UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended - June 30, 2023
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-36192
Civista Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Ohio
34-1558688
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
100 East Water Street, Sandusky, Ohio
44870
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (419) 625-4121
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common
CIVB
NASDAQ Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Shares, no par value, outstanding at August 3, 2023—15,748,862 shares
CIVISTA BANCSHARES, INC.
Index
PART I.
Financial Information
2
Item 1.
Financial Statements:
Consolidated Balance Sheets (Unaudited) June 30, 2023 and December 31, 2022
Consolidated Statements of Operations (Unaudited) Three- and six-months ended June 30, 2023 and 2022
3
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three- and six-months ended June 30, 2023 and 2022
4
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)Three- and six-months ended June 30, 2023 and 2022
5
Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2023 and 2022
7
Notes to Interim Consolidated Financial Statements (Unaudited)
8-41
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42-55
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
56-57
Item 4.
Controls and Procedures
58
PART II.
Other Information
59
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
60
Signatures
61
Part I – Financial Information
ITEM 1. Financial Statements
Consolidated Balance Sheets
(In thousands, except share data)
June 30, 2023
(Unaudited)
December 31, 2022
ASSETS
Cash and due from financial institutions
$
41,354
43,361
Investments in time deposits
1,719
1,477
Securities available-for-sale
617,298
615,402
Equity securities
1,952
2,190
Loans held for sale
3,014
683
Loans, net of allowance for credit losses of $35,149 and $28,511
2,601,131
2,518,155
Other securities
28,449
33,585
Premises and equipment, net
60,899
64,018
Accrued interest receivable
11,043
11,178
Goodwill
125,078
125,695
Other intangible assets, net
10,328
10,759
Bank owned life insurance
53,787
53,543
Swap assets
16,432
16,579
Deferred taxes
18,768
16,009
Other assets
24,728
25,196
Total assets
3,615,980
3,537,830
LIABILITIES
Deposits
Noninterest-bearing
1,002,461
896,333
Interest-bearing
1,940,313
1,723,651
Total deposits
2,942,774
2,619,984
Short-term Federal Home Loan Bank advances
142,000
393,700
Securities sold under agreements to repurchase
6,788
25,143
Long-term Federal Home Loan Bank advances
2,859
3,578
Subordinated debentures
103,880
103,799
Other borrowings
12,568
15,516
Swap liabilities
Securities purchased payable
2,924
1,338
Tax refunds in process
7,208
278
Accrued expenses and other liabilities
28,671
23,080
Total liabilities
3,266,104
3,202,995
SHAREHOLDERS’ EQUITY
Common shares, no par value, 40,000,000 shares authorized, 19,288,674 shares issued at June 30, 2023 and 19,231,061 shares issued at December 31, 2022, including Treasury shares
310,784
310,182
Retained earnings
168,777
156,492
Treasury shares, 3,508,447 common shares at June 30, 2023 and 3,502,827 common shares at December 31, 2022, at cost
(73,915
)
(73,794
Accumulated other comprehensive loss
(55,770
(58,045
Total shareholders’ equity
349,876
334,835
Total liabilities and shareholders’ equity
See notes to interim unaudited consolidated financial statements
Page 2
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)
Three months ended
Six Months Ended
June 30,
2023
2022
Interest and dividend income
Loans, including fees
37,978
21,851
74,376
42,889
Taxable securities
2,984
1,775
5,818
3,495
Tax-exempt securities
2,319
1,882
4,581
3,671
Deposits in other banks
54
556
99
675
Total interest and dividend income
43,335
26,064
84,874
50,730
Interest expense
7,534
710
10,766
1,415
Federal Home Loan Bank advances
3,130
193
7,407
383
1,198
890
2,367
1,726
Securities sold under agreements to repurchase and other
134
394
6
Total interest expense
11,996
1,796
20,934
3,530
Net interest income
31,339
24,268
63,940
47,200
Provision for credit losses
861
400
1,481
700
Net interest income after provision for loan losses
30,478
23,868
62,459
46,500
Noninterest income
Service charges
1,831
1,540
3,604
3,119
Net gain on sale of securities
—
Net gain (loss) on equity securities
(170
39
(238
89
Net gain on sale of loans
615
573
1,246
1,509
ATM/Interchange fees
1,450
1,355
2,803
2,596
Wealth management fees
1,180
1,228
2,373
2,505
Lease revenue and residual income
2,201
4,247
-
311
233
564
477
Tax refund processing fees
475
2,375
Swap fees
116
177
Other
1,140
186
3,066
602
Total noninterest income
9,149
5,635
20,217
13,278
Noninterest expense
Compensation expense
14,978
11,947
30,083
24,170
Net occupancy expense
1,369
1,026
2,728
2,176
Equipment expense
2,766
562
5,527
1,057
Contracted data processing
559
433
1,079
1,053
FDIC assessment
529
195
777
398
State franchise tax
654
628
1,219
Professional services
1,239
1,209
2,794
2,258
Amortization of intangible assets
399
217
797
434
ATM/Interchange expense
542
1,195
1,055
Marketing
540
380
1,045
697
Software maintenance expense
1,059
790
1,937
1,498
Other operating expenses
3,206
2,450
6,404
4,622
Total noninterest expense
27,913
20,379
55,546
40,637
Income before taxes
11,714
9,124
27,130
19,141
Income tax expense
1,680
1,423
4,208
2,974
Net Income
10,034
7,701
22,922
16,167
Earnings per common share, basic
0.64
0.53
1.45
1.10
Earnings per common share, diluted
Page 3
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In thousands)
Three Months Ended
Net income
Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for-sale securities
(7,432
(32,465
2,865
(69,911
Tax effect
1,572
6,862
(590
14,744
Reclassification of gains recognized in net income
(6
1
Pension liability adjustment
70
139
(15
(29
Total other comprehensive income (loss)
(5,860
(25,553
2,275
(55,062
Comprehensive income (loss)
4,174
(17,852
25,197
(38,895
Page 4
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)
Common Shares
AccumulatedOther
Total
OutstandingShares
Amount
RetainedEarnings
TreasuryShares
ComprehensiveIncome (Loss)
Shareholders’Equity
Balance, March 31, 2023
15,768,410
310,412
161,110
(49,910
347,697
Other comprehensive loss
Stock-based compensation
11,817
372
Common stock dividends ($0.15 per share)
(2,367
Purchase of common stock
Balance, June 30, 2023
15,780,227
Balance, March 31, 2022
14,797,232
277,919
131,934
(61,472
(20,689
327,692
5,086
321
Common stock dividends ($0.14 per share)
(2,043
(264,885
(6,056
Balance, June 30, 2022
14,537,433
278,240
137,592
(67,528
(46,242
302,062
Page 5
Balance, December 31, 2022
15,728,234
Cumulative-effect adjustment for adoption of ASC 326
(6,069
Balance January 1, 2023
150,423
328,766
Other comprehensive income
57,613
Common stock dividends ($0.29 per share)
(4,568
(5,620
(121
Balance, December 31, 2021
14,954,200
277,741
125,558
(56,907
8,820
355,212
36,860
499
Common stock dividends ($0.28 per share)
(4,133
(453,627
(10,621
Page 6
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30,
Net cash provided by operating activities
39,124
47,628
Cash flows used for investing activities:
Maturities, paydowns and calls of investments in time deposits
490
Maturities, paydowns and calls of securities, available-for-sale
11,166
26,784
Purchases of securities, available-for-sale
(10,551
(53,586
Purchase of other securities
(9,128
(1,500
Redemption of other securities
14,264
Net change in loans
(89,903
(64,133
Premises and equipment purchases
(1,358
(2,672
Net cash used for investing activities
(85,510
(94,617
Cash flows from financing activities:
Repayment of long-term FHLB advances
(719
Net change in short-term FHLB advances
(251,700
Repayment of other borrowings
(2,948
Increase in deposits
322,790
38,801
Decrease in securities sold under repurchase agreements
(18,355
(8,016
Purchase of treasury shares
Common dividends paid
Net cash provided by financing activities
44,379
16,031
Increase in cash and cash equivalents
(2,007
(30,958
Cash and cash equivalents at beginning of period
264,239
Cash and cash equivalents at end of period
233,281
Cash paid during the period for:
Interest
5,023
3,558
Income taxes
2,496
1,300
Supplemental cash flow information:
Change in fair value of swap asset
147
Change in fair value of swap liability
(147
(195
Securities purchased not settled
15,025
Page 7
Form 10-Q
(Amounts in thousands, except share data)
(1) Consolidated Financial Statements
Nature of Operations and Principles of Consolidation: Civista Bancshares, Inc. (CBI) is an Ohio corporation and a registered financial holding company. The Consolidated Financial Statements include the accounts of CBI and its wholly-owned direct and indirect subsidiaries: Civista Bank (Civista), Vision Financial Group, Inc. (VFG), First Citizens Insurance Agency, Inc. (FCIA), Water Street Properties, Inc. (Water St.), CIVB Risk Management, Inc. (CRMI) and First Citizens Investments, Inc. (FCI).
Civista provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Madison, Summit, Huron, Ottawa, Richland, Montgomery, Henry, Wood and Cuyahoga, in the Indiana counties of Dearborn and Ripley and in the Kentucky county of Kenton. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions that are in excess of federally insured limits. Civista also engages in a general equipment leasing and financing business through its wholly-owned subsidiary, VFG, which was acquired in October 2022 and is headquartered in Pittsburgh, Pennsylvania.
FCIA is wholly-owned by CBI and was formed to allow the Company to participate in commission revenue generated through its third-party insurance agreement. Water St. is wholly-owned by CBI and was formed to hold properties repossessed by CBI subsidiaries. CRMI is a captive insurance company that is wholly-owned by CBI and allows CBI and its subsidiaries to insure against certain risks unique to their operations. The operations of CRMI are located in Wilmington, Delaware. FCI is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware.
