain officers under the Company's 2014 Incentive Plan. In addition, 7,224 common shares were issued to Civista directors as a retainer payment for service on the Civista Board of Directors. Results of Operations
Three Months Ended
The Company had net income of$7,701 for the three months endedJune 30, 2022 , a decrease of$1,463 from net income of$9,164 for the same three months of 2021. Basic earnings per common share were$0.53 for the quarter endedJune 30, 2022 , compared to$0.59 for the same period in 2021. Diluted earnings per common share were$0.53 for the quarter endedJune 30, 2022 , compared to$0.59 for the same period in 2021. The primary reasons for the changes in net income are explained below. Net interest income for the three months endedJune 30, 2022 was$24,268 , an increase of$427 from$23,841 for the same three months of 2021. This increase is the result of an increase of$566 in total interest income, offset by an increase of$139 in interest expense. Interest-earning assets averaged$2,866,362 during the three months endedJune 30, 2022 , an increase of$90,231 from$2,776,131 for the same period of 2021. The Company's average interest-bearing liabilities increased from$1,738,808 during the three months endedJune 30, 2021 to$1,830,089 during the three months endedJune 30, 2022 . The Company's fully tax equivalent net interest margin for the three months endedJune 30, 2022 and 2021 was 3.43% and 3.53%, respectively. Total interest income was$26,064 for the three months endedJune 30, 2022 , an increase of$566 from$25,498 of total interest income for the same period in 2021. The increase in interest income is attributable to increases in interest income on taxable and tax-exempt securities of$545 and %357, respectively, offset by a decrease of$802 in interest and fees on loans. Interest on loans decreased$802 to$21,851 for the three months endedJune 30, 2022 , as compared to$22,653 for the same period in 2021. The average balance of loans decreased by$21,406 , or 1.0% to$2,033,378 for the three months endedJune 30, 2022 as compared to$2,054,784 for the same period in 2021. The loan yield decreased to 4.31% for the three months endedJune 30, 2022 , from 4.42% for the same period in 2021. During the quarter, the average balance of PPP loans was$6,543 . These loans had an average yield of 27.5%, which includes the amortization of PPP fees. Page 41 -------------------------------------------------------------------------------- Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Interest on taxable securities increased$545 to$1,775 for the three months endedJune 30, 2022 , compared to$1,230 for the same period in 2021. The average balance of taxable securities increased$92,702 to$297,256 for the three months endedJune 30, 2022 , as compared to$204,554 for the same period in 2021. The yield on taxable securities decreased 24 basis points to 2.23% for 2022, compared to 2.47% for 2021. Interest on tax-exempt securities increased$357 to$1,882 for the three months endedJune 30, 2022 , compared to$1,525 for the same period in 2021. The average balance of tax-exempt securities increased$50,156 to$259,096 for the three months endedJune 30, 2022 , as compared to$208,940 for the same period in 2021. The yield on tax-exempt securities decreased 52 basis points to 3.52% for 2022, compared to 4.04% for 2021 due to the impact of lower interest rates in 2022 as compared to the same period of 2021. Interest expense increased$139 , or 8.4%, to$1,796 for the three months endedJune 30, 2022 , compared with$1,657 for the same period in 2021. