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 atMarch 31, 2023 compared toDecember 31, 2022 , and the consolidated results of operations for the three-month periods endedMarch 31, 2023 , compared to the same periods in 2022. 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:
•
current and future economic and financial market conditions, including the effects of inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling and/or possible futureU.S. government shutdowns over budget disagreements, slowing gross domestic product, tariffs, aU.S. withdrawal from or renegotiation of trade agreements, trade wars, and other factors beyond our control, 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 made by Civista; • recent and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational impact on the banking industry as a whole, and of which could adversely affect the Company's business, financial condition and results of operations; • adverse changes in the real estate market, which could cause increases in delinquencies and non-performing assets, including additional loan charge-offs, and could depress our income, earnings and capital; • changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of theBoard of Governors of theFederal Reserve System , which may 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; • continuing economic impacts and recovery from the COVID-19 pandemic, or the outbreak of another highly infectious or contagious disease, which could adversely affect our business, financial condition and results of operations; • 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 account management, 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; 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) • risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past, pending and possible future acquisitions, including, without limitation, the recently completed acquisitions ofComunibanc Corp. and VFG; • 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,FDIC insurance premium levels, pensions, bankruptcy, consumer 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; • changes in federal, state and/or local tax laws; • the effect of changes in accounting policies and practices, as may be adopted by theFinancial Accounting Standards Board (FASB), theSEC , thePublic Company Accounting Oversight Board and other regulatory agencies, may 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 raise additional capital in the future if and when needed and/or on terms acceptable to us; • our ability to conform and comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulatory authorities, shareholders, investors and other stakeholders with regard to our environmental, social and governance (ESG) policies and practices, which could affect our reputation and business and operating results; • 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 theSEC , including those risks identified in "Item 1A. Risk Factors" of Part I of the Company's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2022 , as supplemented by "Item 1A. Risk Factors" of Part II of this Quarterly Report on Form 10-Q. 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 atMarch 31, 2023 were$3,584,558 compared to$3,537,830 atDecember 31, 2022 , an increase of$46,728 , or 1.3%. The increase in total assets was due to increases in cash and cash equivalents of$9,362 , accompanied by other increases in securities available for sale, other securities and loans of$12,305 ,$1,798 and$27,715 , respectively, partially offset by decreases in office premises and equipment, net and swap assets of$2,123 and$3,229 , respectively. Total liabilities atMarch 31, 2023 were$3,236,861 compared to$3,202,995 atDecember 31, 2022 , an increase of$33,866 , or 1.1%. The increase in total liabilities was primarily attributable to an increase in total deposit accounts of$223,532 , accompanied by an increase in tax refunds in process and accrued interest, taxes and other liabilities of$5,474 and$2,392 , respectively, partially offset by decreases in short term FHLB borrowings, securities sold under agreements to repurchase and swap liabilities of$181,700 ,$9,512 and$3,229 , respectively. Page 40 -------------------------------------------------------------------------------- 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 ofMarch 31, 2023 andDecember 31, 2022 were as follows: December 31, March 31, 2023 2022 $ Change % Change Commercial & Agriculture$ 271,160 $ 278,595 $ (7,435 ) -2.7 % Commercial Real Estate-Owner Occupied 375,825 371,147 4,678 1.3 % Commercial Real Estate-Non-Owner Occupied 1,043,635 1,018,736 24,899 2.4 % Residential Real Estate 560,978 552,781 8,197 1.5 % Real Estate Construction 247,253 243,127 4,126 1.7 % Farm Real Estate 24,040 24,708 (668 ) -2.7 % Lease Financing Receivables 37,570 36,797 773 2.1 % Consumer and Other 19,605 20,775 (1,170 ) -5.6 % Total loans 2,580,066 2,546,666 33,400 1.3 % Allowance for credit losses (34,196 ) (28,511 ) (5,685 ) 19.9 % Net loans$ 2,545,870 $ 2,518,155 $ 27,715 1.1 %
