CIVISTA BANCSHARES, INC. - FORM 10-Q

CIVISTA BANCSHARES, INC. - FORM 10-Q - August 8, 2017

Attached files

Attached files

file	filename
EX-32.2 - EX-32.2 - CIVISTA BANCSHARES, INC.	d422493dex322.htm
EX-32.1 - EX-32.1 - CIVISTA BANCSHARES, INC.	d422493dex321.htm
EX-31.2 - EX-31.2 - CIVISTA BANCSHARES, INC.	d422493dex312.htm
EX-31.1 - EX-31.1 - CIVISTA BANCSHARES, INC.	d422493dex311.htm

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, 2017

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

For the transition period from to

Commission File Number: 001-36192

Civista Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Ohio

34-1558688

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


100 East Water Street, Sandusky, Ohio		44870
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (419) 625-4121

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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” or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

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 4, 2017—10,170,779 shares

CIVISTA BANCSHARES, INC.

Index



PART I.	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets (Unaudited) June 30, 2017 and December 31, 2016	2
	Consolidated Statements of Operations (Unaudited) Three and six months ended June 30, 2017 and 2016	3
	Consolidated Statements of Comprehensive Income (Unaudited) Three and six months ended June 30, 2017 and 2016	4
	Condensed Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) Six months ended June 30, 2017	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 2017 and 2016	6
	Notes to Interim Consolidated Financial Statements (Unaudited)	7-53
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54-69
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	70-72
Item 4.	Controls and Procedures	73

PART II.	Other Information
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	74
Signatures		75

Part I – Financial Information

ITEM 1.

Financial Statements

CIVISTA BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)


ASSETS	June 30, 2017			December 31, 2016
Cash and due from financial institutions	$	39,515		$	36,695
Securities available for sale		230,197			195,864
Loans held for sale		4,728			2,268
Loans, net of allowance of $13,047 and $13,305		1,087,770			1,042,201
Other securities		14,225			14,055
Premises and equipment, net		17,777			17,920
Accrued interest receivable		3,928			3,854
Goodwill		27,095			27,095
Other intangibles		1,494			1,784
Bank owned life insurance		24,839			24,552
Other assets		10,447			10,975

Total assets	$	1,462,015		$	1,377,263

LIABILITIES
Deposits
Noninterest-bearing	$	391,619		$	345,588
Interest-bearing		773,269			775,515

Total deposits		1,164,888			1,121,103
Federal Home Loan Bank advances		63,300			48,500
Securities sold under agreements to repurchase		12,730			28,925
Subordinated debentures		29,427			29,427
Accrued expenses and other liabilities		12,827			11,692

Total liabilities		1,283,172			1,239,647

SHAREHOLDERS’ EQUITY
Preferred shares, no par value, 200,000 shares authorized, Series B Preferred stock, $1,000 liquidation preference, 18,987 shares issued at June 30, 2017 and 20,481 shares issued at December 31, 2016, net of issuance costs		17,568			18,950
Common shares, no par value, 20,000,000 shares authorized, 10,917,145 shares issued at June 30, 2017 and 9,091,473 shares issued at December 31, 2016		153,495			118,975
Retained earnings		25,751			19,263
Treasury shares, 747,964 shares at cost		(17,235	)		(17,235	)
Accumulated other comprehensive loss		(736	)		(2,337	)

Total shareholders’ equity		178,843			137,616

Total liabilities and shareholders’ equity	$	1,462,015		$	1,377,263

See notes to interim unaudited consolidated financial statements

Page 2

CIVISTA BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)


	Three months ended June 30,					Six months ended June 30,
	2017		2016			2017		2016
Interest and dividend income
Loans, including fees	$	12,412	$	12,170		$	24,189	$	23,487
Taxable securities		940		821			1,787		1,622
Tax-exempt securities		784		661			1,496		1,315
Federal funds sold and other		92		87			448		367

Total interest income		14,228		13,739			27,920		26,791

Interest expense
Deposits		428		485			892		974
Federal Home Loan Bank advances		170		91			258		201
Subordinated debentures		258		218			499		430
Other		5		5			10		11

Total interest expense		861		799			1,659		1,616

Net interest income		13,367		12,940			26,261		25,175
Provision (credit) for loan losses		—		(1,300	)		—		(1,300	)

Net interest income after provision (credit) for loan losses		13,367		14,240			26,261		26,475

Noninterest income
Service charges		1,387		1,391			2,432		2,520
Net gain on sale of securities		—		6			—		1
Net gain on sale of loans		478		406			735		800
ATM fees		567		535			1,076		1,043
Wealth management fees		738		666			1,445		1,300
Bank owned life insurance		143		151			287		266
Tax refund processing fees		550		550			2,750		2,750
Other		238		370			512		655

Total noninterest income		4,101		4,075			9,237		9,335

Noninterest expense
Salaries, wages and benefits		7,178		6,354			14,296		12,678
Net occupancy expense		655		670			1,312		1,301
Equipment expense		418		368			747		664
Contracted data processing		429		395			818		750
FDIC assessment		133		179			298		431
State franchise tax		255		240			512		458
Professional services		733		517			1,184		1,019
Amortization of intangible assets		158		172			325		355
ATM expense		214		75			468		196
Marketing		276		275			528		561
Other operating expenses		2,100		1,805			3,563		3,544