The above companies together are referred to as the “Company.” Intercompany balances and transactions are eliminated in consolidation. Management considers the Company to operate primarily in one reportable segment, banking.
The Consolidated Financial Statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2023 and its results of operations and changes in cash flows for the periods ended June 30, 2023 and 2022 have been made. The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the period ended June 30, 2023 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Company described in the notes to the audited financial statements contained in the Company’s 2022 annual report. The Company has consistently followed these policies in preparing this Form 10-Q.
(2) Significant Accounting Policies
Allowance for Credit Losses: On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 introduces a new credit loss methodology, Current Expected Credit Losses ("CECL"), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. Topic 326 eliminates the probable initial recognition threshold previously required under Generally Accepted Accounting Principles ("GAAP") and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination.
Page 8
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the periods beginning after January 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for purchased credit deteriorated ("PCD") financial assets that were previously classified as purchased credit impared ("PCI") and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $1,668 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2023. The adoption of CECL resulted in an increase to our total allowance for credit losses (“ACL”) on loans held for investment of $4.3 million, an increase in allowance for credit losses on unfunded loan commitments of $3.4 million, a reclassification of purchased credit-impaired discount from loans to the ACL of $1.7 million, and an increase in deferred tax asset of $1.6 million. The Company also recorded a net reduction of retained earnings of $6.1 million upon adoption.
The allowance for credit losses is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
Portfolio Segmentation (“Pooled Loans”)
Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the allowance for credit losses were constructed for each segment. The Company has identified eight portfolio segments of loans including Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate, Real Estate Construction, Farm Real Estate, Lease Financing Receivable and Consumer and Other Loans.
The allowance for credit losses for Pooled Loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. The Company utilized a discounted cash flow (DCF) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a loss driver analysis (LDA) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized the Company’s own Federal Financial Institutions Examination Council’s (“FFIEC”) Call Report data for all segments except indirect auto and all new and unknown values. Peer data was incorporated into the analysis for all segments except indirect auto and all new and unknown values. The Company has established a one-year reasonable and supportable forecast period with a one-year straight-line reversion to the long-term historical average. The Company’s policy is to utilize its own data, which includes loan-level loss data from March 31, 2004 through December 31, 2019 and from December 31, 2021 through June 30, 2022, whenever possible. The two-year period from December 31, 2019 to December 31, 2021 was excluded due to modeling errors stemming from the impact of the COVID-19 pandemic. Peer data is utilized when there are not sufficient defaults for a satisfactory sound calculation, or if the Company does not have its own loan-level detail reflecting similar economic conditions as the forecasted loss drivers.
Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company uses the central tendency midpoint seasonally adjusted forecasts from the Federal Open Market Committee (FOMC). Other key assumptions include the probability of default (PD), loss given default (LGD), and prepayment/curtailment rates. When possible, the Company utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. In all cases, the LDA is then utilized to determine the long-term historical average, which is reached over the reversion period. When possible, the Company utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own LGDs, the LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. Prepayment and curtailment rates were calculated based on the Company’s own data utilizing a one-year average. When the discounted cash flow method is used to determine the allowance for credit losses, management incorporates expected prepayments to determine the effective interest rate utilized to discount expected cash flow.
Page 9
Adjustments to the quantitative evaluation may be made to account for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, changes in the value of underlying collateral dependent loans, the existence and effect of portfolio concentration, delinquency level, regulatory environment, economic conditions, Company management and the status of portfolio administration including the Company’s loan review function.
Purchased Credit Deteriorated (PCD) Loans
The Company has purchased loans, some of which have shown evidence of credit deterioration since origination. Upon adoption of ASC 326, the Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense.
Individually Evaluated Loans
The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, loan and lease modifications experiencing financial difficulty, and other loans deemed appropriate by management.
Available for Sale (“AFS”) Debt Securities
For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
Page 10
Accrued Interest Receivable
Upon adoption of ASU 2016-13 and its related amendments on January 1, 2023, the Company made the following elections regarding accrued interest receivable:
Reserve for Unfunded Commitments
The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. The Company is defining unconditionally cancelable in its literal sense, meaning that a commitment may be cancelled by the Company for any, and or no reason whatsoever. However, the Company in its business dealings, has no practical history of unconditionally canceling commitments. Commitments are not typically cancelled until a default or a defined condition occurs. Being that its historical practice has been to not cancel credit commitments unconditionally, the Company has made the decision to reserve for Unfunded Commitments. The Unfunded Reserve is recognized as a liability (included within other liabilities in the consolidated balance sheets), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of income. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings over its estimated life are based on historical averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current funding rates are compared to historical funding rates. Estimate of credit losses are determined using the same loss rates as funded loans.
Revisions: An immaterial revision has been made to the consolidated financial statements for a change in the fair market value of loans for the period ended December 31, 2022, as set forth in Note 13 herein. This revision did not have a significant impact on the affected financial statement line item or total assets, equity or net income.
Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, consideration of impairment of goodwill, fair values of financial instruments, deferred taxes, swap assets/liabilities and pension obligations are particularly subject to change.
Adoption of New Accounting Standards:
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU introduces a new credit loss methodology, CECL, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.
Page 11
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods under prior GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk.
On January 1, 2023, the Company adopted the guidance prospectively with a cumulative adjustment to retained earnings. The Company has not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023.
At adoption, the Company recognized an incremental allowance for credit losses on its loans to customers of $4.3 million, a liability for off-balance sheet unfunded commitments of $3.4 million and a reclassification of the discount ("PCD") on PCI loans to the ACL of $1.7 million. Additionally, the Company recorded a $6.1 million after tax decrease in retained earnings associated with the increased estimated credit losses. The “Day 1” impact of CECL adoption is summarized below:
CECL Adoption
Impact of
Adopting ASC 326 -
Impact
PCD Loans
January 1, 2023
Allowance for Credit Losses:
Commercial & Agriculture
3,011
429
390
3,830
Commercial Real Estate:
Owner Occupied
4,565
1,075
179
5,819
Non-Owner Occupied
14,138
(2,847
11,291
Residential Real Estate
3,145
2,762
386
6,293
Real Estate Construction
2,293
1,502
3,795
Farm Real Estate
291
(28
263
Lease Financing Receivable
1,743
635
2,807
Consumer and Other
98
201
78
377
Unallocated
541
(541
Total Allowance for Credit Losses
28,511
4,296
1,668
34,475
3,386
Total Reserve for Credit Losses
7,682
37,861
Retained Earnings
Total Pre-tax Impact
(7,682
Tax Effect
1,613
Decrease to Retained Earnings
The Company did not record an allowance for available-for-sale securities on Day 1 as the investment portfolio consists primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed minimal. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods.
Page 12
On January 1, 2023, the Company adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is an SEC filer, such as the Company, was to adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, however, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for SEC filers that were eligible to be smaller reporting companies as of November 15, 2019, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of the ASU provisions did not have a significant impact on the Company's consolidated financial statements.
On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The adoption of the ASU provisions did not have a significant impact on the Company’s consolidated financial statements.
Effect of Newly Issued but Not Yet Effective Accounting Standards:
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Update is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. The Update also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022; however, a deferral of the implementation of reference rate reform was issued in December of 2022, which extends the implementation to December 31, 2024. The Company is working through this transition via a multi-disciplinary project team. We are still evaluating the impact the change from LIBOR to a benchmark like SOFR or Prime Rate will have on our financial condition, results of operations or cash flows.
Other recent ASU’s issued by the FASB did not, or are not believed by management to have, a material effect on the Company’s present or future Consolidated Financial Statements.
(3) Securities
The amortized cost and fair market value of available-for-sale securities and the related gross unrealized gains and losses recognized were as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Fair Value
U.S. Treasury securities and obligations of U.S. government agencies
66,357
18
(5,231
61,144
Obligations of states and political subdivisions
358,564
922
(29,331
330,155
Mortgage-backed securities in government sponsored entities
256,457
11
(30,469
225,999
Total debt securities
681,378
951
(65,031
Page 13
66,495
20
(5,486
61,029
350,104
784
(33,640
317,248
265,752
15
(28,642
237,125
682,351
819
(67,768
The amortized cost and fair value of securities at June 30, 2023, by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.
Available for sale
FairValue
Due in one year or less
6,174
6,064
Due after one year through five years
73,270
67,318
Due after five years through ten years
40,195
37,579
Due after ten years
305,282
280,338
Mortgage-backed securities
Total securities available-for-sale
At June 30, 2023 and June 30, 2022 there were no proceeds from sales of securities available-for-sale, gross realized gains and gross realized losses.
Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $235,076 and $218,344 as of June 30, 2023 and December 31, 2022, respectively.
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2023 and December 31, 2022:
12 Months or less
More than 12 months
Description of Securities
UnrealizedLoss
20,331
(837
40,429
(4,394
60,760
88,343
(1,003
153,102
(28,328
241,445
Mortgage-backed securities in gov’t sponsored entities
88,195
(3,650
136,710
(26,819
224,905
Total temporarily impaired
196,869
(5,490
330,241
(59,541
527,110
21,042
(880
39,567
(4,606
60,609
169,594
(13,016
73,967
(20,624
243,561
111,639
(4,713
124,622
(23,929
236,261
302,275
(18,609
238,156
(49,159
540,431
Page 14
At June 30, 2023, there were a total of 478 securities in the portfolio with unrealized losses mainly due to higher current market rates when compared to the time of purchase. Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to currently higher market rates when compared to the time of purchase. The fair value is expected to recover as the securities approach their maturity date or reset date. The Company does not intend to sell until recovery and does not believe selling will be required before recovery.