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, offset by a decrease in rates on interest-bearing deposit accounts andFederal Home Loan Bank (FHLB) borrowings. For the three months endedJune 30, 2022 , the average balance of interest-bearing liabilities increased$91,281 to$1,830,089 , as compared to$1,738,808 for the same period in 2021. Interest incurred on deposits decreased by$426 to$710 for the three months endedJune 30, 2022 , compared to$1,136 for the same period in 2021. Although the average balance of interest-bearing deposits increased by$49,462 for the three months endedJune 30, 2022 , as compared to the same period in 2021, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.10% in 2021 to 0.07% in 2022. The rate paid on time deposits decreased from 1.19% to 0.81% in 2022. Interest expense incurred on FHLB advances decreased 41.5% from 2021. The average balance on FHLB balances decreased$26,923 for the three months endedJune 30, 2022 , as compared to the same period in 2021, as a result of the prepayment of a long-term advance. Interest expense incurred on subordinated debentures increased$705 , to$890 for the three months endedJune 30, 2022 , compared to$185 for the same period in 2021. For the three months endedJune 30, 2022 , the average balance of subordinated debentures increased$73,365 to$103,714 , as compared to$30,349 for the same period in 2021. During the fourth quarter of 2021, the Company entered into a Subordinated Note Purchase Agreement pursuant to which the Company sold and issued$75,000 aggregate principal amount of its 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031. Page 42 -------------------------------------------------------------------------------- Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) The following table presents the condensed average balance sheets for the three months endedJune 30, 2022 and 2021. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities. Three Months Ended June 30, 2022 2021 Average Yield/ Average Yield/ Assets: balance Interest rate* balance Interest rate* Interest-earning assets: Loans, including fees**$ 2,033,378 $ 21,851 4.31 %$ 2,054,784 $ 22,653 4.42 % Taxable securities 297,256 1,775 2.23 % 204,554 1,230 2.47 % Tax-exempt securities 259,096 1,882 3.52 % 208,940 1,525 4.04 % Interest-bearing deposits in other banks 276,632 556 0.81 % 307,853 90 0.12 %
Total interest-earning assets
$ 2,776,131 $ 25,498 3.77 % Noninterest-earning assets: Cash and due from financial institutions 44,538 45,626 Premises and equipment, net 22,264 22,375 Accrued interest receivable 7,993 8,463 Intangible assets 84,167 84,638 Other assets 46,608 38,095 Bank owned life insurance 46,966 46,305 Less allowance for loan losses (27,174 ) (26,580 ) Total Assets$ 3,091,724 $ 2,995,053 Liabilities and Shareholders Equity: Interest-bearing liabilities: Demand and savings$ 1,401,351 $ 247 0.07 %$ 1,310,998 $ 334 0.10 % Time 228,733 463 0.81 % 269,624 802 1.19 % Long-term FHLB advances 75,000 193 1.03 % 101,923 330 1.30 % Subordinated debentures 103,714 890 3.44 % 30,349 185 2.52 % Repurchase Agreements 21,291 3 0.06 % 25,914 6 0.09 % Total interest-bearing liabilities$ 1,830,089 $ 1,796 0.39 %$ 1,738,808 $ 1,657 0.38 % Noninterest-bearing deposits 894,887 867,561 Other liabilities 53,476 39,428 Shareholders' Equity 313,272 349,256 Total Liabilities and Shareholders' Equity$ 3,091,724 $ 2,995,053 Net interest income and interest rate spread$ 24,268 3.28 %$ 23,841 3.39 % Net interest margin 3.43 % 3.53 % *-Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was$501 and$406 for the periods endedJune 30, 2022 and 2021, respectively.
**-Average balance includes nonaccrual loans.
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
Net interest income may also be analyzed by comparing the volume and rate
components of interest income and interest expense. The following table provides
an analysis of the changes in interest income and expense between the three
months ended
Increase (decrease) due to:
Volume (1) Rate (1) Net
(Dollars in thousands)
Interest income:
Loans, including fees $ (234 ) $ (568 ) $ (802 )
Taxable securities 676 (131 ) 545
Tax-exempt securities 571 (214 ) 357
Interest-bearing deposits in other banks (10 ) 476 466
Total interest income $ 1,003 $ (437 ) $ 566
Interest expense:
Demand and savings $ 22 $ (109 ) $ (87 )
Time (109 ) (230 ) (339 )
Long-term FHLB advances (77 ) (60 ) (137 )
Subordinated debentures 603 102 705
Repurchase agreements (1 ) (2 ) (3 )
Total interest expense $ 438 $ (299 ) $ 139
Net interest income $ 565 $ (138 ) $ 427 (1) The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated
proportionately to the change due to volume and the change due to rate.