Total noninterest expense		12,549		11,050			24,051		21,957

Income before taxes		4,919		7,265			11,447		13,853
Income tax expense		1,323		2,084			3,216		3,947

Net Income		3,596		5,181			8,231		9,906
Preferred stock dividends		308		391			627		782

Net income available to common shareholders	$	3,288	$	4,790		$	7,604	$	9,124

Earnings per common share, basic	$	0.32	$	0.61		$	0.79	$	1.16

Earnings per common share, diluted	$	0.29	$	0.47		$	0.68	$	0.91

See notes to interim unaudited consolidated financial statements

Page 3

CIVISTA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)


	Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016
Net income	$	3,596		$	5,181		$	8,231		$	9,906
Other comprehensive income:
Unrealized holding gains on available for sale securities		1,454			1,593			1,905			3,498
Tax effect		(495	)		(542	)		(647	)		(1,189	)
Pension liability adjustment		426			83			520			166
Tax effect		(145	)		(28	)		(177	)		(56	)

Total other comprehensive income		1,240			1,106			1,601			2,419

Comprehensive income	$	4,836		$	6,287		$	9,832		$	12,325

See notes to interim unaudited consolidated financial statements

Page 4

CIVISTA BANCSHARES, INC.

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

(In thousands, except share data)


	Preferred Shares						Common Shares										Accumulated Other			Total
	Outstanding Shares			Amount			Outstanding Shares		Amount		Retained Earnings			Treasury Shares			Comprehensive Loss			Shareholders’ Equity
Balance, December 31, 2016		20,481		$	18,950			8,343,509	$	118,975	$	19,263		$	(17,235	)	$	(2,337	)	$	137,616
Net Income		—			—			—		—		8,231			—			—			8,231
Other comprehensive income		—			—			—		—		—			—			1,601			1,601
Conversion of Series B preferred shares to common shares		(1,494	)		(1,382	)		190,970		1,382		—			—			—			—
Common stock issuance, net of costs		—			—			1,610,000		32,821		—			—			—			32,821
Stock-based compensation		—			—			24,702		317		—			—			—			317
Common stock dividends ($0.12 per share)		—			—			—		—		(1,116	)		—			—			(1,116	)
Preferred stock dividend		—			—			—		—		(627	)		—			—			(627	)

Balance, June 30, 2017		18,987		$	17,568			10,169,181	$	153,495	$	25,751		$	(17,235	)	$	(736	)	$	178,843

See notes to interim unaudited consolidated financial statements

Page 5

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Six months ended June 30,
	2017			2016
Net cash from operating activities	$	8,223		$	7,866

Cash flows used for investing activities:
Maturities and calls of securities, available-for-sale		15,385			14,684
Purchases of securities, available-for-sale		(48,444	)		(18,295	)
Sale of securities available for sale		—			1,994
Purchases of other securities		(170	)		(282	)
Purchase of bank owned life insurance		—			(3,885	)
Net loan originations		(45,318	)		(23,919	)
Loans purchased, installment		—			(1,884	)
Proceeds from sale of other real estate owned properties		72			106
Proceeds from sale of premises and equipment		139			—
Premises and equipment purchases		(535	)		(367	)

Net cash used for investing activities		(78,871	)		(31,848	)

Cash flows from financing activities:
Repayment of long-term FHLB advances		(2,500	)		—
Net change in short-term FHLB advances		17,300			(23,900	)
Increase in deposits		43,785			62,974
Decrease in securities sold under repurchase agreements		(16,195	)		(7,315	)
Net proceeds from common stock issuance		32,821			—
Common dividends paid		(1,116	)		(784	)
Preferred dividends paid		(627	)		(782	)

Net cash provided by financing activities		73,468			30,193

Increase in cash and due from financial institutions		2,820			6,211
Cash and due from financial institutions at beginning of period		36,695			35,561

Cash and due from financial institutions at end of period	$	39,515		$	41,772

Cash paid during the period for:
Interest	$	1,740		$	1,615
Income taxes		2,600			2,550
Supplemental cash flow information:
Transfer of loans from portfolio to other real estate owned		78			73
Transfer of premises to held-for-sale		3			—
Transfer of loans held for sale to portfolio		419			—
Conversion of preferred shares to common shares		1,382			149
Securities purchased not settled		1,073			—

See notes to interim unaudited consolidated financial statements

Page 6

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(1) Consolidated Financial Statements

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

The Consolidated Financial Statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2017 and its results of operations and changes in cash flows for the periods ended June 30, 2017 and 2016 have been made. The accompanying Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the periods ended June 30, 2017 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 2016 annual report. The Company has consistently followed these policies in preparing this Form 10-Q.

The Company provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Madison, Summit, Huron, Ottawa, Richland, Montgomery and Cuyahoga. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. The bank has two concentrations, one is to Lessors of Non-Residential Buildings and Dwellings totaling $265,921, or 24.1% of total loans, as of June 30, 2017 and the other is to Lessors of Residential Buildings and Dwellings totaling $147,812, or 13.4% of total loans, as of June 30, 2017. These segments of the portfolio are stable and have been conservatively underwritten, monitored and managed by experienced commercial bankers. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include Federal Funds sold and deposit accounts in other financial institutions that are in excess of federally insured limits.