The following table presents the net gains and losses on equity investments recognized in earnings for the three- and six-months ended June 30, 2023 and 2022 and the portion of unrealized gains and losses for the period that relates to equity investments held at June 30, 2023 and 2022:
Three Months Ended June 30,
Net gains (losses) recognized on equity securities during the period
Less: Net losses realized on the sale of equity securities during the period
Unrealized gains (losses) recognized on equity securities held at reporting date
(4) Loans
Loan balances were as follows:
292,091
278,595
Commercial Real Estate- Owner Occupied
367,797
371,147
Commercial Real Estate- Non-Owner Occupied
1,063,263
1,018,736
589,066
552,781
234,261
243,127
24,123
24,708
46,553
36,797
19,126
20,775
Total loans
2,636,280
2,546,666
Allowance for credit losses
(35,149
(28,511
Net loans
Included in Commercial & Agriculture loans above are $403 and $566 of Paycheck Protection Program (“PPP”) loans as of June 30, 2023 and December 31, 2022, respectively.
Included in total loans above are net deferred loan fees of $2,218 and $1,652 at June 30, 2023 and December 31, 2022, respectively.
The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this Note 4 and Note 5 (Allowance for Credit Losses). As of June 30, 2023 and December 31, 2022, accrued interest receivable totaled $11,043 and $11,178, respectively, and is included in the accrued interest receivable line item on the Company's Consolidated Balance Sheet.
Page 15
(5) Allowance for Credit Losses
As previously mentioned in Note 2 Significant Accounting Policies, the Company’s January 1, 2023, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” resulted in a significant change to our methodology for estimating the ACL since December 31, 2022. As a result of this adoption, the Company recorded a $5,193 increase to the ACL as a cumulative-effect adjustment on January 1, 2023.
The following tables present, by portfolio segment, the changes in the ACL for the three- and six-months ended June 30, 2023 and 2022.
Allowance for credit losses:
For the three months ended June 30, 2023
Beginning balance
Charge-offs
Recoveries
Provision
Ending Balance
3,316
42
2,182
5,540
5,733
(202
5,531
11,760
8
(122
11,646
5,934
(1
32
550
6,515
3,920
(478
3,447
269
(26
243
Lease Financing Receivables
2,907
(960
1,947
354
(13
19
(88
272
34,196
(14
106
35,149
1 Day 1 impact of $1,668, of adopting ASC 326-PCD loans was netted by changes in estimates of $771.
For the three months ended June 30, 2023, the Company provided $861 to the allowance for credit losses, as compared to a provision of $400 for the three months ended June 30, 2022. The increase in the reserves was principally related to loan growth during the quarter.
Page 16
For the three months ended June 30, 2022
2,584
203
2,790
4,594
27
108
4,729
14,577
130
14,711
2,612
(57
289
1,863
1,969
249
236
136
(3
418
(407
27,033
(60
62
27,435
For the three months ended June 30, 2022, the Company provided $400 to the allowance for credit losses. The provision in the second quarter of 2022 reflected the Company’s strong loan growth during the quarter. Our credit quality metrics remained stable despite the ongoing headwinds of the challenging international, national, regional and local economic conditions. While COVID-19 vaccinations and improved treatments had created a level of optimism, there remained caution due to the lingering concerns over potential infection spikes. We remained cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry as well as the challenges businesses face in today’s environment. As of June 30, 2022 economic impacts related to the COVID-19 pandemic had improved somewhat, but continued concerns lingered due to the disruption of supply chains, additional employee costs, higher challenges throughout our footprint, rising inflationary pressures and the prospects of recession.
During the three months ended June 30, 2022, the allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loss rates, partially offset by a decrease in Commercial & Agriculture loan balances during the quarter mainly due to the forgiveness or payoff of PPP loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate and Real Estate Construction loans increased due to an increase in general reserves required for this type as a result of increased loan balances. The result was represented as an increase in the provision. Management felt the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at June 30, 2022.
Page 17
For the six months ended June 30, 2023
CECL Adoption Day 1 Impact
Impact of Adopting ASC 326 - PCD Loans 1
(140
48
2,192
(128
340
166
(11
9
(357
(20
(860
77
(38
(93
897
(189
153
For the six months ended June 30, 2023, the Company provided $1,481 to the allowance for credit losses, as compared to a provision of $700 for the six months ended June 30, 2022. Upon adoption of CECL on January 1, 2023, we recorded an increase in the allowance for credit losses of $5,193 in the first quarter of 2023. The increase in the reserves was principally related to loan growth during the quarter.
Page 18
For the six months ended June 30, 2022
2,600
4,464
238
13,860
52
799
2,597
(58
76
244
1,810
159
287
(55
176
(32
21
(35
847
(836
26,641
(90
184
For the six months ended June 30, 2022, the Company provided $700 to the allowance for loan losses. During the six months ended June 30, 2022, the allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loss rates, partially offset by a decrease in Commercial & Agriculture loan balances during the first six months of the year mainly due to the forgiveness or payoff of PPP loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate and Real Estate Construction loans increased due to an increase in general reserves required for this type as a result of increased loan balances. The result was represented as an increase in the provision. The allowance for Consumer and Other loans decreased due to a decrease in loan balances. This was represented as a decrease in the provision. Management felt that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at June 30, 2022.
Page 19
The following tables present, by portfolio segment, the allocation of the allowance for credit losses and related loan balances as of December 31, 2022.
Loans acquiredwith creditdeterioration
Loans individuallyevaluated forimpairment
Loans collectivelyevaluated forimpairment
3,005
4,556
3,144
28,495
Outstanding loan balances:
863.00
277,732
1,988
232
368,927
119
1,018,617
1,414
392
550,975
20,774
4,385
624
2,541,657
The following tables present credit exposures by internally assigned risk grades as of June 30, 2023 and December 31, 2022. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.
The Company’s internally assigned risk grades are as follows:
Page 20
Based on the most recent analysis performed, the risk category of loans, by type and year of originations, at June 30, 2023, is as follows:
Term Loans Amortized Cost Basis by Origination Year
Revolving
Loans
Converted
2021
2020
2019
Prior
to Term
Pass
67,864
68,956
31,829
9,035
9,228
2,482
96,802
286,196
Special Mention
113
Substandard
2,627
101
2,410
5,268
Doubtful
207
124
24
355
Total Commercial & Agriculture
69,163
34,580
9,302
2,583
99,371
Commercial & Agriculture:
Current-period gross charge-offs
81
140
Commercial Real Estate - Owner Occupied
15,978
83,687
74,403
62,948
33,994
88,206
6,829
366,045
711
1,038
1,041
Total Commercial Real Estate - Owner Occupied
74,404
34,394
89,555
6,831
Commercial Real Estate - Owner Occupied:
Commercial Real Estate - Non-Owner Occupied
84,210
284,184
219,651
148,969
114,306
169,197
25,786
1,046,302
5,543
277
7,250
13,347
146
3,468
3,614
Total Commercial Real Estate - Non-Owner Occupied
289,727
114,730
179,914
26,063
Commercial Real Estate - Non-Owner Occupied:
46,011
108,692
100,130
77,777
37,552
85,246
127,539
582,948
45
55
155
240
361
258
978
3,505
621
5,963
Total Residential Real Estate
108,987
100,492
78,036
38,530
88,796
128,215
Residential Real Estate:
Page 21
39,396
129,587
37,997
18,211
8,900
234,092
169
Total Real Estate Construction
Real Estate Construction:
792
2,400
5,321
826
12,188
1,040
23,935
187
Total Farm Real Estate
12,375
Farm Real Estate:
Current-period charge-offs
19,340
18,316
5,291
2,099
1,272
46
46,364
33
156
189
Total Lease Financing Receivables
5,324
1,428
Lease Financing Receivables:
3,962
5,360
4,753
2,148
416
1,634
19,070
14
57
Total Consumer and Other
5,374
4,786
2,149
424
Consumer and Other:
12
10
38
Total Loans
277,553
706,209
479,633
327,035
200,102
373,694
272,054
Total Loans:
68
92
Page 22
Generally, Residential Real Estate, Real Estate Construction and Consumer and Other loans are not risk-graded, except when collateral is used for a business purpose. Only those loans that have been risk rated as of December 31, 2022 are included below.
273,291
2,558
2,746
367,652
734
2,761
1,003,942
10,947
3,847
114,021
183
5,787
119,991
198,734
221
198,955
24,283
379
36,223
401
173
839
163
1,002
2,018,985
14,801
15,972
2,049,931
The following tables present performing and nonperforming loans based solely on payment activity for the period ended December 31, 2022 that have not been assigned an internal risk grade.
ResidentialReal Estate
Real EstateConstruction
Consumerand Other
Performing
432,790
44,172
19,773
496,735
Nonperforming
The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2023 and December 31, 2022.
30-59DaysPast Due
60-89DaysPast Due
90 Daysor GreaterPast Due
Total PastDue
Current
Past Due90 DaysandAccruing
2,146
315
1,072
3,533
288,558
219
237
367,560
1,252
1,062,011
389
678
1,786
2,853
586,213
334
436
202
972
45,581
83
150
18,976
2,952
1,459
4,586
8,997
2,627,283
PurchasedCredit-ImpairedLoans
247
534
859
276,873
863
13
110
369,049
1,164
1,017,453
3,133
857
1,107
5,097
546,270
242,908
24,701
341
1,381
35,416
293
49
74
20,358
4,741
997
3,515
9,253
2,533,028
Page 23
The following table presents loans on nonaccrual status as of June 30, 2023.