The Company provides for loan losses through regular provisions to the allowance
for loan losses. Provisions for loan losses totaled $400 and $0 during the
quarters ended June 30, 2022 and 2021, respectively. The increase in the
provision in the second quarter of 2022 reflects the Company's strong loan
growth during the quarter. Our credit quality metrics remain stable despite the
ongoing headwinds of the challenging international, national, regional and local
economic conditions. While COVID-19 vaccinations and improved treatments have
created a level of optimism, there remains caution due to the lingering concerns
over potential infection spikes. We remain cautious given the level of
classified loans in the portfolio, particularly loans to borrowers in the hotel
industry as well as challenges businesses face in today's environment. Economic
impacts related to the COVID-19 pandemic have improved somewhat, but continued
concerns linger due to the disruption of supply chains, additional employee
costs, hiring challenges throughout our footprint, rising inflationary pressures
and the prospects of recession. Our Commercial and Commercial Real Estate
portfolios have been, and are expected to continue to be, impacted the most.
Noninterest income for the three-month periods ended June 30, 2022 and 2021 are
as follows:
Three months ended June 30,
2022 2021 $ Change % Change
Service charges $ 1,540 $ 1,317 $ 223 16.9 %
Net gain on sale of securities 6 1,784 (1,778 ) -99.7 %
Net gain on equity securities 39 53 (14 ) -26.4 %
Net gain on sale of loans 573 2,218 (1,645 ) -74.2 %
ATM/Interchange fees 1,355 1,373 (18 ) -1.3 %
Wealth management fees 1,228 1,188 40 3.4 %
Bank owned life insurance 233 248 (15 ) -6.0 %
Tax refund processing fees 475 475 - 0.0 %
Swap fees - 17 (17 ) -100.0 %
Other 186 352 (166 ) -47.2 %
Total noninterest income $ 5,635 $ 9,025 $ (3,390 ) -37.6 %
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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 three months ended June 30, 2022 was $5,635 , a
decrease of $3,390 , or 37.6%, from $9,025 for the same period of 2021. The
decrease was primarily due to decreases in net gain on sale of securities, net
gain on equity securities, net gain on sale of loans, swap fees and other
income, offset by increases in service charges. Net gain on sale of securities
decreased due to the sale of Visa Class B shares in 2021. Net gain on equity
securities decreased as a result of market value decreases. Net gain on sale of
loans decreased primarily as a result of a decrease in volume of loans
sold. During the three-months ended June 30, 2022 , 186 loans were sold, totaling
$35,494 . During the three-months ended June 30, 2021 , 372 loans were sold,
totaling $69,200 . Swap fees decreased due to the volume of swaps performed
during the quarter ended June 30, 2022 as compared to the same period of
2021. Other income decreased as result of an increase in insurance loss reserves
from the Company's reinsurance subsidiary. Service charges increased due to
higher overdraft fees of $222 .
Additionally, the Company processes state and federal income tax refunds for
customers of third-party income tax preparation vendors for which we receive a
fee for processing the refund payments. Tax refund processing fees were $475 for
each of the three months ended June 30, 2022 and 2021. This fee income is
seasonal in nature, the majority of which is earned in the first quarter of the
year.
Noninterest expense for the three-month periods ended June 30, 2022 and 2021 are
as follows:
Three months ended June 30,
2022 2021 $ Change % Change
Compensation expense $ 11,947 $ 11,406 $ 541 4.7 %
Net occupancy expense 1,026 1,007 19 1.9 %
Equipment expense 562 482 80 16.6 %
Contracted data processing 433 490 (57 ) -11.6 %
FDIC assessment 195 322 (127 ) -39.4 %
State franchise tax 628 471 157 33.3 %
Professional services 1,209 741 468 63.2 %
Amortization of intangible assets 217 223 (6 ) -2.7 %
ATM/Interchange expense 542 656 (114 ) -17.4 %
Marketing 380 343 37 10.8 %
Software maintenance expense 790 545 245 45.0 %
Other 2,450 5,578 (3,128 ) -56.1 %
Total noninterest expense $ 20,379 $ 22,264 $ (1,885 ) -8.5 %
Noninterest expense for the three months ended June 30, 2022 was $20,379 , a
decrease of $1,885 , or 8.5%, from $22,264 reported for the same period of 2021.