Included in Commercial & Agriculture loans above were
Loans held for sale increased
Net loans have increased$27,715 , or 1.1%, sinceDecember 31, 2022 . TheCommercial Real Estate - Owner Occupied,Commercial Real Estate - Non-Owner Occupied,Residential Real Estate ,Real Estate Construction and Lease Financing Receivables loan portfolios increased$4,678 ,$24,899 ,$8,197 ,$4,126 and$773 , respectively, sinceDecember 31, 2022 , while the Commercial & Agriculture,Farm Real Estate and Consumer and Other loan portfolios decreased$7,435 ,$668 and$1,170 , respectively, sinceDecember 31, 2022 . AtMarch 31, 2023 , the net loan to deposit ratio was 89.5% compared to 96.1% atDecember 31, 2022 . The decrease in the net loan to deposit ratio is primarily the result of an increase in deposits. Upon adoption of CECL we recorded an increase in the allowance for credit losses of$5,193 . During the first quarter of 2023 we recorded a provision for credit losses of$620 , an increase of$320 , from$300 during the three months endedMarch 31, 2022 . The increase in the reserves was principally related to loan growth during the quarter. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. Net charge-offs for the first three months of 2023 totaled$175 , compared to net recoveries of$92 in the first three months of 2022. For the first three months of 2023, the Company charged off a total of 15 loans. Five Commercial and Agriculture loan totaling$140 , oneResidential Real Estate loan totaling$10 and nine Consumer and Other loans totaling$25 were charged off in the first three months of the year. In addition, during the first three months of 2023, the Company had recoveries on previously charged-off Commercial and Agriculture loans of$6 ,Commercial Real Estate - Non-Owner Occupied loans of$7 ,Residential Real Estate loans of$22 ,Real Estate Construction loans of$4 and Consumer and Other loans of$8 . For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans increased by$520 sinceDecember 31, 2022 , which was due to a$473 increase in loans on nonaccrual status and an increase in loans past due 90 days and accruing of$47 . 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 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) Management analyzes each individually evaluated Commercial andCommercial Real Estate loan relationship with a balance of$350 or larger, on an individual basis and designates a loan as individually evaluated 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 credit losses as a percent of total loans was 1.33% atMarch 31, 2023 and 1.12% atDecember 31, 2022 . The available-for-sale security portfolio increased by$12,305 , from$615,402 atDecember 31, 2022 to$627,707 atMarch 31, 2023 . 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 ofMarch 31, 2023 , the Company was in compliance with all pledging requirements.
Premises and equipment, net, decreased
Goodwill decreased by$617 , from$125,695 atDecember 31, 2022 to$125,078 atMarch 31, 2023 . The decrease is due to adjustments to estimated fair values of the assets acquired and liabilities assumed since the date of acquisition. Bank owned life insurance (BOLI) increased$253 fromDecember 31, 2022 toMarch 31, 2023 . The increase is the result of increases in the cash surrender value of the underlying insurance policies.
Swap assets decreased
Total deposits as of
December 31,
March 31, 2023 2022 $ Change % Change
Noninterest-bearing demand $ 938,967 $ 896,333 $ 42,634 4.8 %
Interest-bearing demand 541,027 527,879 13,148 2.5 %
Savings and money market 836,743 876,427 (39,684 ) -4.5 %
Time deposits 526,779 319,345 207,434 65.0 %
Total Deposits $ 2,843,516 $ 2,619,984 $ 223,532 8.5 %
The Company had approximately $594,376 and $563,092 of uninsured deposits as of
March 31, 2023 and December 31, 2022 , respectively. Uninsured deposit amounts
are estimated based on the portions of customer account balances that exceed the
FDIC insurance limit of $250,000 .
Total deposits at March 31, 2023 increased $223,532 from year-end 2022.