Page 7

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

First Citizens Insurance Agency, Inc. was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue was less than 1.0% of total revenue through June 30, 2017. Revenue from Water St. was less than 1.0% of total revenue through June 30, 2017. Management considers the Company to operate primarily in one reportable segment, banking.

(2) Significant Accounting Policies

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, impairment of goodwill, fair values of financial instruments, deferred taxes and pension obligations are particularly subject to change.

Income Taxes: Income tax expense is based on the effective tax rate expected to be applicable for the entire year. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Business Combinations: At the date of acquisition the Company records the assets and liabilities of the acquired companies on the Consolidated Balance Sheet at their estimated fair value. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Operations during the period incurred.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Such reclassifications had no effect on net income or shareholders’ equity.

Derivative Instruments and Hedging Activities: The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. All derivatives are accounted for in accordance with ASC-815, Derivatives and Hedging. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated balance sheets. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes because the Company does not currently intend to execute a setoff with its’ counterparties. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds.

Page 8

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Effect of Newly Issued but Not Yet Effective Accounting Standards:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) to defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, we do not expect the new standard, or any of the amendments, to result in a material change from our current accounting for revenue because the majority of the Company’s financial instruments are not within the scope of Topic 606. However, we do expect that the standard will result in new disclosure requirements, which are currently being evaluated.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other

Page 9

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard in this Update requires lessees to recognize the assets and liabilities that arise from leases on the balance sheet. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. A short-term lease is defined as one in which: (a) the lease term is 12 months or less, and (b) there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise. For short-term leases, lessees may elect to recognize lease payments over the lease term on a straight-line basis. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. The amendments should be applied at the beginning of the earliest period presented using a modified retrospective approach with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently assessing the practical expedients it may elect at adoption, but does not anticipate the amendments will have a significant impact to the financial statements. Based on the Company’s preliminary analysis of its current portfolio, the impact to the Company’s balance sheet is estimated to result in less than a 1% increase in assets and liabilities. The Company also anticipates additional disclosures to be provided at adoption.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of ASU 2016-13 is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial statements.

Page 10

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which addresses eight specific cash flow issues with the objective of reducing diversity in practice. Among these include recognizing cash payments for debt prepayment or debt extinguishment as cash outflows for financing activities; cash proceeds received from the settlement of insurance claims should be classified on the basis of the related insurance coverage; and cash proceeds received from the settlement of bank-owned life insurance policies should be classified as cash inflows from investing activities while the cash payments for premiums on bank-owned policies may be classified as cash outflows for investing activities, operating activities, or a combination of investing and operating activities. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s statement of cash flows.

In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810) (“ASU 2016-17”), which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (“VIE”) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. Under the amendments, a single decision maker is not required to consider indirect interests held through related parties that are under common control with the single decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include those interests on a proportionate basis consistent with indirect interests held through other related parties. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Page 11

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). This Update, among others things, clarifies that guarantee fees within the scope of Topic 460, Guarantees, (other than product or service warranties) are not within the scope of Topic 606. The effective date and transition requirements for ASU 2016-20 are the same as the effective date and transition requirements for the new revenue recognition guidance. For public entities with a calendar year-end, the new guidance is effective in the quarter and year beginning January 1, 2018. For all other entities with a calendar year-end, the new guidance is effective in the year ending December 31, 2019, and interim periods in 2020. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business (“ASU 2017-01”), which provides a more robust framework to use in determining when a set of assets and activities (collectively referred to as a “set”) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update should be applied prospectively on or after the effective date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In January 2017, the FASB issued ASU 2017-04, 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 a U.S. Securities and Exchange Commission (“SEC”) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. A public business entity that is not an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years

Page 12

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

beginning after December 15, 2020. All other entities, including not-for-profit entities, that are adopting the amendments in this Update should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2021. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2017, the FASB issued ASU 2017-07, Compensation—Retirement Benefits (Topic 715). The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in paragraphs 715-30-35-4 and 715-60-35-9 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), which affects any entity that changes the terms or conditions of a share-based payment award. This Update amends the definition of modification by qualifying that modification accounting does not apply to changes to outstanding share-based payment awards that do not affect the total fair value, vesting requirements, or equity/liability classification of the awards. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for

Page 13

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivative and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down-round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down-round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down-round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (“EPS”) in accordance with Topic 260 to recognize the effect of the down-round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down- round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Accounting Standards Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in Part I of this Update should be applied either retrospectively to outstanding financial instruments with a down-round feature by means of a cumulative-effect adjustment to the statement of financial position as of the beginning of the first fiscal year and interim period(s) in which the pending content that links to this paragraph is effective or retrospectively to outstanding financial instruments with a down-round feature for each prior reporting period presented in accordance with the guidance on accounting changes in paragraphs 250-10-45-5 through 45-10. The amendments in Part II of this Update do not require any transition guidance because those amendments do not have an accounting effect. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Page 14

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(3) Securities

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


June 30, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities and obligations of U.S. government agencies	$	35,690	$	158	$	(85	)	$	35,763
Obligations of states and political subdivisions		104,811		4,386		(255	)		108,942
Mortgage-backed securities in government sponsored entities		84,266		853		(384	)		84,735

Total debt securities		224,767		5,397		(724	)		229,440
Equity securities in financial institutions		481		276		—			757

Total	$	225,248	$	5,673	$	(724	)	$	230,197


December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities and obligations of U.S. government agencies	$	37,406	$	117	$	(77	)	$	37,446
Obligations of states and political subdivisions		92,177		3,395		(574	)		94,998
Mortgage-backed securities in government sponsored entities		62,756		483		(597	)		62,642

Total debt securities		192,339		3,995		(1,248	)		195,086
Equity securities in financial institutions		481		297		—			778

Total	$	192,820	$	4,292	$	(1,248	)	$	195,864

Page 15

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The amortized cost and fair value of securities at June 30, 2017, by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities and equity securities are shown separately.