The primary reasons for the decrease were decreases in contracted data
processing expense, FDIC assessment, ATM/Interchange expense and other operating
expense, offset by increases in compensation expense, equipment expense, state
franchise tax, professional services, marketing and software maintenance
expense. The increase in compensation expense was due to increased salary,
payroll taxes and commission and incentive based costs, offset by a decrease in
employer savings contributions. Equipment expense increased due to an increase
in computer equipment purchases of $48 . Contracted data processing fees
decreased due to a decrease in monthly processing fees of $62 . The
quarter-over-quarter decrease in FDIC assessments was attributable to lower
assessment multipliers charged to Civista. The increase in state franchise tax
expense was attributable to an increase in equity capital, which is the basis of
the Ohio Financial Institutions tax. Professional services increased due to
merger related legal and audit fees of $118 , accompanied by increases in
recruitment fees and increased call volumes at the Company's call center. The
quarter-over-quarter decrease in ATM/Interchange expense is the result of a
decrease in billings from Mastercard of $94 in 2022. The increase in software
maintenance expense is due to a general increase in legacy software maintenance
contracts and the implementation of our new digital banking. The decrease in
other operating expense is primarily due to a prepayment fee paid in the second
quarter of 2021 related to the early payoff of an FHLB long-term advance.
Page 45
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
Income tax expense for the three months ended June 30, 2022 totaled $1,423 , down
$15 compared to the same period in 2021. The effective tax rates for the
three-month periods ended June 30, 2022 and 2021 were 15.6% and 13.6%,
respectively. The difference between the statutory federal income tax rate and
the Company's effective tax rate is the permanent tax differences, primarily
consisting of tax-exempt interest income from municipal investments and loans,
low income housing tax credits and bank owned life insurance income.
Six Months Ended
The Company had net income of$16,167 for the six months endedJune 30, 2022 , a decrease of$3,755 from net income of$19,922 for the same six months of 2021. Basic earnings per common share were$1.10 for the period endedJune 30, 2022 , compared to$1.27 for the same period in 2021. Diluted earnings per common share were$1.10 for the period endedJune 30, 2022 , compared to$1.27 for the same period in 2021. The primary reasons for the changes in net income are explained below. Net interest income for the six months endedJune 30, 2022 was$47,200 , a decrease of$469 from$47,669 in the same six months of 2021. This decrease is the result of a decrease of$494 in total interest income, partially offset by a decrease of$25 in interest expense. Interest-earning assets averaged$2,840,619 during the six months endedJune 30, 2022 , a decrease of$50,136 from$2,890,755 for the same period of 2021. The Company's average interest-bearing liabilities increased from$1,729,101 for the first six months of 2021 to$1,829,191 for the same period in 2022. The Company's fully tax equivalent net interest margin for the six months endedJune 30, 2022 and 2021 was 3.40% and 3.41%, respectively. Total interest income decreased$494 to$50,730 for the period endedJune 30, 2022 This change was the result of a decrease in the average balance of loans, accompanied by a lower yield on the portfolio. The average balance of loans decreased by$41,807 , or 2.0%, to$2,020,254 for the period endedJune 30, 2022 , as compared to$2,062,061 for the period