Nonaccrual loans with a related ACL
Nonaccrual loans without a related ACL
Total Nonaccrual loans
Interest Income Recognized
565
622
1,187
312
4,571
65
214
373
63
938
7,034
7,972
The following table presents loans on nonaccrual status as of December 31, 2022, excluding PCI loans.
774
1,109
3,926
91
6,507
Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Payments received on nonaccrual loans are applied to the unpaid principal balance. A loan may be returned to accruing status only if one of two conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months.
Modifications to Borrowers Experiencing Financial Difficulty: From time to time, the Company may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of principal forgiveness, interest rate reduction, term extension, other-than-significant payment delay or a combination thereof, among other things. During the six months ended June 30, 2023, there were no modifications of loans to borrowers experiencing financial difficulty.
Individually Evaluated Loans: Larger (greater than $350) Commercial & Agricultural and Commercial Real Estate loan relationships, and Residential Real Estate and Consumer loans that are part of a larger relationship are tested for impairment on a quarterly basis. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition.
Page 24
The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans.
Real Estate
Allowance for Credit Losses
632
307
610
431
216
659
1,063
523
Collateral-dependent loans consist primarily of residential real estate, commercial real estate and commercial and industrial loans. These loans are individually evaluated when foreclosure is probable or when the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral. In the case of commercial and industrial loans secured by equipment, the fair value of the collateral is estimated by third-party valuation experts. Loan balances are charged down to the underlying collateral value when they are deemed uncollectible. Note that the Company did not elect to use the collateral maintenance agreement practical expedient available under CECL.
The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable, as of December 31, 2022, excluding PCI loans.
RecordedInvestment
UnpaidPrincipalBalance
RelatedAllowance
Average RecordedInvestment
InterestIncomeRecognized
With no related allowance recorded:
86
82
192
35
385
410
595
40
381
467
492
1,289
With an allowance recorded:
157
161
Total:
406
421
614
653
1,522
Page 25
The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three and six-month periods ended June 30, 2022.
June 30, 2022
For the three months ended
AverageRecordedInvestment
Commercial Real Estate—Owner Occupied
178
Commercial Real Estate—Non-Owner Occupied
466
501
1,145
For the six months ended
508
31
Page 26
Changes in the accretable yield for PCI loans as of June 30, 2022 were as follows, since acquisition:
For theThree-Month Period EndedJune 30, 2022
(In Thousands)
Balance at beginning of period
Acquisition of PCI loans
Accretion
(16
Transfer from non-accretable to accretable
Balance at end of period
The Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. Upon the Company's adoption of ASU 2016-13, remaining credit-related discount on these assets were re-classified to the allowance for credit losses. The Company elected the prospective transition approach and all loans previously considered purchased credit impaired are now classified as purchased with credit deterioration. The remaining non-credit discount will continue to be accreted into income over the remining lives of the assets. The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 as of December 31, 2022:
At December 31, 2022
Acquired Loans withSpecific Evidence ofDeterioration of CreditQuality (ASC 310-30)
Outstanding balance
5,220
Carrying amount
4,386
There was no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2022.
Foreclosed Assets Held For Sale
Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in Other assets on the Consolidated Balance Sheet. As of June 30, 2023 and December 31, 2022 there were no foreclosed assets included in Other assets.
Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit. The allowance for credit losses on off-balance-sheet credit exposures is adjusted as a provision for credit loss expense recognized within other non-interest expense on the Consolidated Statements of Operations. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the loan class in which the loan commitments would be classified as if funded.
Page 27
The following table lists the allowance for credit losses on off-balance sheet credit exposures as of June 30, 2023:
Beginning of Period
3,588
CECL adoption adjustments
465
End of Period
3,851
(6) Accumulated Other Comprehensive Loss
The following table presents the changes in each component of accumulated other comprehensive loss, net of tax for the three-month periods ended June 30, 2023 and June 30, 2022.
For the Three-Month Period Ended
June 30, 2023(a)
June 30, 2022(a)
UnrealizedGains and(Losses) onAvailable-for-SaleSecurities (a)
DefinedBenefitPensionItems (a)
Total (a)
(44,636
(5,274
(14,889
(5,800
Other comprehensive income (loss) before reclassifications
(25,603
Amounts reclassified from accumulated other comprehensive loss
(5
50
Net current-period other comprehensive income (loss)
(25,608
Ending balance
(50,496
(40,497
(5,745
Page 28
The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss for the three-month periods ended June 30, 2023 and June 30, 2022.
Amount Reclassified fromAccumulated Other ComprehensiveLoss (a)
Details about Accumulated OtherComprehensive LossComponents
For the Threemonths endedJune 30, 2023
For the Threemonths endedJune 30, 2022
Affected Line Item in theStatement Where Net Income isPresented
Unrealized gains (losses) on available-for-sale securities
Amortization of defined benefit pension items
Actuarial gains/(losses) (b)
(70
Total reclassifications for the period
(50
The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax for the six month periods ended June 30, 2023 and June 30, 2022.
For the Six-Month Period Ended
(52,771
14,675
(5,855
(55,167
Amounts reclassified from accumulated other comprehensive income (loss)
105
(55,172
Page 29
(a) Amounts in parentheses indicate debits on the Consolidated Balance Sheets
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six month periods ended June 30, 2023 and June 30, 2022.
Amount Reclassified fromAccumulated Other ComprehensiveIncome (Loss) (a)
Details about Accumulated OtherComprehensive Income (Loss)Components
For the Sixmonths endedJune 30, 2023
For the Sixmonths endedJune 30, 2022
(139
0
29
(110
(105
(a) Amounts in parentheses indicate expenses/losses and other amounts indicate income/benefit.
(b) These accumulated other comprehensive income components are included in the computation of net periodic pension cost.
(7) Goodwill and Intangible Assets
The carrying amount of goodwill has decreased $617 since December 31, 2022 as a result of adjustments to estimated fair values of the assets acquired and liabilities assumed since the date of acquisition. The balance of goodwill was $125,078 at June 30, 2023 and $125,695 at December 31, 2022.
Acquired intangible assets, other than goodwill, as of June 30, 2023 and December 31, 2022 were as follows:
GrossCarryingAmount
AccumulatedAmortization
NetCarryingAmount
Amortized intangible assets:
Core deposit intangibles
12,952
5,680
7,272
4,883
8,069
Total amortized intangible assets
Aggregate core deposit intangible amortization expense was $399, and $217, for the three-months ended June 30, 2023 and 2022, respectively. Aggregate core deposit intangible amortization expense was $797 and $434 for the six-months ended June 30, 2023 and June 30, 2022, respectively.
Page 30
Activity for mortgage servicing rights (MSRs) and the related valuation allowance for the three and six-month periods ended June 30, 2023 and June 30, 2022 were as follows:
Loan Servicing Rights:
Balance at Beginning of Period
3,059
2,678
2,689
2,642
Additions
88
524
226
Additions from acquisition
Disposals
Amortized to expense
(91
(95
(157
(204
Other charges
Change in valuation allowance
Balance at End of Period
3,056
2,664
Valuation allowance:
Additions expensed
Reductions credited to operations
Direct write-offs
Estimated amortization expense for each of the next five years and thereafter is as follows:
MSRs
Core depositintangibles
782
868
2024
171
1,489
1,660
2025
170
1,312
1,482
2026
168
1,193
1,361
2027
1,071
1,234
Thereafter
2,298
1,425
3,723
Page 31
(8) Short-Term and Other Borrowings
Short-term and other borrowings, which consist of federal funds purchased, securities sold under agreements to repurchase and other short-term borrowings, are summarized as follows:
At June 30, 2023
Federal FundsPurchased
Short-termBorrowings
Interest rate on balance
5.17
%
4.24
Maximum indebtedness
302,000
540,000
15,800
Average balance
242,395
306,952
Average rate paid
5.15
4.84
0.30
Average balance during the period represents daily averages. Average rate paid represents interest expense divided by the related average balances.
Short-term borrowings and federal funds purchased transactions can range from overnight to six months in maturity. The average maturity was one day at June 30, 2023.
Securities sold under agreements to repurchase are used to facilitate the needs of our customers as well as to facilitate our short-term funding needs. Securities sold under repurchase agreements are carried at the amount of cash received in association with the agreement. We continuously monitor the collateral levels and may be required, from time to time, to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.
The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of June 30, 2023 and December 31, 2022. All of the repurchase agreements are overnight agreements.
Securities pledged for repurchase agreements:
U.S. Treasury securities
Obligations of U.S. government agencies
Total securities pledged
Gross amount of recognized liabilities for repurchase agreements
Amounts related to agreements not included in offsetting disclosures above
Page 32
(9) Earnings per Common Share
The Company has granted restricted stock awards with non-forfeitable rights (with respect to dividends), which are considered participating securities. Accordingly, earnings per share is computed using the two-class method as required by ASC 260-10-45. Basic earnings per common share are computed as net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, which excludes the participating securities. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under the Company’s equity incentive plan, computed using the treasury stock method. The Company had no dilutive securities for the three-months ended June 30, 2023 and 2022.
Basic
Less allocation of earnings and dividends to participating securities
374
831
71
Net income available to common shareholders—basic
9,660
7,662
22,091
16,096
Weighted average common shares outstanding
15,775,812
14,615,154
15,754,073
14,761,363
Less average participating securities
588,715
74,286
570,897
65,146
Weighted average number of shares outstanding used in the calculation of basic earnings per common share
15,187,097
14,540,868
15,183,176
14,696,217
Earnings per common share:
Diluted
(10) Commitments, Contingencies and Off-Balance Sheet Risk
Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amounts of financial instruments with off-balance-sheet risk were as follows at June 30, 2023 and December 31, 2022:
Contract Amount
Fixed Rate
VariableRate
Commitment to extend credit:
Lines of credit and construction loans
65,676
665,017
42,184
599,185
Overdraft protection
45,288
45,182
Letters of credit
883
960
630
66,569
710,729
43,154
644,997
Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments included in the table above had interest rates ranging from 2.75% to 8.75% at June 30, 2023 and from 3.25% to 8.00% at December 31, 2022. Maturities extend up to 30 years.