Noninterest-bearing deposits increased $42,634 from year-end 2022, while
interest-bearing deposits, including savings and time deposits, increased
$180,898 from December 31, 2022 . 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 $82,013 . This increase is temporary as
transactions are processed and is expected to return to levels more consistent
with December 31, 2022 over the next two quarters. In addition, public fund
demand deposit accounts increased $10,350 , offset by decreases in personal and
business demand deposit accounts of $7,497 and $37,690 , respectively. The
increase in interest-bearing deposits was primarily due to increases in brokered
deposits and public fund interest-bearing demand accounts of $201,201 and
$15,796 , respectively, accompanied by decreases in statement savings, business
savings and money market savings accounts of $14,539 , $5,179 and $19,060 ,
respectively. Time certificates over $250 , time certificates increased $3,732
from year-end 2022. The year-to-date average balance of total deposits increased
$68,486 , compared to the average balance for the same period in 2022, mainly due
to a $67,788 increase in the average balance of time deposits.
Short-term FHLB advances decreased
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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 decreased$1,338 fromDecember 31, 2022 toMarch 31, 2023 . The decrease is primarily the result of a decrease in accounts payable related to securities purchased but not yet funded of$1,338 .
Tax refunds in process increased
Swap liabilities decreased$3,229 fromDecember 31, 2022 toMarch 31, 2023 . The decrease of$3,229 is primarily the result of a decrease in fair value of swap liabilities. Accrued expenses and other liabilities increased$2,392 fromDecember 31, 2022 toMarch 31, 2023 . The increase is primarily the result of an increase in allowance for credit losses on unfunded commitments of$3,587 as a result of the Company's adoption of ASU 2013-16. Shareholders' equity atMarch 31, 2023 was$347,697 , or 9.7% of total assets, compared to$334,835 , or 9.5% of total assets, atDecember 31, 2022 . The increase was the result of an increase in the fair value of securities available-for-sale, net of tax, of$8,135 and net income of$12,888 , offset by dividends on common shares of$2,201 , the purchase of treasury shares of$121 and the cumulative effect of adopting ASU 2016-13 of$6,069 . Total outstanding common shares atMarch 31, 2023 were 15,768,410, which increased from 15,728,234 common shares outstanding atDecember 31, 2022 . Common shares outstanding increased due to the grant of 47,536 restricted common shares to certain officers under the Company's 2014 Incentive Plan, offset by 5,620 common shares surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 1,740 restricted common shares forfeited.
Results of Operations
Three Months Ended
The Company had net income of$12,888 for the three months endedMarch 31, 2023 , an increase of$4,422 from net income of$8,466 for the same three months of 2022. Basic earnings per common share were$0.82 for the quarter endedMarch 31, 2023 , compared to$0.57 for the same period in 2022. Diluted earnings per common share were$0.82 for the quarter endedMarch 31, 2023 , compared to$0.57 for the same period in 2022. The primary reasons for the changes in net income are explained below. Net interest income for the three months endedMarch 31, 2023 was$32,601 , an increase of$9,669 from$22,932 for the same three months of 2022. This increase is the result of an increase of$16,873 in total interest income, offset by an increase of$7,204 in interest expense. Interest-earning assets averaged$3,211,902 during the three months endedMarch 31, 2023 , an increase of$397,313 from$2,814,589 for the same period of 2022. The Company's average interest-bearing liabilities increased from$1,828,283 during the three months endedMarch 31, 2022 to$2,207,592 during the three months endedMarch 31, 2023 . The Company's fully tax equivalent net interest margin for the three months endedMarch 31, 2023 and 2022 was 4.11% and 3.38%, respectively. Total interest income was$41,539 for the three months endedMarch 31, 2023 , an increase of$16,873 from$24,666 of total interest income for the same period in 2022. The increase in interest income is attributable to increases in interest and fees on loans and interest income on taxable and tax-exempt securities of$15,360 ,$1,114 , and$473 , respectively. Interest on loans increased$15,360 to$36,398 for the three months endedMarch 31, 2023 , as compared to$21,038 for the same period in 2022. The average balance of loans increased by$541,534 , or 