endedJune 30, 2021 . The loan yield decreased to 4.28% for 2022, from 4.44% in 2021. During the six months endedJune 30, 2022 , the average balance of PPP loans was$17,043 . These loans had an average yield of 20.1%, which includes the amortization of PPP fees. Interest on taxable securities increased$990 to$3,495 for the period endedJune 30, 2022 , compared to$2,505 for the same period in 2021. The average balance of taxable securities increased$116,098 to$305,827 for the period endedJune 30, 2022 , as compared to$189,729 for the period endedJune 30, 2021 . The yield on taxable securities decreased 54 basis points to 2.21% for 2022, compared to 2.75% for 2021. Interest on tax-exempt securities increased$627 to$3,671 for the period endedJune 30, 2022 , compared to$3,044 for the same period in 2021. The average balance of tax-exempt securities increased$51,716 to$259,976 for the period endedJune 30, 2022 , as compared to$208,260 for the period endedJune 30, 2021 . The yield on tax-exempt securities decreased 49 basis points to 3.59% for 2022, compared to 4.08% for 2021. Interest on interest-bearing deposits in other banks increased$436 to$675 for the period endedJune 30, 2022 , compared to$239 for the same period in 2021. The average balance of interest-bearing deposits in other banks decreased$176,143 to$254,562 for the period endedJune 30, 2022 , as compared to$430,705 for the period endedJune 30, 2021 . The yield on interest-bearing deposits in other banks increased 42 basis points to 0.53% for 2022, compared to 0.11% for 2021. Interest expense decreased$25 , or 0.7%, to$3,530 for the period endedJune 30, 2022 , compared with$3,555 for the same period in 2021. The change in interest expense can be attributed to a decrease in rate, partially offset by an increase in the average balance of interest-bearing liabilities. For the period endedJune 30, 2022 , the average balance of interest-bearing liabilities increased$100,090 to$1,829,191 , as compared to$1,729,101 for the period endedJune 30, 2021 . Interest incurred on deposits decreased by$981 to$1,415 for the period endedJune 30, 2022 , compared to$2,396 for the same period in 2021. Although the average balance of interest-bearing deposits increased by$112,381 for the period endedJune 30, 2022 , as compared to the same period in 2021, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.11% in 2021 to 0.07% in 2022. The rate paid on time deposits decreased from 1.25% in 2021 to 0.80% in 2022. Interest expense incurred on FHLB advances and subordinated debentures increased 84.2% from 2021. The average balance on FHLB balances decreased$38,398 as a result of the prepayment of a long-term advance for the period endedJune 30, 2022 , as compared to the same period in 2021, while the rate paid decreased 8 basis points. In addition, the average balance of subordinated debentures increased$73,364 to$103,713 , as compared to$30,349 for the same period in 2021. During the fourth quarter of 2021, the Company entered into a Subordinated Note Purchase Agreement pursuant to which the Company sold and issued$75,000 aggregate principal amount of its 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031. The rate paid on subordinated debentures increased 82 basis points for the period endedJune 30, 2022 , as compared to the same period in 2021. Page 46 -------------------------------------------------------------------------------- Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) The following table presents the condensed average balance sheets for the six months endedJune 30, 2022 and 2021. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities. Six Months Ended June 30, 2022 2021 Average Yield/ Average Yield/ Assets: balance Interest rate* balance Interest rate* Interest-earning assets: Loans, including fees**$ 2,020,254 $ 42,889 4.28 %$ 2,062,061 $ 45,436 4.44 % Taxable securities 305,827 3,495 2.21 % 189,729 2,505 2.75 % Tax-exempt securities 259,976 3,671 3.59 % 208,260 3,044 4.08 % Interest-bearing deposits in other banks 254,562 675 0.53 % 430,705 239 0.11 %