Civista is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. No reserve balance was maintained, or required to be maintained, in accordance with such requirements at June 30, 2023 and December 31, 2022.
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(11) Pension Information
The Company sponsors a pension plan which is a noncontributory defined benefit retirement plan. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. In 2006, the Company amended the pension plan to provide that no employee could be added as a participant to the pension plan after December 31, 2006. In 2014, the Company amended the pension plan again to provide that no additional benefits would accrue beyond April 30, 2014.
Net periodic pension cost was as follows:
Service cost
Interest cost
125
103
251
Expected return on plan assets
(132
(144
(265
(288
Other components
Net periodic pension cost
(7
The Company does not expect to make any contribution to its pension plan in 2023. The Company made no contribution to its pension plan in 2022.
(12) Equity Incentive Plan
At the Company’s 2014 annual meeting, the shareholders adopted the Company’s 2014 Incentive Plan (“2014 Incentive Plan”). The 2014 Incentive Plan authorizes the Company to grant options, stock awards, stock units and other awards for up to 375,000 common shares of the Company. There were 60,049 shares available for future grants under this plan at June 30, 2023.
No options were granted under the 2014 Incentive Plan during the six month periods ended June 30, 2023 and 2022.
Each year, the Board of Directors has awarded restricted common shares to senior officers of the Company. The restricted shares vest ratably over a three-year or five-year period following the grant date. The product of the number of restricted shares granted and the grant date market price of the Company’s common shares determines the fair value of restricted shares awarded under the Company’s 2014 Incentive Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.
The Company classifies share-based compensation for employees with “Compensation expense” in the Consolidated Statements of Operations.
The following is a summary of the Company’s outstanding restricted shares and changes therein for the three- and six-month periods ended June 30, 2023:
Number ofRestrictedShares
WeightedAverage GrantDate Fair Value
Nonvested at beginning of period
88,422
21.98
70,096
21.88
Granted
47,536
21.85
Vested
(27,470
21.52
Forfeited
(1,740
21.74
Nonvested at end of period
Page 34
The following is a summary of the status of the Company’s outstanding restricted shares as of June 30, 2023:
Date of Award
Shares
Remaining Expense
Remaining VestingPeriod (Years)
March 14, 2019
1,924
0.50
March 14, 2020
4,265
1.50
March 3, 2021
7,776
114
2.50
6,793
March 3, 2022
9,554
191
3.50
11,261
March 14, 2023
17,103
316
4.50
29,746
527
1,485
2.87
The Company recorded $191 and $152 of share-based compensation expense during the three months ended June 30, 2023 and 2022, respectively. At June 30, 2023, the total compensation cost related to unvested awards not yet recognized was $1,485, which was expected to be recognized over the weighted average remaining life of the grants of 2.87 years.
(13) Fair Value Measurement
The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; and Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.
Debt securities: The fair values of securities available-for-sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
Equity securities: The Company’s equity securities are not actively traded in an open market. The fair value of these equity securities available-for-sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable (Level 2 inputs).
The fair value of the swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs based on similar transactions as of the valuation date and classified Level 2. The changes in fair value of these assets/liabilities had no impact on net income or comprehensive income.
Mortgage servicing rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that the Company believes market participants would use in estimating future net servicing income. Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.
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Assets and liabilities measured at fair value are summarized in the tables below.
Fair Value Measurements at June 30, 2023 Using:
Assets:
(Level 1)
(Level 2)
(Level 3)
Assets measured at fair value on a recurring basis:
U.S. Treasury securities and obligations of U.S. Government agencies
Swap asset
Liabilities measured at fair value on a recurring basis:
Swap liability
Assets measured at fair value on a nonrecurring basis:
Mortgage servicing rights
Fair Value Measurements at December 31, 2022 Using:
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The following tables present quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2023 and December 31, 2022.
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Input
Range
Weighted Average
Mortgage Servicing Rights
Discounted Cash Flow
Constant Prepayment Rate
4% - 10%
6%
Discount Rate
12%
5% - 20%
7%
The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at June 30, 2023 were as follows:
CarryingAmount
TotalFair Value
Level 1
Level 2
Level 3
Financial Assets:
Loans, held for sale
Loans, net of allowance
2,510,194
Financial Liabilities:
Nonmaturing deposits
2,360,418
Time deposits
582,356
582,041
Short-term FHLB advances
141,700
Long-term FHLB advances
2,839
12,801
Securities sold under agreement to repurchase
102,115
Accrued interest payable
Page 37
The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at December 31, 2022 were as follows:
698
2,427,291
2,300,215
319,769
318,886
393,247
3,534
98,513
15,806
668
An immaterial revision has been made to the fair market value of loans for the period ended December 31, 2022. This revision did not have a significant impact on the financial statement line item affected or total assets, equity or net income.
(14) Derivatives
To accommodate customer need and to support the Company’s asset/liability positioning, on occasion we enter into interest rate swaps with a customer and a bank counterparty. The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations. None of the Company’s derivatives are designated as hedging instruments.
Page 38
The Company presents derivative positions net on the balance sheet for customers and financial institution counterparty positions subject to master netting arrangements. The following table reflects the derivatives recorded on the balance sheet:
NotionalAmount
Included in other assets:
Interest rate swaps with loan customers in an asset position
6,921
6,980
Counterparty positions with financial institutions in an asset position
209,209
16,189
212,570
16,310
Total included in other assets
Included in accrued expenses and other liabilities:
Interest rate swaps with loan customers in a liability position
202,288
205,590
Counterparty positions with financial institutions in a liability position
Total included in accrued expenses and other liabilities
Gross notional positions with customers
Gross notional positions with financial institution counterparties
The presentation for derivatives for the current and prior periods was revised to present derivative positions net for customer positions. Fair value of swap assets and liabilities for the prior period was not impacted.
The effect of swap fair value changes on the Consolidated Statement of Operations are as follows:
Location of
Amount of Gain or (Loss)
Derivatives
Gain or (Loss)
Recognized in
Not Designated
Income on Derivatives
as Hedging Instruments
Income on Derivative
Interest rate swaps related to customer loans
Other income
The Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All interest rate swap transactions must be approved in advance by the Lenders Loan Committee or the Directors Loan Committee of the Board of Directors. The Company classifies changes in fair value of derivatives with “Other” in the Consolidated Statements of Operation.
At June 30, 2023 and December 31, 2022, the Company did not have any cash or securities pledged for collateral on its interest rate swaps with third party financial institutions. Cash pledged for collateral on interest rate swaps is classified as restricted cash on the Consolidated Balance Sheet.
(15) Qualified Affordable Housing Project Investments
The Company invests in certain qualified affordable housing projects. At June 30, 2023 and December 31, 2022, the balance of the Company's investments in qualified affordable housing projects was $13,653 and $14,149, respectively. These balances are reflected in the Other assets line on the Consolidated Balance Sheet. The unfunded commitments related to the investments in qualified affordable housing projects totaled $4,818 and $5,634 at June 30, 2023 and December 31, 2022, respectively. These balances are reflected in the Accrued expenses and other liabilities line on the Consolidated Balance Sheet.
Page 39
During the three months ended June 30, 2023 and 2022, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $252 and $239, respectively, offset by tax credits and other benefits from its investments in affordable housing tax credits of $426 and $396, respectively. During the three- and six-months ended June 30, 2023 and 2022, the Company did not incur any impairment losses related to its investments in qualified affordable housing projects.
(16) Revenue Recognition
The Company accounts for revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers. Revenue associated with financial instruments, including revenue from loans and securities, are outside the scope of ASC 606 and accounted for under other existing GAAP. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the guidance. Noninterest revenue streams in-scope of ASC 606 are discussed below.
Service Charges
Service charges consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
ATM/Interchange Fees
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Wealth Management Fees
Wealth management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received in the following month through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Tax Refund Processing Fees
The Company facilitates the payment of federal and state income tax refunds in partnership with a third-party vendor. Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Company has received the refund from the federal or state government. As part of this agreement the Company earns fee income, the majority of which is received in the first quarter of the year. The Company’s fee income revenue is recognized based on the estimated percent of business completed by each date.
Page 40
Other noninterest income consists of other recurring revenue streams such as check order fees, wire transfer fees, safety deposit box rental fees, item processing fees and other miscellaneous revenue streams. Check order income mainly represents fees charged to customers for checks. Wire transfer fees represent revenue from processing wire transfers. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Item processing fee income represents fees charged to other financial institutions for processing their transactions. Payment is typically received in the following month.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three- and six-months ended June 30, 2023 and 2022.
June
Noninterest Income
In-scope of Topic 606:
1,201
23
3,293
300
Noninterest Income (in-scope of Topic 606)
6,137
4,621
14,448
10,895
Noninterest Income (out-of-scope of Topic 606)
3,012
1,014
5,769
2,383
Total Noninterest Income
Page 41
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, 2023 compared to December 31, 2022, and the consolidated results of operations for the three- and six-month periods ended June 30, 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:
Page 42
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 at June 30, 2023 were $3,615,980 compared to $3,537,830 at December 31, 2022, an increase of $78,150, or 2.2%. The increase in total assets was due to increases in loans of $82,976, accompanied by other increases in securities available for sale, loans held for sale and deferred taxes of $1,896, $2,331, and $2,759, respectively. Total liabilities at June 30, 2023 were $3,266,104 compared to $3,202,995 at December 31, 2022, an increase of $63,109, or 2.0%. The increase in total liabilities was primarily attributable to an increase in total deposit accounts of $322,790 accompanied by an increase in tax refunds in process and accrued interest, taxes and other liabilities of $6,930 and $8,515, respectively, partially offset by decreases in short term FHLB borrowings, securities sold under agreements to repurchase, swap liabilities and other borrowings of $251,700, $189, $355 and $948, respectively.