27.0%, to$2,548,518 for the three months endedMarch 31, 2023 as compared to$2,006,984 for the same period in 2022. The loan yield increased to 5.79% for the three months endedMarch 31, 2023 , from 4.25% for the same period in 2022. Page 43 -------------------------------------------------------------------------------- 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$1,114 to$2,834 for the three months endedMarch 31, 2023 , compared to$1,720 for the same period in 2022. The average balance of taxable securities increased$60,358 to$374,851 for the three months endedMarch 31, 2023 , as compared to$314,493 for the same period in 2022. The yield on taxable securities increased 57 basis points to 2.77% for 2023, compared to 2.20% for 2022. Interest on tax-exempt securities increased$473 to$2,262 for the three months endedMarch 31, 2023 , compared to$1,789 for the same period in 2022. The average balance of tax-exempt securities increased$20,270 to$281,136 for the three months endedMarch 31, 2023 , as compared to$260,866 for the same period in 2022. The yield on tax-exempt securities decreased 14 basis points to 3.81% for 2023, compared to 3.67% for 2022 . Interest expense increased$7,204 , or 415.5%, to$8,938 for the three months endedMarch 31, 2023 , compared with$1,734 for the same period in 2022. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, accompanied by increases in rates. For the three months endedMarch 31, 2023 , the average balance of interest-bearing liabilities increased$379,309 to$2,207,592 , as compared to$1,828,283 for the same period in 2022. Interest incurred on deposits decreased by$2,527 to$3,232 for the three months endedMarch 31, 2023 , compared to$705 for the same period in 2022. The average balance of interest-bearing deposits increased by$68,486 for the three months endedMarch 31, 2023 , as compared to the same period in 2022, accompanied by an increase in the rate paid on time deposits from 0.79% in 2022 to 2.82% in 2023. Interest expense incurred on short-term FHLB advances increased as a result of higher average balances on short-term FHLB advances of$371,868 for the three months endedMarch 31, 2023 , as compared to the same period in 2022, as a result of increased overnight borrowings. Interest expense incurred on subordinated debentures increased$333 , to$1,169 for the three months endedMarch 31, 2023 , compared to$836 for the same period in 2022. The rate paid on subordinated debentures increased from 3.27% in 2022 to 4.57% in 2023 Page 44 -------------------------------------------------------------------------------- Civista Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) The following table presents the condensed average balance sheets for the three months endedMarch 31, 2023 and 2022. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities. Three Months Ended March 31, 2023 2022 Average Yield/ Average Yield/ Assets: balance Interest rate* balance Interest rate* Interest-earning assets: Loans, including fees**$ 2,548,518 $ 36,398 5.79 %$ 2,006,984 $ 21,038 4.25 % Taxable securities 374,851 2,834 2.77 % 314,493 1,720 2.20 % Tax-exempt securities 281,136 2,262 3.81 % 260,866 1,789 3.67 % Interest-bearing deposits in other banks 7,397 45 2.47 % 232,246 119 0.21 %
Total interest-earning assets
$ 2,814,589 $ 24,666 3.63 % Noninterest-earning assets: Cash and due from financial institutions 54,136 223,353 Premises and equipment, net 62,776 22,320 Accrued interest receivable 10,655 7,157 Intangible assets 135,554 84,374 Other assets 61,292 37,346 Bank owned life insurance 53,630 46,726 Less allowance for loan losses (30,454 ) (26,775 ) Total Assets$ 3,559,491 $ 3,209,090 Liabilities and Shareholders Equity: Interest-bearing liabilities: Demand and savings$ 1,384,070 $ 1,084 0.32 %$ 1,383,372 $ 234 0.07 % Time 308,400 2,148 2.82 % 240,612 471 0.79 % Short-term FHLB advances 372,226 4,258 4.64 % 358 - 0.00 % Long-term FHLB advances 3,442 19 2.24 % 75,000 190 1.03 % Other borrowings 14,484 252 7.06 % - - 0.00 % Federal funds purchased 333 5 6.09 % - - 0.00 % Subordinated debentures 103,814 1,169 4.57 % 103,713 836 3.27 % Repurchase Agreements 20,823 3 0.06 % 25,228 3 0.05 % Total interest-bearing liabilities$ 2,207,592 $ 8,938 1.64 %$ 1,828,283 $ 1,734 0.38 % Noninterest-bearing deposits 961,886 933,654 Other liabilities 48,854 99,851 Shareholders' Equity 341,159 347,302 Total Liabilities and Shareholders' Equity$ 3,559,491 $ 3,209,090 Net interest income and interest rate spread$ 32,601 3.58 %$ 22,932 3.25 % Net interest margin 4.11 % 3.38 % *-Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was$601 and$476 for the periods endedMarch 31, 2023 and 2022, respectively.