Total interest-earning assets
$ 2,890,755 $ 51,224 3.66 % Noninterest-earning assets: Cash and due from financial institutions 133,452 39,777 Premises and equipment, net 22,292 22,442 Accrued interest receivable 7,577 8,515 Intangible assets 84,270 84,749 Other assets 41,838 38,079 Bank owned life insurance 46,847 46,185 Less allowance for loan losses (26,976 ) (26,087 ) Total Assets$ 3,149,919 $ 3,104,415 Liabilities and Shareholders Equity: Interest-bearing liabilities: Demand and savings$ 1,392,411 $ 481 0.07 %$ 1,280,030 $ 677 0.11 % Time 234,640 934 0.80 % 276,793 1,719 1.25 % Short-term FHLB advance 178 - - - - - Long-term FHLB advance 75,000 383 1.03 % 113,398 774 1.38 % Subordinated debentures 103,713 1,726 3.36 % 30,349 371 2.54 % Repurchase Agreements 23,249 6 0.05 % 28,531 14 0.10 % Total interest-bearing liabilities$ 1,829,191 $ 3,530 0.39 %$ 1,729,101 $ 3,555 0.41 % Noninterest-bearing deposits 914,163 986,185 Other liabilities 76,372 39,690 Shareholders' Equity 330,193 349,439 Total Liabilities and Shareholders' Equity$ 3,149,919 $ 3,104,415 Net interest income and interest rate spread$ 47,200 3.26 %$ 47,669 3.25 % Net interest margin 3.40 % 3.41 % *-Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was$977 and$814 for the periods endedJune 30, 2022 and 2021, respectively.
**-Average balance includes nonaccrual loans.
Page 47
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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, 2022 and 2021. 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 $ (909 ) $ (1,638 ) $ (2,547 )
Taxable securities 1,551 (561 ) 990
Tax-exempt securities 1,022 (395 ) 627
Interest-bearing deposits in other banks (134 ) 570 436
Total interest income $ 1,530 $ (2,024 ) $ (494 )
Interest expense:
Demand and savings $ 55 $ (251 ) $ (196 )
Time (234 ) (551 ) (785 )
Short-term FHLB advance - - -
Long-term FHLB advance (224 ) (167 ) (391 )
Subordinated debentures 1,179 176 1,355
Repurchase agreements (2 ) (6 ) (8 )
Total interest expense $ 774 $ (799 ) $ (25 )
Net interest income $ 756 $ (1,225 ) $ (469 )
(1)The change in interest income and interest expense due to changes in both
volume and rate, which cannot be segregated, has been allocated proportionately
to the change due to volume and the change due to rate.
The Company provides for loan losses through regular provisions to the allowance
for loan losses. Provisions for loan losses totaled $700 and $830 during the
periods ended June 30, 2022 and 2021, respectively. The decrease in provision
was due to the improvement of our credit quality metrics, offset by strong loan
growth during the second quarter of 2022. To address the challenges of the
international, national, regional and local economic conditions adversely
impacted by the prior economic shutdown and restrictions in response to the
ongoing COVID-19 pandemic, management maintained a strong provision in the first
quarter of 2021. When conditions stabilized and criticized loans peaked,
management reduced the provision. We continue to be optimistic that asset
quality will continue to improve despite ongoing headwinds. We remain cautious
given the level of classified loans in the portfolio, particularly loans to
borrowers in the hotel industry. However, we are encouraged by strong loan
growth. Our Commercial and Commercial Real Estate portfolios have been and are
expected to continue to be impacted the most.