Available for sale	Amortized Cost		Fair Value
Due in one year or less	$	4,800	$	4,801
Due after one year through five years		33,657		33,779
Due after five years through ten years		31,566		33,177
Due after ten years		70,478		72,948
Mortgage-backed securities		84,266		84,735
Equity securities		481		757

Total securities available for sale	$	225,248	$	230,197

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


	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016
Sale proceeds	$	—	$	1,994	$	—	$	1,994
Gross realized gains		—		—		—		—
Gross realized losses		—		—		—		—
Gains from securities called or settled by the issuer		—		6		—		1

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $138,078 and $139,179 as of June 30, 2017 and December 31, 2016, respectively.

Page 16

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Securities with unrealized losses at June 30, 2017 and December 31, 2016 not recognized in income are as follows:


June 30, 2017	12 Months or less					More than 12 months					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	20,067	$	(73	)	$	821	$	(12	)	$	20,888	$	(85	)
Obligations of states and political subdivisions		11,377		(188	)		1,547		(67	)		12,924		(255	)
Mortgage-backed securities in gov’t sponsored entities		28,040		(332	)		3,110		(52	)		31,150		(384	)

Total temporarily impaired	$	59,484	$	(593	)	$	5,478	$	(131	)	$	64,962	$	(724	)


December 31, 2016	12 Months or less					More than 12 months					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	13,271	$	(61	)	$	893	$	(16	)	$	14,164	$	(77	)
Obligations of states and political subdivisions		17,167		(558	)		519		(16	)		17,686		(574	)
Mortgage-backed securities in gov’t sponsored entities		35,453		(566	)		2,849		(31	)		38,302		(597	)

Total temporarily impaired	$	65,891	$	(1,185	)	$	4,261	$	(63	)	$	70,152	$	(1,248	)

At June 30, 2017, there were fifty-six securities in the portfolio with unrealized losses mainly due to higher market rates when compared to the time of purchase. Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to market yields increasing across the municipal sector. The fair value is expected to recover as the securities approach their maturity date or reset date. The Company does not intend to sell until recovery and does not believe selling will be required before recovery.

Page 17

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(4) Loans

Loan balances were as follows:


	June 30, 2017			December 31, 2016
Commercial and agriculture	$	143,708		$	135,462
Commercial real estate- owner occupied		172,262			161,364
Commercial real estate- non-owner occupied		405,876			395,931
Residential real estate		258,580			247,308
Real estate construction		63,538			56,293
Farm Real Estate		39,069			41,170
Consumer and other		17,784			17,978

Total loans		1,100,817			1,055,506
Allowance for loan losses		(13,047	)		(13,305	)

Net loans	$	1,087,770		$	1,042,201

Included in total loans above are deferred loan fees of $4 at June 30, 2017 and $94 at December 31, 2016.

(5) Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan and lease losses, the Company has segmented certain loans in the portfolio by product type. Loss migration rates for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve. The following economic factors are analyzed:

•

Changes in lending policies and procedures

•

Changes in experience and depth of lending and management staff

•

Changes in quality of credit review system

•

Changes in nature and volume of the loan portfolio

•

Changes in past due, classified and nonaccrual loans and TDRs

•

Changes in economic and business conditions

•

Changes in competition or legal and regulatory requirements

•

Changes in concentrations within the loan portfolio

•

Changes in the underlying collateral for collateral dependent loans

Page 18

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $13,047 adequate to cover loan losses inherent in the loan portfolio, at June 30, 2017. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and six months ended June 30, 2017 and 2016.

Allowance for loan losses:

For the six months ended June 30, 2017


June 30, 2017	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	2,018	$	(1	)	$	83	$	(492	)	$	1,608
Commercial Real Estate:
Owner Occupied		2,171		(210	)		18		31			2,010
Non-Owner Occupied		4,606		—			9		124			4,739
Residential Real Estate		3,089		(196	)		87		(304	)		2,676
Real Estate Construction		420		—			19		43			482
Farm Real Estate		442		—			—		(17	)		425
Consumer and Other		314		(81	)		14		77			324
Unallocated		245		—			—		538			783

Total	$	13,305	$	(488	)	$	230	$	—		$	13,047

For the six months ended June 30, 2017, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower loss rates, offset by an increase in the specific reserves required for this type. The result of these changes was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves as a result of lower loss rates. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by lower loss rates. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan and recoveries. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances. The result of these changes was represented as a decrease in the provision. The allowance for Consumer and Other loans was increased by an increase in general reserves required for this type as a result of higher loss rates. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio.