**-Average balance includes nonaccrual loans.
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)
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 $ 6,555 $ 8,805 $ 15,360
Taxable securities 598 516 1,114
Tax-exempt securities 404 69 473
Interest-bearing deposits in other banks (218 ) 144 (74 )
Total interest income $ 7,339 $ 9,534 $ 16,873
Interest expense:
Demand and savings $ - $ 850 $ 850
Time 166 1,511 1,677
Short-term FHLB advances 4,258 - 4,258
Long-term FHLB advances (277 ) 106 (171 )
Other borrowings 252 - 252
Federal funds purchased 5 - 5
Subordinated debentures 1 332 333
Repurchase agreements (1 ) 1 -
Total interest expense $ 4,404 $ 2,800 $ 7,204
Net interest income $ 2,935 $ 6,734 $ 9,669
(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. Upon adoption of CECL we recorded an increase in the allowance
for credit losses of $5,193 . During the first quarter of 2023 we recorded a
provision for credit losses of $620 , an increase of $320 , from $300 during the
three months ended March 31, 2022 . The increase in the reserves was principally
related to loan growth during the quarter. As time progresses the results of
economic conditions will require CECL model assumption inputs to change and
further refinements to the estimation process may also be identified.
Noninterest income for the three-month periods ended March 31, 2023 and 2022 are
as follows:
Three months ended March 31,
2023 2022 $ Change % Change
Service charges $ 1,773 $ 1,579 $ 194 12.3 %
Net gain on sale of securities - - - 0.0 %
Net gain (loss) on equity securities (68 ) 50 (118 ) -236.0 %
Net gain on sale of loans 631 936 (305 ) -32.6 %
ATM/Interchange fees 1,353 1,241 112 9.0 %
Wealth management fees 1,193 1,277 (84 ) -6.6 %
Lease revenue and residual income 2,046 - 2,046 0.0 %
Bank owned life insurance 253 244 9 3.7 %
Tax refund processing fees 1,900 1,900 - 0.0 %
Swap fees 61 - 61 0.0 %
Other 1,926 416 1,510 363.0 %
Total noninterest income $ 11,068 $ 7,643 $ 3,425 44.8 %
Page 46
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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 March 31, 2023 was $11,068 , an
increase of $3,425 , or 44.8%, from $7,643 for the same period of 2022. The
increase was primarily due to the addition of Lease revenue and residual income
of $2,046 for the three months ended March 31, 2023 , as a result of the
acquisition of Vision Financial Group, Inc. (VFG) in October 2023 , coupled with
increases in service charges and other income , offset by decreases in net gain
(loss) on equity securities and net gain on sale of loans. Service charges
increased due to higher service charges of $105 and overdraft fees of $89 . Other
income increased as result of a $1,500 fee collected with the renewal of the
company's contract with MasterCard. Net gain (loss) 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 March 31, 2023 , 63 loans were sold, totaling $9,239 .
During the three-months ended March 31, 2022 , 208 loans were sold, totaling
$38,164 .
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 $1,900
for each of the three months ended March 31, 2023 and 2022. 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 March 31, 2023 and 2022
are as follows:
Three months ended March 31,
2023 2022 $ Change % Change
Compensation expense $ 15,105 $ 12,223 $ 2,882 23.6 %
Net occupancy expense 1,359 1,150 209 18.2 %
Equipment expense 2,761 495 2,266 457.8 %
Contracted data processing 520 620 (100 ) -16.1 %
FDIC assessment 248 203 45 22.2 %
State franchise tax 526 591 (65 ) -11.0 %
Professional services 1,555 1,049 506 48.2 %
Amortization of intangible assets 398 217 181 83.4 %
ATM/Interchange expense 580 513 67 13.1 %
Marketing 505 317 188 59.3 %
Software maintenance expense 878 708 170 24.0 %
Other 3,198 2,172 1,026 47.2 %
Total noninterest expense $ 27,633 $ 20,258 $ 7,375 36.4 %
Noninterest expense for the three months ended March 31, 2023 was $27,633 , an
increase of $7,375 , or 36.4%, from $20,258 reported for the same period of 2022.