Noninterest income for the six-month periods ended June 30, 2022 and 2021 are as
follows:
Six months ended June 30,
2022 2021 $ Change % Change
Service charges $ 3,119 $ 2,573 $ 546 21.2 %
Net gain on sale of securities 6 1,783 (1,777 ) -99.7 %
Net gain on equity securities 89 141 (52 ) -36.9 %
Net gain on sale of loans 1,509 4,963 (3,454 ) -69.6 %
ATM/Interchange fees 2,596 2,620 (24 ) -0.9 %
Wealth management fees 2,505 2,334 171 7.3 %
Bank owned life insurance 477 491 (14 ) -2.9 %
Tax refund processing fees 2,375 2,375 - 0.0 %
Swap fees - 94 (94 ) -100.0 %
Other 602 841 (239 ) -28.4 %
Total noninterest income $ 13,278 $ 18,215 $ (4,937 ) -27.1 %
Page 48
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
Noninterest income for the six months ended June 31, 2022 was $13,278 , a
decrease of $4,937 , or 27.1%, from $18,215 for the same period of 2021. The
decrease was primary due to decreases in net gain on the sale of securities of
$1,777 , net gain on equity securities of $52 , net gain on sale of loans of
$3,454 , swap fees of $94 and other income of $239 , which was offset by an
increase in service charges of $546 . Net gain on sale of securities decreased
due to the sale of Visa Class B shares in 2021. Net gain (loss) on equity
securities decreased as a result of market value increases. Net gain on sale of
loans decreased primarily as a result of a decrease in volume of loans
sold. During the six-months ended June 30, 2022 , 394 loans were sold, totaling
$73,659 . During the six-months ended June 30, 2021 , 752 loans were sold,
totaling $147,841 . Swap fees decreased due to the volume of swaps performed
during the six-months ended June 30, 2022 , as compared to the same period of
2021. Other income decreased as result of an increase in insurance loss reserves
from the Company's reinsurance subsidiary. Service charges increased due to an
increase in service charges and overdraft fees of $101 and $445 , respectively.
Tax refund processing fees were $2,375 for each of the six months ended June 30,
2022 and 2021. These fees are received for processing state and federal income
tax refund payments for customers of third party income tax preparation
vendors. This fee income is seasonal in nature, the majority of which is earned
in the first quarter of the year.
Noninterest expense for the six-month periods ended June 30, 2022 and 2021 are
as follows:
Six months ended June 30,
2022 2021 $ Change % Change
Compensation expense $ 24,170 $ 23,188 $ 982 4.2 %
Net occupancy expense 2,176 2,231 (55 ) -2.5 %
Equipment expense 1,057 896 161 18.0 %
Contracted data processing 1,053 933 120 12.9 %
FDIC assessment 398 582 (184 ) -31.6 %
State franchise tax 1,219 1,096 123 11.2 %
Professional services 2,258 1,479 779 52.7 %
Amortization of intangible assets 434 445 (11 ) -2.5 %
ATM/Interchange expense 1,055 1,249 (194 ) -15.5 %
Marketing 697 641 56 8.7 %
Software maintenance expense 1,498 1,053 445 42.3 %
Other operating expenses 4,622 7,658 (3,036 ) -39.6 %
Total noninterest expense $ 40,637 $ 41,451 $ (814 ) -2.0 %
Noninterest expense for the six months ended June 30, 2022 was $40,637 , a
decrease of $814 , or 2.0%, from $41,451 reported for the same period of 2021.
The primary reasons for the decrease were decreases in FDIC assessments of $184 ,
ATM/Interchange expense of $194 and other operating expenses of $3,036 , offset
by increases in compensation expenses of $982 , equipment expense of $161 ,
contracted data processing of $120 , state franchise tax of $123 , professional
services of $779 and software maintenance expense of $445 . The increase in
compensation expense was due to increased payroll, 401k expenses, payroll taxes
and commission and incentive based costs. Payroll and payroll related expenses
increased due to annual pay increases. Equipment expense increased due to an
increase in computer equipment purchases of $110 and reimbursement of COVID-19
expenses of $12 in 2021. Contracted data processing fees increased due to merger
related system deconversion fees of $234 , offset by a decrease in computer
processing fees. The decrease in FDIC assessments was attributable to lower
assessment multipliers charged to Civista. The increase in state franchise tax
expense was attributable to an increase in equity capital, which is the basis of
the Ohio Financial Institutions tax, offset by the payment of $172 of additional
taxes in 2021 as a result of findings from a State of Ohio audit. Professional
services increased due to merger related legal and audit fees of $428 ,
accompanied by increases in recruitment fees and increased call volumes at the
Company's call center. The decrease in ATM/Interchange expense is the result of
a decrease in billings from Mastercard of $152 in 2022 and lower processing
fees. The increase in marketing expense is the result of efforts to promote our
new digital banking and other initiatives. The increase in software maintenance
expense is due to a general increase in legacy software maintenance contracts
and the implementation of our new digital banking. The decrease in other
operating expense is primarily due to a prepayment fee paid in the second
quarter of 2021 related to the early payoff of an FHLB long-term advance. The
increase in other operating expense is primarily due to the prepayment expense
of $3,717 related to the early payoff of an FHLB long-term advance, offset by a
credit to the valuation adjustment for mortgage servicing rights.