Page 43
Loans outstanding as of June 30, 2023 and December 31, 2022 were as follows:
$ Change
% Change
13,496
4.8
(3,350
-0.9
44,527
4.4
36,285
6.6
(8,866
-3.6
(585
-2.4
9,756
26.5
(1,649
-7.9
89,614
3.5
(6,638
23.3
82,976
3.3
Included in Commercial & Agriculture loans above were $403 of PPP loans as of June 30, 2023 and $566 of PPP loans as of December 31, 2022.
Loans held for sale increased $2,331, or 341.3%, since December 31, 2022. The increase was due to increases in both the number of loans and average loan balance held for sale. At June 30, 2023, 17 loans totaling $3,014 were held for sale as compared to 7 loans totaling $683 at December 31, 2022.
Net loans have increased $82,976, or 3.3%, since December 31, 2022. The Commercial & Agriculture, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate and Lease Financing Receivables loan portfolios increased $13,496, $44,527, $36,285, and $9,756, respectively, since December 31, 2022, while the Commercial Real Estate - Owner Occupied, Farm Real Estate and Consumer and Other loan portfolios decreased $3,350, $585 and $1,649, respectively, since December 31, 2022. At June 30, 2023, the net loan to deposit ratio was 88.4% compared to 96.1% at December 31, 2022. The decrease in the net loan to deposit ratio is primarily the result of an increase in deposits.
Upon adoption of CECL on January 1, 2023 we recorded an increase in the allowance for credit losses of $5,193. During the first six months of 2023 we recorded a provision for credit losses of $1,481, an increase of $781, from $700 during the same period of 2022. The increase in the reserves was principally related to loan growth during the first six months of the year. 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 chargeoffs for the first six months of 2023 totaled $36, compared to net recoveries of $94 in the first six months of 2022. For the first six months of 2023, the Company charged off a total of 26 loans. Five Commercial and Agriculture loan totaling $140, two Residential Real Estate loan totaling $10 and nineteen Consumer and Other loans totaling $38 were charged off in the first six months of the year. In addition, during the first six 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 $15, Residential Real Estate loans of $94, Real Estate Construction loans of $8 and Consumer and Other loans of $30. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. 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 do not share common risk characteristics for estimates of loss. To evaluate the adequacy of the allowance for credit losses to cover probable losses in the loan 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 44
Management analyzes each individually evaluated Commercial and Commercial 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. Loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for credit losses as a percent of total loans was 1.33% at June 30, 2023 and 1.12% at December 31, 2022.
The available-for-sale security portfolio increased by $1,896, from $615,402 at December 31, 2022 to $617,298 at June 30, 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 of June 30, 2023, the Company was in compliance with all pledging requirements.
Premises and equipment, net, decreased $3,119 from December 31, 2022 to June 30, 2023. The decrease is primarily the result of depreciation of $3,890.
Goodwill decreased by $617, from $125,695 at December 31, 2022 to $125,078 at June 30, 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 $244 from December 31, 2022 to June 30, 2023. The increase is the result of increases in the cash surrender value of the underlying insurance policies.
Swap assets decreased $147 from December 31, 2022 to June 30, 2023. The decrease is primarily the result of a decrease in market value.
Total deposits as of June 30, 2023 and December 31, 2022 were as follows:
Noninterest-bearing demand
106,128
11.8
Interest-bearing demand
503,726
527,879
(24,153
-4.6
Savings and money market
854,231
876,427
(22,196
-2.5
319,345
263,011
82.4
Total Deposits
12.3
The Company had approximately $667,497 and $563,092 of uninsured deposits as of June 30, 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 June 30, 2023 increased $322,790 from year-end 2022. Noninterest-bearing deposits increased $106,128 from year-end 2022, while interest-bearing deposits, including savings and time deposits, increased $216,662 from December 31, 2022. The increase in noninterest-bearing deposits was primarily due to a $179,254 increase in cash balances related to the Company’s participation in our tax refund processing program. 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. This seasonal increase was partially offset by a $59,873 decrease in noninterest-bearing business accounts and a $26,404 decrease in noninterest-bearing personal accounts. The $24,153 decrease in interest-bearing demand was spread across personal, business, and public fund accounts. The decrease in money market and savings accounts was primarily due to a $39,686 decrease in statement savings, and a $26,445 decrease in personal money markets, partially offset by a $39,991 increase in brokered money market accounts. The increase in time certificates was primarily due to a $202,500 increase in brokered time deposits. Jumbo time certificates also increased $44,2052. The year-to-date average balance of total deposits increased $189,036, compared to the average balance for the same period in 2022, mainly due to a $194,376 increase in the average balance of time deposits.
Short-term FHLB advances decreased $251,700 from December 31, 2022 to June 30, 2023. The decrease is due to the repayment of overnight borrowings.
Page 45
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 $18,355 from December 31, 2022 to June 30, 2023.
Securities purchased payable increased $1,586 from December 31, 2022 to June 30, 2023. The increase is the result of an increase in accounts payable related to securities purchased but not yet funded.
Tax refunds in process increased $6,930 from December 31, 2022 to June 30, 2023. The increase is the result of an increase in a clearing account related to our tax refund processing program of $6,930.
Swap liabilities decreased $147 from December 31, 2022 to June 30, 2023. The decrease of $147 is the result of a decrease in fair value of swap liabilities.
Accrued expenses and other liabilities increased $8,515 from December 31, 2022 to June 30, 2023. The increase is primarily the result of an increase in allowance for credit losses on unfunded commitments of $3,851 as a result of the Company's adoption of ASU 2013-16.
Shareholders’ equity at June 30, 2023 was $349,876, or 9.7% of total assets, compared to $334,835, or 9.5% of total assets, at December 31, 2022. The increase was the result of an increase in the fair value of securities available-for-sale, net of tax, of $2,275 and net income of $22,922, offset by dividends on common shares of $4,568, the purchase of treasury shares of $121 and the cumulative effect of adopting ASU 2016-13 of $6,069.
Total outstanding common shares at June 30, 2023 were 15,780,227, which increased from 15,728,234 common shares outstanding at December 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 June 30, 2023 and 2022
The Company had net income of $10,034 for the three months ended June 30, 2023, an increase of $2,333 from net income of $7,701 for the same three months of 2022. Basic earnings per common share were $0.64 for the quarter ended June 30, 2023, compared to $0.53 for the same period in 2022. Diluted earnings per common share were $0.64 for the quarter ended June 30, 2023, compared to $0.53 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 ended June 30, 2023 was $31,339, an increase of $7,701 from $24,288 for the same three months of 2022. This increase is the result of an increase of $17,271 in total interest income, offset by an increase of $10,200 in interest expense. Interest-earning assets averaged $3,258,738 during the three months ended June 30, 2023, an increase of $392,376 from $2,866,362 for the same period of 2022. The Company’s average interest-bearing liabilities increased from $1,830,089 during the three months ended June 30, 2022 to $2,288,563 during the three months ended June 30, 2023. The Company’s fully tax equivalent net interest margin for the three months ended June 30, 2023 and 2022 was 3.86% and 3.43%, respectively.
Total interest income was $43,335 for the three months ended June 30, 2023, an increase of $17,271 from $26,064 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 $16,127, $1,209, and $473, respectively. Interest on loans increased $16,127 to $37,978 for the three months ended June 30, 2023, as compared to $21,851 for the same period in 2022. The average balance of loans increased by $559,908, or 28.0%, to $2,593,286 for the three months ended June 30, 2023 as compared to $2,003,378 for the same period in 2022. The loan yield increased to 5.88% for the three months ended June 30, 2023, from 4.31% for the same period in 2022.
Page 46
Interest on taxable securities increased $1,209 to $2,984 for the three months ended June 30, 2023, compared to $1,775 for the same period in 2022. The average balance of taxable securities increased $72,746 to $370,002 for the three months ended June 30, 2023, as compared to $297,256 for the same period in 2022. The yield on taxable securities increased 71 basis points to 2.94% for 2023, compared to 2.23% for 2022. Interest on tax-exempt securities increased $437 to $2,319 for the three months ended June 30, 2023, compared to $1,882 for the same period in 2022. The average balance of tax-exempt securities increased $29,417 to $288,513 for the three months ended June 30, 2023, as compared to $259,096 for the same period in 2022. The yield on tax-exempt securities increased 27 basis points to 3.79% for 2023, compared to 3.52% for 2022 .
Interest expense increased $10,200, or 567.9%, to $11,996 for the three months ended June 30, 2023, compared with $1,796 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 ended June 30, 2023, the average balance of interest-bearing liabilities increased $458,474 to $2,288,563, as compared to $1,830,089 for the same period in 2022. Interest incurred on deposits increased by $6,824 to $7,534 for the three months ended June 30, 2023, compared to $710 for the same period in 2022. The average balance of interest-bearing deposits increased by $282,871 for the three months ended June 30, 2023, as compared to the same period in 2022, accompanied by an increase in the rate paid on demand and savings accounts from 0.81% in 2022 to 4.38% in 2023. The average balance on long-term FHLB balances decreased $71,893 as a result of a prepayment, while the rate paid increased 116 basis points. In addition, the average balance of short-term FHLB balances increased $242,395, compared to the same period in 2022. The rate paid on subordinated debentures increased 118 basis points for the three-month period ended June 30, 2023, as compared to the same period in 2022.