The primary reasons for the increase were increases in compensation expense, net
occupancy, equipment expense, FDIC assessment, professional services,
amortization expense, ATM/Interchange expense, marketing, software maintenance
expense and other operating expense, offset by decreases in contracted data
processing expense and state franchise tax. The increase in compensation expense
was due to increased salaries, payroll taxes and employee insurance. The average
full time equivalent (FTE) employees were 532.4 at March 31, 2023 , an increase
of 89 FTEs over the same period of 2022 due to the acquisitions of Comunibanc
Corp. and VFG in 2022. The increase in occupancy expense is due to increases
related to the acquisition of Comunibanc Corp. and the opening of a new branch
in Ohio . Equipment expense increased due to increases in equipment depreciation
related to the acquisition of VFG. Contracted data processing fees decreased due
to the payment of deconversion fees related to the merger with Comunibanc Corp.
in the first quarter of 2022. The quarter-over-quarter increase in FDIC
assessments was attributable to higher average consolidated assets and average
tangible equity. The decrease in state franchise tax expense was attributable to
lower estimated tax payments during the first quarter of 2023 as compared to the
same period in 2022. Professional services increased due to acquisition advisory
costs of $115 , advisory fees for the company's MasterCard contract of $400 and
consulting fees related to CECL implementation of $29 . The increase in
amortization of intangible assets is related to the merger with Comunibanc Corp.
Marketing expense increased due to a general increase in marketing and increase
marketing efforts in newly acquired markets. 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 increase in
other operating expense is primarily due to increases in promotional expenses of
$274 , loan related expenses of $11 , bad check losses of $115 , ATM/ACH losses of
$217 and a provision for credit losses on unfunded commitments of $201 .
Income tax expense for the three months ended March 31, 2023 totaled $2,528 , up
$977 compared to the same period in 2022. The effective tax rates for the
three-month periods ended March 31, 2023 and 2022 were 16.4% and 15.5%,
respectively. The difference between the statutory federal income tax rate and
the Company's effective tax rate is the permanent tax differences, primarily
consisting
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)
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$347,697 atMarch 31, 2023 , compared to$334,835 atDecember 31, 2022 . Shareholders' equity increased during the first three months of 2023 as a result of an increase in the fair value of securities available-for-sale, net of tax, of$8,135 and net income of$12,888 , offset by dividends on common shares of$2,201 , the purchase of treasury shares of$121 and the cumulative effect of adopting ASU 2016-13 of$6,069 . All of the Company's capital ratios exceeded the regulatory minimum guidelines as ofMarch 31, 2023 andDecember 31, 2022 as identified in the following table: Total Risk Tier I Risk CET1 Risk Based Based Based Leverage Capital Capital Capital Ratio Company Ratios-March 31, 2023 14.7 % 10.8 % 9.7 % 8.6 % Company Ratios-December 31, 2022 14.5 % 10.8 % 9.7 % 8.9 % 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$6,299 , or 1.0% of the total security portfolio atMarch 31, 2023 . 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$19,794 and$9,114 for the three months endedMarch 31, 2023 and 2022, 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$38,635 and$50,872 for the three months endedMarch 31, 2023 and 2022, 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$28,203 and$190,217 for the three months endedMarch 31, 2023 and 2022, 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$30,000 . As ofMarch 31, 2023 , Civista had total credit availability with the FHLB of$880,481 with standby letters of credit totaling$32,920 and a remaining borrowing capacity of approximately$632,200 . 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 ofMarch 31, 2023 . Page 48 -------------------------------------------------------------------------------- Civista Bancshares, Inc.
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