Page 49
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Civista Bancshares, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Form 10-Q
(Amounts in thousands, except share data)
Income tax expense for the six months ended June 30, 2022 totaled $2,974 , down
$707 compared to the same period in 2021. The effective tax rates for the
six-month periods ended June 30, 2022 and 2021 were 15.5% and 15.6%,
respectively. The difference between the statutory federal income tax rate and
the Company's effective tax rate is the permanent tax differences, primarily
consisting of tax-exempt interest income from municipal investments and loans,
low income housing tax credits and bank owned life insurance income.
Capital Resources
Shareholders' equity totaled$302,062 atJune 30, 2022 compared to$355,212 atDecember 31, 2021 . Shareholders' equity decreased during the first six months of 2022 as a result of a decrease in fair value of securities available-for-sale, net of tax, of$55,172 , dividends on common stock of$4,133 and the Company's repurchase of common shares during the period, which totaled$10,621 , offset by net income of$16,167 and a$110 net decrease in the Company's pension liability. All of the Company's capital ratios exceeded the regulatory minimum guidelines as ofJune 30, 2022 andDecember 31, 2021 as identified in the following table: Total Risk Tier I Risk CET1 Risk Based Based Based Leverage Capital Capital Capital Ratio Company Ratios-June 30, 2022 18.2 % 13.6 % 12.3 % 9.9 % Company Ratios-December 31, 2021 19.2 % 14.3 % 12.9 % 10.2 % For Capital Adequacy Purposes 8.0 % 6.0 % 4.5 % 4.0 % To Be Well Capitalized Under Prompt Corrective Action Provisions 10.0 % 8.0 % 6.5 % 5.0 % Liquidity The Company maintains a conservative liquidity position. All securities, with the exception of equity securities, are classified as available-for-sale. Securities, with maturities of one year or less, totaled$980 , or 0.18% of the total security portfolio atJune 30, 2022 . The available-for-sale portfolio helps to provide the Company with the ability to meet its funding needs. The Condensed Consolidated Statements of Cash Flows (Unaudited) contained in the Consolidated Financial Statements detail the Company's cash flows from operating activities resulting from net earnings. As reported in the Condensed Consolidated Statements of Cash Flows (Unaudited), our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was$47,628 and$19,996 for the six months endedJune 30, 2022 and 2021, respectively. The primary additions to cash from operating activities are from proceeds from the sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used by investing activities was$94,617 and$58,661 for the six months endedJune 30, 2022 and 2021, respectively, principally reflecting our loan and investment security activities. Cash provided by and used for deposits and purchase of treasury shares comprised most of our financing activities, which resulted in net cash provided by of$16,031 and$144,449 for the six months endedJune 30, 2022 and 2021, respectively. Future loan demand of Civista may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, and the sale of securities classified as available-for-sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. Through its correspondent banks, Civista maintains federal funds borrowing lines totaling$50,000 . As ofJune 30, 2022 , Civista had total credit availability with the FHLB of$725,428 with standby letters of credit totaling$21,300 and a remaining borrowing capacity of approximately$629,128 In addition, CBI maintains a credit line with a third party lender totaling$10,000 . No borrowings were outstanding by CBI under this credit line as ofJune 30, 2022 . Page 50
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Civista Bancshares, Inc. © Edgar Online, source