Page 47
The following table presents the condensed average balance sheets for the three months ended June 30, 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.
Averagebalance
Yield/rate*
Interest-earning assets:
Loans, including fees**
2,593,286
5.87
2,033,378
4.31
370,002
2.93
297,256
2.23
288,513
3.79
259,096
3.52
Interest-bearing deposits in other banks
6,937
3.12
276,632
0.81
Total interest-earning assets
3,258,738
5.31
2,866,362
3.67
Noninterest-earning assets:
47,560
44,538
61,220
22,264
11,191
7,993
Intangible assets
135,669
84,167
60,253
46,608
53,878
46,966
Less allowance for loan losses
(34,668
(27,174
Total Assets
3,593,841
3,091,724
Liabilities and Shareholders Equity:
Interest-bearing liabilities:
Demand and savings
1,364,648
1,546
0.45
1,401,351
0.07
Time
548,307
5,988
4.38
228,733
463
3,113
0.00
3,107
17
2.19
75,000
1.03
13,018
132
4.07
103,854
4.62
103,714
3.44
Repurchase Agreements
13,234
0.06
21,291
Total interest-bearing liabilities
2,288,563
2.10
1,830,089
0.39
Noninterest-bearing deposits
904,757
894,887
Other liabilities
52,874
53,476
Shareholders’ Equity
347,647
313,272
Total Liabilities and Shareholders’ Equity
Net interest income and interest rate spread
3.21
3.28
Net interest margin
3.86
3.43
*—Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $617 and $501 for the periods ended June 30, 2023 and 2022, respectively.
**—Average balance includes nonaccrual loans.
Page 48
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 June 30, 2023 and 2022.
Increase (decrease) due to:
Volume (1)
Rate (1)
Net
(Dollars in thousands)
Interest income:
6,959
9,168
16,127
644
148
437
(937
435
(502
Total interest income
6,876
10,395
17,271
Interest expense:
1,306
1,299
1,333
4,192
5,525
3,114
(281
(176
Federal funds purchased
306
Repurchase agreements
4,291
5,909
10,200
2,585
4,486
7,071
The Company provides for loan losses through regular provisions to the allowance for loan losses. Upon adoption of CECL on January 1, 2023, we recorded an increase in the allowance for credit losses of $5,193. During the second quarter of 2023 we recorded a provision for credit losses of $861, an increase of $461, from $400 during the three months ended June 30, 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 June 30, 2023 and 2022 are as follows:
Three months ended June 30,
18.9
-100.0
(209
-535.9
7.3
95
7.0
(48
-3.9
0.0
33.5
954
512.9
3,514
62.4
Page 49
Noninterest income for the three months ended June 30, 2023 was $9,149, an increase of $3,514, or 62.4%, from $5,635 for the same period of 2022. The increase was primarily due to the addition of Lease revenue and residual income of $2,201 for the three months ended June 30, 2023, as a result of the acquisition of Vision Financial Group, Inc. (VFG) in October 2022, coupled with increases in service charges and other income. Service charges increased $169, split between increases on personal and business deposit accounts. Overdraft fees also increased by $122. 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 June 30, 2023, 103 loans were sold, totaling $16,200. During the three months ended June 30, 2022, 186 loans were sold, totaling $35,494. Other income also increased as result of a $553 increase related to the timing of claims at the Company’s reinsurance subsidiary and $581 in interim rent at VFG.
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, 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 June 30, 2023 and 2022 are as follows:
3,031
25.4
343
33.4
2,204
392.2
126
29.1
171.3
26
4.1
30
2.5
182
83.9
73
13.5
160
42.1
34.1
756
30.9
37.0
Noninterest expense for the three months ended June 30, 2023 was $27,913, an increase of $7,534, or 37.0%, from $20,379 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. The increase in compensation expense was primarily due to a $2,312 increase in salaries related to the acquisitions of Comunibanc and VFG during 2022. The average full time equivalent (FTE) employees were 532.3 for the quarter ended June 30,2023, an increase of 80 FTEs over the same period of 2022, due to the acquisitions. 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 $2,067 due to increases in equipment depreciation related to the acquisition of VFG. The quarter-over-quarter increase in FDIC assessments was attributable to an increase in the assessment rate charged. The increase in amortization of intangible assets is related to the core deposit intangible associated with the merger with Comunibanc Corp. The increase in software maintenance expense is due to a general increase in legacy software maintenance contracts and increases related to our new digital banking. The increase in other operating expense is primarily due to a $264 provision for credit losses on unfunded commitments, an increase in promotional expenses of $43, loan related expenses of $25, bad check losses of $32, and general insurance of $57.
Income tax expense for the three months ended June 30, 2023 totaled $1,680, up $257 compared to the same period in 2022. The effective tax rates for the three-month periods ended June 30, 2023 and 2022 were 14.3% 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, tax-deductible captive insurance premiums and bank owned life insurance income.
Page 50
Six Months Ended June 30, 2023 and 2022
The Company had net income of $22,922 for the six months ended June 30, 2023, an increase of $6,755 from net income of $16,167 for the same six months of 2022. Basic earnings per common share were $1.45 for the period ended June 30, 2023, compared to $1.10 for the same period in 2022. Diluted earnings per common share were $1.45 for the period ended June 30, 2023, compared to $1.10 for the same period in 2022. The primary reasons for the changes in net income are explained below.
Net interest income for the six months ended June 30, 2023 was $63,940, an increase of $16,740, from $47,200 in the same six months of 2022. This increase is the result of an increase of $34,144 in total interest income, partially offset by an increase of $17,404 in interest expense. Interest-earning assets averaged $3,235,444 during the six months ended June 30, 2023, an increase of $394,825 from $2,840,619 for the same period of 2022. The Company’s average interest-bearing liabilities increased from $1,419,116 for the first six months of 2023 to $2,248,307 for the same period in 2022. The Company’s fully tax equivalent net interest margin for the six months ended June 30, 2023 and 2022 was 3.99% and 3.40%, respectively.
Total interest income increased $34,144 to $84,874 for the period ended June 30, 2023 This change was the result of an increase in the average balance of loans, accompanied by a higher yield on the portfolio. The average balance of loans decreased by $550,766, or 27.0%, to $2,571,020 for the period ended June 30, 2023, as compared to $2,020,254 for the period ended June 30, 2022. The loan yield increased to 5.83% for 2023, from 4.28% in 2022. During the six months ended June 30, 2023, the average balance of PPP loans was $480. These loans had an average yield of 0.96%, which includes the amortization of PPP fees.
Interest on taxable securities increased $2,323 to $5,818 for the period ended June 30, 2023, compared to $3,495 for the same period in 2022. The average balance of taxable securities increased $66,586 to $372,413 for the period ended June 30, 2023, as compared to $305,827 for the period ended June 30, 2022. The yield on taxable securities increased 65 basis points to 2.86% for 2023, compared to 2.21% for 2022. Interest on tax-exempt securities increased $911 to $4,582 for the period ended June 30, 2023, compared to $3,671 for the same period in 2022. The average balance of tax-exempt securities increased $24,869 to $284,845 for the period ended June 30, 2023, as compared to $259,976 for the period ended June 30, 2022. The yield on tax-exempt securities increased 21 basis points to 3.80% for 2023, compared to 3.59% for 2022.
Interest on interest-bearing deposits in other banks decreased $576 to $99 for the period ended June 30, 2023, compared to $675 for the same period in 2022. The average balance of interest-bearing deposits in other banks decreased $247,396 to $7,166 for the period ended June 30, 2023, as compared to $234,562 for the period ended June 30, 2022. The yield on interest-bearing deposits in other banks increased 223 basis points to 2.76% for 2023, compared to 0.53% for 2022.
Interest expense increased $17,404, or 93%, to $20,934 for the period ended June 30, 2023, compared with $3,530 for the same period in 2022. The change in interest expense can be attributed to an increase in rate and an increase in the average balance of interest-bearing liabilities. For the period ended June 30, 2023, the average balance of interest-bearing liabilities increased $419,116 to $2,248,307, compared to $1,829,191 for the period ended June 30, 2022. Interest incurred on deposits increased by $9,351 to $10,766 for the period ended June 30, 2023, compared to $1,415 for the same period in 2022. The average balance of interest-bearing deposits increased by $176,270 during the period and the rate paid on demand and savings accounts increased from 0.07% in 2022 to 0.39% in 2023. The rate paid on time deposits increased from 0.80% in 2022 to 3.82% in 2023. The average balance on long-term FHLB balances decreased $71,726 as a result of prepayment, while the rate paid increased 125 basis points. In addition, the average balance of short-term FHLB balances increased to $306,774, compared to the same period in 2022. The rate paid on subordinated debentures increased 124 basis points for the period ended June 30, 2023, as compared to the same period in 2022.
The following table presents the condensed average balance sheets for the six months ended June 30, 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.
Page 51
2,571,020
5.83
2,020,254
4.28
372,413
2.85
305,827
2.21
284,845
3.80
259,976
3.59
7,166
2.79
254,562
3,235,444
5.27
2,840,619
3.65
44,584
133,452
62,002
22,292
10,924
7,577
135,625
84,270
60,478
41,838
53,754
46,847
(32,555
(26,976
3,570,256
3,149,919
1,374,305
2,629
1,392,411
481
429,016
8,137
3.82
234,640
934
0.80
Short-term FHLB advance
7,370
Long-term FHLB advance
3,274
37
2.28
13,752
4.49
6.07
103,834
4.60
103,713
3.36
17,008
0.05
23,249
2,248,307
1.88
1,829,191
926,929
914,163
50,599
76,372
344,421
330,193
3.39
3.26
3.99
3.40
*—Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $1,219 and $977 for the periods ended June 30, 2023 and 2022, respectively.