Page 19

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the six months ended June 30, 2016


	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,478	$	(42	)	$	35	$	86		$	1,557
Commercial Real Estate:
Owner Occupied		2,467		(42	)		52		(84	)		2,393
Non-Owner Occupied		4,657		—			1,359		(1,047	)		4,969
Residential Real Estate		4,086		(225	)		361		(323	)		3,899
Real Estate Construction		371		—			2		(7	)		366
Farm Real Estate		538		—			—		(62	)		476
Consumer and Other		382		(47	)		33		(10	)		358
Unallocated		382		—			—		147			529

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

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

Page 20

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the three months ended June 30, 2017


	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,569	$	—		$	27	$	12		$	1,608
Commercial Real Estate:
Owner Occupied		2,259		(210	)		16		(55	)		2,010
Non-Owner Occupied		4,543		—			4		192			4,739
Residential Real Estate		3,022		(107	)		32		(271	)		2,676
Real Estate Construction		413		—			14		55			482
Farm Real Estate		407		—			—		18			425
Consumer and Other		354		(40	)		11		(1	)		324
Unallocated		733		—			—		50			783

Total	$	13,300	$	(357	)	$	104	$	—		$	13,047

For the three months ended June 30, 2017, the increase in the allowance for Commercial & Agriculture loans was due to an increase in general reserves as a result of higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves as a result of lower loss rates. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by lower loss rates. The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan and recoveries. The allowance for Farm Real Estate loans increased due to higher outstanding loan balances for this type of loan. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio.

Page 21

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the three months ended June 30, 2016


	Beginning balance		Charge- offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,446	$	(20	)	$	30	$	101		$	1,557
Commercial Real Estate:
Owner Occupied		2,372		(42	)		3		60			2,393
Non-Owner Occupied		4,711		—			1,319		(1,061	)		4,969
Residential Real Estate		4,114		(129	)		272		(358	)		3,899
Real Estate Construction		408		—			1		(43	)		366
Farm Real Estate		496		—			—		(20	)		476
Consumer and Other		358		(39	)		19		20			358
Unallocated		528		—			—		1			529

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

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

Page 22

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of June 30, 2017 and December 31, 2016.


June 30, 2017	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	82	$	235	$	1,291	$	1,608
Commercial Real Estate:
Owner Occupied		—		4		2,006		2,010
Non-Owner Occupied		—		—		4,739		4,739
Residential Real Estate		73		103		2,500		2,676
Real Estate Construction		—		—		482		482
Farm Real Estate		—		6		419		425
Consumer and Other		—		—		324		324
Unallocated		—		—		783		783

Total	$	155	$	348	$	12,544	$	13,047

Outstanding loan balances:
Commercial & Agriculture	$	87	$	1,562	$	142,059	$	143,708
Commercial Real Estate:
Owner Occupied		—		1,715		170,547		172,262
Non-Owner Occupied		—		355		405,521		405,876
Residential Real Estate		151		1,487		256,942		258,580
Real Estate Construction		—		—		63,538		63,538
Farm Real Estate		—		614		38,455		39,069
Consumer and Other		—		—		17,784		17,784

Total	$	238	$	5,733	$	1,094,846	$	1,100,817

Page 23

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)


December 31, 2016	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	86	$	82	$	1,850	$	2,018
Commercial Real Estate:
Owner Occupied		—		4		2,167		2,171
Non-Owner Occupied		—		—		4,606		4,606
Residential Real Estate		89		102		2,898		3,089
Real Estate Construction		—		—		420		420
Farm Real Estate		—		—		442		442
Consumer and Other		—		—		314		314
Unallocated		—		—		245		245

Total	$	175	$	188	$	12,942	$	13,305

Outstanding loan balances:
Commercial & Agriculture	$	88	$	1,983	$	133,391	$	135,462
Commercial Real Estate:
Owner Occupied		—		1,896		159,468		161,364
Non-Owner Occupied		—		359		395,572		395,931
Residential Real Estate		168		1,686		245,454		247,308
Real Estate Construction		—		—		56,293		56,293
Farm Real Estate		—		614		40,556		41,170
Consumer and Other		—		1		17,977		17,978

Total	$	256	$	6,539	$	1,048,711	$	1,055,506

The following tables present credit exposures by internally assigned grades for the periods ended June 30, 2017 and December 31, 2016. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned grades are as follows:

•

Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral.

•

Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected.

•

Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Civista will sustain some loss if the deficiencies are not corrected.

Page 24

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

•

Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances.

•

Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted.

Generally, Residential Real Estate, Real Estate Construction and Consumer and Other loans are not risk-graded, except when collateral is used for a business purpose.


June 30, 2017	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	136,174	$	5,245	$	2,289	$	—	$	143,708
Commercial Real Estate:
Owner Occupied		160,769		6,233		5,260		—		172,262
Non-Owner Occupied		403,157		1,916		803		—		405,876
Residential Real Estate		61,022		2,098		6,255		—		69,375
Real Estate Construction		58,340		15		27		—		58,382
Farm Real Estate		30,753		6,311		2,005		—		39,069
Consumer and Other		1,794		—		75		—		1,869

Total	$	852,009	$	21,818	$	16,714	$	—	$	890,541


December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	127,867	$	4,300	$	3,295	$	—	$	135,462
Commercial Real Estate:
Owner Occupied		151,659		4,016		5,689		—		161,364
Non-Owner Occupied		393,592		1,676		663		—		395,931
Residential Real Estate		59,015		1,661		6,911		—		67,587
Real Estate Construction		50,678		16		27		—		50,721
Farm Real Estate		31,814		5,673		3,683		—		41,170
Consumer and Other		2,135		—		109		—		2,244

Total	$	816,760	$	17,342	$	20,377	$	—	$	854,479

Page 25

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables present performing and nonperforming loans based solely on payment activity for the periods ended June 30, 2017 and December 31, 2016 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.


	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
June 30, 2017
Performing	$	189,205	$	5,156	$	15,871	$	210,232
Nonperforming		—		—		44		44

Total	$	189,205	$	5,156	$	15,915	$	210,276


	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
December 31, 2016
Performing	$	179,721	$	5,572	$	15,725	$	201,018
Nonperforming		—		—		9		9

Total	$	179,721	$	5,572	$	15,734	$	201,027

Page 26

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of June 30, 2017 and December 31, 2016.


June 30, 2017	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Purchased Credit- Impaired Loans		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	249	$	—	$	10	$	259	$	143,362	$	87	$	143,708	$	—
Commercial Real Estate:
Owner Occupied		334		640		614		1,588		170,674		—		172,262		—
Non-Owner Occupied		—		—		600		600		405,276		—		405,876		—
Residential Real Estate		263		198		979		1,440		256,989		151		258,580		—
Real Estate Construction		—		—		27		27		63,511		—		63,538		—
Farm Real Estate		504		—		—		504		38,565		—		39,069		—
Consumer and Other		150		11		44		205		17,579		—		17,784		44

Total	$	1,500	$	849	$	2,274	$	4,623	$	1,095,956	$	238	$	1,100,817	$	44


December 31, 2016	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Purchased Credit- Impaired Loans		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	156	$	20	$	152	$	328	$	135,046	$	88	$	135,462	$	—
Commercial Real Estate:
Owner Occupied		722		553		280		1,555		159,809		—		161,364		—
Non-Owner Occupied		147		—		316		463		395,468		—		395,931		—
Residential Real Estate		1,812		507		1,049		3,368		243,772		168		247,308		—
Real Estate Construction		—		—		27		27		56,266		—		56,293		—
Farm Real Estate		93		—		—		93		41,077		—		41,170		—
Consumer and Other		215		31		31		277		17,701		—		17,978		9

Total	$	3,145	$	1,111	$	1,855	$	6,111	$	1,049,139	$	256	$	1,055,506	$	9

Page 27

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of June 30, 2017 and December 31, 2016.


	June 30, 2017		December 31, 2016
Commercial & Agriculture	$	1,342	$	1,622
Commercial Real Estate:
Owner Occupied		1,715		1,461
Non-Owner Occupied		611		464
Residential Real Estate		2,987		3,266
Real Estate Construction		27		27
Farm Real Estate		—		2
Consumer and Other		70		101

Total	$	6,752	$	6,943

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 three conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days; the loan is a TDR and has made a minimum of six months payments; or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months.

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

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of June 30, 2017, TDRs accounted for $421 of the allowance for loan losses. As of December 31, 2016, TDRs accounted for $278 of the allowance for loan losses.

Page 28

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Loan modifications that are considered TDRs completed during the periods ended June 30, 2017 and June 30, 2016 were as follows:


	For the Six-Month Period Ended
	June 30, 2017
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		—		—		—
Residential Real Estate		1		13		13
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		1	$	13	$	13


	For the Six-Month Period Ended
	June 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		4	$	529	$	529
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		—		—		—
Residential Real Estate		2		308		308
Real Estate Construction		—		—		—
Farm Real Estate		2		614		614
Consumer and Other		—		—		—

Total Loan Modifications		8	$	1,451	$	1,451

Page 29

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)


	For the Three-Month Period Ended
	June 30, 2017
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		—		—		—
Residential Real Estate		1		13		13
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		1	$	13	$	13


	For the Three-Month Period Ended
	June 30, 2016
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		1	$	47	$	47
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		—		—		—
Residential Real Estate		1		76		76
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—

Total Loan Modifications		2	$	123	$	123

Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new origination loans, so modified loans present a higher risk of loss than do new origination loans.

During both the three- and six-month periods ended June 30, 2017 and June 30, 2016, there were no defaults on loans that were modified and considered TDRs during the respective twelve previous months.

Page 30

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Impaired Loans: Larger (greater than $350) Commercial & Agricultural and Commercial Real Estate loan relationships, all TDRs and Residential Real Estate and Consumer loans that are part of a larger relationship are tested for impairment on a quarterly basis. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance.

The following table includes the recorded investment and unpaid principal balances for impaired financing receivables, excluding PCI loans, with the associated allowance amount, if applicable, as of June 30, 2017 and December 31, 2016.


	June 30, 2017						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial & Agriculture	$	375	$	376			$	1,230	$	1,751
Commercial Real Estate:
Owner Occupied		1,485		1,650				1,658		1,803
Non-Owner Occupied		355		381				359		386
Residential Real Estate		1,105		1,177				1,259		1,590
Farm Real Estate		150		150				614		614
Consumer and Other		—		—				1		1

Total		3,470		3,734				5,121		6,145
With an allowance recorded:
Commercial & Agriculture		1,187		1,737	$	235		753		1,303	$	82
Commercial Real Estate:
Owner Occupied		230		230		4		238		238		4
Non-Owner Occupied		—		—		—		—		—		—
Residential Real Estate		382		386		103		427		431		102
Farm Real Estate		464		464		6		—		—		—

Total		2,263		2,817		348		1,418		1,972		188
Total:
Commercial & Agriculture		1,562		2,113		235		1,983		3,054		82
Commercial Real Estate:
Owner Occupied		1,715		1,880		4		1,896		2,041		4
Non-Owner Occupied		355		381		—		359		386		—
Residential Real Estate		1,487		1,563		103		1,686		2,021		102
Farm Real Estate		614		614		6		614		614		—
Consumer and Other		—		—		—		1		1		—

Total	$	5,733	$	6,551	$	348	$	6,539	$	8,117	$	188

Page 31

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table includes the average recorded investment and interest income recognized for impaired financing receivables for the three- and six-month periods ended June 30, 2017 and 2016.