Page 52
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.
13,512
17,975
31,487
1,159
2,323
693
910
(1,174
598
(576
14,195
19,949
34,144
2,154
5,904
7,203
(562
(346
639
641
(2
8,491
8,913
17,404
5,704
11,036
16,740
(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 on January 1, 2023, we recorded an increase in the allowance for credit losses of $5,193. During the six months ended June 30, 2023 we recorded a provision for credit losses of $1,481, an increase of $781, from $700 during the six months ended June 30, 2022. The increase in the reserves was principally related to loan growth during the year. 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.
The components of noninterest income for the six-month periods ended June 30, 2023 and 2022 were as follows:
Six months ended June 30,
485
15.5
(327
-367.4
(263
-17.4
8.0
-5.3
87
18.2
2,464
409.3
6,939
52.3
Page 53
Noninterest income for the six months ended June 31, 2023 was $20,217, an increase of $6,939, or 52.3%, from $13,278 for the same period of 2022. The increase was primarily due to increases in Lease revenue and residual income of $4,247 due to the acquisition of VFG during the fourth quarter of 2022. Service charges increased $273, split between increases on personal and business deposit accounts. Overdraft fees also increased by $212. The Net gain/loss on equity securities decrease was the result of a market valuation adjustment. 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, 2023, 166 loans were sold, totaling $25,939. During the six-months ended June 30, 2022, 394 loans were sold, totaling $73,659. Other income increased primarily as result of a $1,500 fee collected associated with the renewal of the Company's contract with MasterCard. Other income also increased as result of a $361 increase related to the timing of claims at the Company’s reinsurance subsidiary and $581 in interim rent at VFG.
Tax refund processing fees were $2,375 for each of the six months ended June 30, 2023 and 2022. 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.
The components of noninterest expense for the six-month periods ended June 30, 2023 and 2022 are as follows:
5,913
24.5
552
4,470
422.9
95.2
(39
-3.2
536
23.7
363
83.6
13.3
348
49.9
439
29.3
1,782
38.6
14,909
36.7
Noninterest expense for the six months ended June 30, 2023 was $55,546, an increase of $14,909, or 36.7%, from $40,637 reported for the same period of 2022. The primary reasons for the increase were increases in compensation expense, equipment expense, FDIC assessment, professional fees, amortization expense, software maintenance expense and other operating expense. The increase in compensation expense was primarily due to a $4,418 increase in salaries related to the acquisitions of Comunibanc and VFG during 2022. The average full time equivalent (FTE) employees were 532.4 for the six months ended June 30,2023, an increase of 84 FTEs over the same period of 2022, due to the acquisitions. 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 $4,100 due to increases in equipment depreciation related to the acquisition of VFG. The year-over-year increase in FDIC assessments was attributable to an increase in the assessment rate charged. The increase in amortization of intangible assets is related to the core deposit intangible associated with the merger with Comunibanc Corp. The increase in software maintenance expense is due to a general increase in legacy software maintenance contracts and increases related to our new digital banking. The increase in other operating expense is primarily due to a $465 provision for credit losses on unfunded commitments, an increase in promotional expenses of $116, loan related expenses of $146, bad check losses of $234, and general insurance of $102.
Income tax expense for the six months ended June 30, 2023 totaled $4,208, up $1,234 compared to the same period in 2022. The effective tax rates both six-month periods ended June 30, 2023 and 2022 was 15.5%. 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, tax-deductible captive insurance premiums and bank owned life insurance income.
Page 54
Capital Resources
Shareholders’ equity totaled $349,876 at June 30, 2023, compared to $334,835 at December 31, 2022. Shareholders’ equity increased during the first six months of 2023 as a result of an increase in the fair value of securities available-for-sale, net of tax, of $2,275 and net income of $22,922, offset by dividends on common shares of $4,568, 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 of June 30, 2023 and December 31, 2022 as identified in the following table:
Total RiskBasedCapital
Tier I RiskBasedCapital
CET1 RiskBasedCapital
LeverageRatio
Company Ratios—June 30, 2023
14.8
10.9
9.9
8.9
Company Ratios—December 31, 2022
14.5
10.8
9.7
For Capital Adequacy Purposes
6.0
4.5
4.0
To Be Well Capitalized Under Prompt
Corrective Action Provisions
10.0
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 $6,064, or 0.98% of the total security portfolio at June 30, 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 $39,124 and $47,628 for the six months ended June 30, 2023 and 2022, respectively. The primary decrease 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 $85,510 and $94,617 for the six months ended June 30, 2023 and 2022, respectively, principally reflecting our loan and investment security activities. Cash provided by and used for deposits along with an increase in short term FHLB advances comprised most of our financing activities, which resulted in net cash provided by of $44,379 and $16,031 for the six months ended June 30, 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 of June 30, 2023, Civista had total credit availability with the FHLB of $878,547 with standby letters of credit totaling $32,900 and a remaining borrowing capacity of approximately $700,788. 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 of June 30, 2023.
Page 55
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure.
Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Company’s safety and soundness.
Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issue policy statements and guidance on sound practices for managing interest-rate risk, which form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The guidance also outlines fundamental elements of sound management and discusses the importance of these elements in the context of managing interest-rate risk. The guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk.
Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.
Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company’s primary asset/liability management technique is the measurement of the Company’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities.
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Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. The Company has not purchased derivative financial instruments to hedge interest rate risk in the past and does not currently intend to purchase such instruments in the near future. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refinance its obligations at new, lower rates. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short-term or due on demand, while most of its assets may be invested in long-term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Company.
The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2022 and June 30, 2023, based on certain prepayment and account decay assumptions that management believes are reasonable. The table shows the changes in the Company’s net portfolio value (in amount and percent) that would result from hypothetical interest rate increases of 200 basis points and 100 basis points and interest rate decreases of 100 basis points and 200 basis points at June 30, 2023 and December 31, 2022.
Net Portfolio Value
Change in Rates
DollarAmount
DollarChange
PercentChange
+200bp
597,147
25,067
571,328
14,733
+100bp
587,920
15,840
566,596
10,001
Base
572,080
556,595
-100bp
557,879
(14,201
)%
548,575
(8,020
-200bp
530,125
(41,955
526,702
(29,893
The change in net portfolio value from December 31, 2022 to June 30, 2023, can be attributed to a couple of factors. The yield curve has inverted since the end of the year, and both the volume and mix of assets and funding sources has changed. The volume of loans has increased, and the asset mix remains centered on loans. The volume of certificates of deposit have increased and borrowed money has decreased. The volume and mix shifts from the end of the year contributed to an increase in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a larger decrease in the market value of liabilities than a small increase in assets. Accordingly, we see an increase in the net portfolio value. The change in the rates down scenario for both the 100 and 200 basis point movements would lead to a larger increase in the market value of liabilities than a small decrease in assets, leading to a decrease in the net portfolio value.
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ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive and our principal financial officers, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive and our principal financial officers concluded that our disclosure controls and procedures as of June 30, 2023, were effective.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II—Other Information
Item 1. Legal Proceedings
In the ordinary course of their respective businesses, CBI or Civista or their respective properties may be named or otherwise subject as a plaintiff, defendant or other party to various pending and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the outcome of such matters, the Company cannot state what the eventual outcome of any such matters will be. However, based on current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of CBI or Civista.
Item 1A. Risk Factors
The following information updates our risk factors and should be read in conjunction with the risk factors disclosed in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. A detailed discussion of our risk factors is included in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as supplemented by “Item IA. Risk Factors” of Part II of the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the quarter ended June 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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Item 6. Exhibits
Exhibit
Description
Location
2.1
Agreement and Plan of Merger, dated January 10, 2022 by and between Civista Bancshares, Inc. and Comunibanc Corp.
Filed as Exhibit 2.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on January 10, 2022 and incorporated herein by reference. (File No. 001-36192)
2.2
Stock Purchase Agreement, dated as of September 29, 2022, by and among Civista Bancshares, Inc., Civista Bank, Vision Financial Group, Inc. and Frederick Summers
Filed as Exhibit 2.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K filed on September 30, 2022 and incorporated herein by reference. (File No. 001-36192)
3.1
Second Amended and Restated Articles of Incorporation of Civista Bancshares, Inc., as filed with the Ohio Secretary of State on November 15, 2018.
Filed as Exhibit 3.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K, filed on November 16, 2018 and incorporated herein by reference. (File No. 001-36192)
3.2
Amended and Restated Code of Regulations of Civista Bancshares, Inc. (adopted April 15, 2008)
Filed as Exhibit 3.2 to Civista Bancshares, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed on November 8, 2017 and incorporated herein by reference. (File No. 001-36192)
31.1
Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer.
Included herewith
31.2
Rule 13a-14(a)/15-d-14(a) Certification of Principal Accounting Officer.
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, formatted in Inline Extensible Business Reporting Language: (i) Consolidated Balance Sheets (Unaudited) as of June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income (Unaudited) for the three-months ended June 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the three and six-months ended June 30, 2023 and 2022; (iv) Consolidated Statement of Shareholders’ Equity (Unaudited) for the three and six-months ended June 30, 2023 and 2022; (v) Condensed Consolidated Statement of Cash Flows (Unaudited) for the three and six-months ended June 30, 2023 and 2022; and (vi) Notes to Interim Consolidated Financial Statements (Unaudited).
104
Cover page formatted in Inline Extensible Business Reporting Language.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Dennis G. Shaffer
August 9, 2023
Dennis G. Shaffer
Date
Chief Executive Officer and President
/s/ Todd A. Michel
Todd A. Michel
Senior Vice President, Controller
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