For the six months ended:	June 30, 2017				June 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	1,756	$	20	$	1,937	$	11
Commercial Real Estate—Owner Occupied		1,829		48		1,800		45
Commercial Real Estate—Non-Owner Occupied		357		3		1,489		857
Residential Real Estate		1,610		39		1,799		39
Real Estate Construction		—		—		—		—
Farm Real Estate		614		13		1,250		10
Consumer and Other		—		—		3		—

Total	$	6,166	$	123	$	8,278	$	962


For the three months ended:	June 30, 2017				June 30, 2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	1,643	$	6	$	2,469	$	8
Commercial Real Estate—Owner Occupied		1,795		26		1,630		20
Commercial Real Estate—Non-Owner Occupied		356		2		1,363		853
Residential Real Estate		1,572		19		1,878		20
Real Estate Construction		—		—		—		—
Farm Real Estate		614		7		1,398		6
Consumer and Other		—		—		2		—

Total	$	5,980	$	60	$	8,740	$	907

Page 32

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Changes in the amortizable yield for PCI loans were as follows, since acquisition:


	For the Six-Month Period Ended June 30, 2017			For the Six-Month Period Ended June 30, 2016
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	49		$	82
Acquisition of PCI loans		—			—
Accretion		(18	)		(16	)

Balance at end of period	$	31		$	66


	For the Three-Month Period Ended June 30, 2017			For the Three-Month Period Ended June 30, 2016
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	40		$	74
Acquisition of PCI loans		—			—
Accretion		(9	)		(8	)

Balance at end of period	$	31		$	66

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


	At June 30, 2017		At December 31, 2016
	Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30)		Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30)
	(In Thousands)
Outstanding balance	$	814	$	850
Carrying amount		238		256

There has been $155 and $175 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of June 30, 2017 and December 31, 2016, respectively.

Page 33

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of June 30, 2017 and December 31, 2016, a total of $27 and $37, respectively of foreclosed assets were included with other assets. As of June 30, 2017, included within the foreclosed assets is $27 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of June 30, 2017 and December 31, 2016, the Company had initiated formal foreclosure procedures on $328 and $710, respectively, of consumer residential mortgages.

(6) Other Comprehensive Income

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


	For the Six-Month Period Ended								For the Six-Month Period Ended
	June 30, 2017								June 30, 2016
	Unrealized Gains and Losses on Available-for- Sale Securities		Defined Benefit Pension Items			Total			Unrealized Gains and Losses on Available-for- Sale Securities		Defined Benefit Pension Items			Total
Beginning balance	$	2,008	$	(4,345	)	$	(2,337	)	$	3,554	$	(4,049	)	$	(495	)

Other comprehensive income before reclassifications		1,258		—			1,258			2,308		—			2,308
Amounts reclassified from accumulated other comprehensive loss		—		343			343			1		110			111

Net current-period other comprehensive income		1,258		343			1,601			2,309		110			2,419

Ending balance	$	3,266	$	(4,002	)	$	(736	)	$	5,863	$	(3,939	)	$	1,924

Amounts in parentheses indicate debits on the consolidated balance sheets.

Page 34

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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


	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) ^(a)
Details about Accumulated Other Comprehensive (Loss) Components	For the six months ended June 30, 2017			For the six months ended June 30, 2016			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—		$	(1	)	Net gain on securities available for sale
Tax effect		—			—		Income tax expense

		—			(1	)	Net of tax

Amortization of defined benefit pension items
Actuarial gains/(losses)		(520	)^(b)		(166	)^(b)	Salaries, wages and benefits
Tax effect		177			56		Income tax expense

		(343	)		(110	)	Net of tax

Total reclassifications for the period	$	(343	)	$	(111	)	Net of tax

^(a)	Amounts in parentheses indicate expenses and other amounts indicate income.

^(b)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Page 35

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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


	For the Three-Month Period Ended								For the Three-Month Period Ended
	June 30, 2017								June 30, 2016
	Unrealized Gains and Losses on Available-for- Sale Securities		Defined Benefit Pension Items			Total			Unrealized Gains and Losses on Available-for- Sale Securities		Defined Benefit Pension Items			Total
Beginning balance	$	2,307	$	(4,283	)	$	(1,976	)	$	4,812	$	(3,994	)	$	818

Other comprehensive income before reclassifications		959		—			959			1,047		—			1,047
Amounts reclassified from accumulated other comprehensive loss		—		281			281			4		55			59

Net current-period other comprehensive income		959		281			1,240			1,051		55			1,106

Ending balance	$	3,266	$	(4,002	)	$	(736	)	$	5,863	$	(3,939	)	$	1,924

Amounts in parentheses indicate debits on the consolidated balance sheets.

Page 36

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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


	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) ^(a)
Details about Accumulated Other Comprehensive (Loss) Components	For the three months ended June 30, 2017			For the three months ended June 30, 2016			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—		$	(6	)	Net loss on securities available for sale
Tax effect		—			2		Income tax expense

		—			(4	)	Net of tax

Amortization of defined benefit pension items
Actuarial gains/(losses)		(426	)^(b)		(83	)^(b)	Salaries, wages and benefits
Tax effect		145			28		Income tax expense

		(281	)		(55	)	Net of tax

Total reclassifications for the period	$	(281	)	$	(59	)	Net of tax

^(a)	Amounts in parentheses indicate expenses and other amounts indicate income.

^(b)	These accumulated other comprehensive income components are included in the computation of net periodic pension cost.

Page 37

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(7) Goodwill and Intangible Assets

The balance of goodwill was $27,095 at June 30, 2017 and December 31, 2016. Management performs an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Management last performed an evaluation of the Company’s goodwill during the fourth quarter of 2016 and concluded that the Company’s goodwill was not impaired at December 31, 2016.

There was no change in the carrying amount of goodwill for the periods ended June 30, 2017 and 2016.

Acquired intangible assets, other than goodwill, as of June 30, 2017 and June 30, 2016 were as follows:


	2017						2016
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets(1):
MSRs	$	975	$	279	$	696	$	819	$	195	$	624
Core deposit intangibles		7,274		6,476		798		7,274		5,807		1,467

Total amortized intangible assets	$	8,249	$	6,755	$	1,494	$	8,093	$	6,002	$	2,091

(1)	Excludes fully amortized intangible assets

Aggregate core deposit intangible amortization expense was $325 and $355 for the six-months ended June 30, 2017 and 2016, respectively.

Aggregate mortgage servicing rights amortization was $28 and $15 for the six-months ended June 30, 2017 and 2016, respectively.

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


	MSRs		Core deposit intangibles		Total
2017	$	19	$	262	$	281
2018		39		111		150
2019		39		88		127
2020		39		72		111
2021		38		68		106
Thereafter		522		197		719

	$	696	$	798	$	1,494

Page 38

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(8) Short-Term Borrowings

Short-term borrowings, which consist of federal funds purchased and other short-term borrowings are included in Federal Home Loan Bank advances on the Consolidated Balance Sheets and are summarized as follows:


	At June 30, 2017					At December 31, 2016
	Federal Funds Purchased		Short-term Borrowings			Federal Funds Purchased			Short-term Borrowings
Outstanding balance	$	—	$	48,300		$	—		$	31,000
Maximum indebtedness		—		106,300			20,000			70,400
Average balance		—		27,294			116			10,483
Average rate paid		—		0.94	%		0.86	%		0.42	%
Interest rate on balance		—		1.17	%		—			0.64	%

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

These borrowing transactions can range from overnight to six months in maturity. The average maturity was one day at June 30, 2017 and December 31, 2016.

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.

Page 39

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of June 30, 2017 and December 31, 2016. All of the repurchase agreements are overnight agreements.


	June 30, 2017		December 31, 2016
Securities pledged for repurchase agreements:
U.S. Treasury securities	$	536	$	1,761
Obligations of U.S. government agencies		12,194		27,164

Total securities pledged	$	12,730	$	28,925

Gross amount of recognized liabilities for repurchase agreements	$	12,730	$	28,925

Amounts related to agreements not included in offsetting disclosures above	$	—	$	—

Page 40

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(9) Earnings per Common Share

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


	Three months ended				Six months ended
	June 30,				June 30,
	2017		2016		2017		2016
Basic
Net income	$	3,596	$	5,181	$	8,231	$	9,906
Preferred stock dividends		308		391		627		782

Net income available to common shareholders—basic	$	3,288	$	4,790	$	7,604	$	9,124

Weighted average common shares outstanding—basic		10,162,528		7,877,119		9,634,363		7,861,444

Basic earnings per common share	$	0.32	$	0.61	$	0.79	$	1.16

Diluted
Net income available to common shareholders—basic	$	3,288	$	4,790	$	7,604	$	9,124
Preferred stock dividends		308		391		627		782

Net income available to common shareholders—diluted	$	3,596	$	5,181	$	8,231	$	9,906

Weighted average common shares outstanding for basic earnings per common share		10,162,528		7,877,119		9,634,363		7,861,444
Add: Dilutive effects of convertible preferred shares		2,431,349		3,074,402		2,469,465		3,076,323

Average shares and dilutive potential common shares outstanding—diluted		12,593,877		10,951,521		12,103,828		10,937,767

Diluted earnings per common share	$	0.29	$	0.47	$	0.68	$	0.91

Page 41

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

For the three-month period ended June 30, 2017 there were 2,431,349 dilutive shares related to the Company’s convertible preferred stock. For the six-month period ended June 30, 2017 there were 2,469,465 dilutive shares related to the Company’s convertible preferred stock. For the three-month period ended June 30, 2016 there were 3,074,402 dilutive shares related to the Company’s convertible preferred stock. For the six-month period ended June 30, 2016 there were 3,076,323 dilutive shares related to the Company’s convertible preferred stock. Under the “if converted” method, all convertible preferred shares are assumed to be converted into common shares at the corresponding conversion rate. These additional shares are then added to the common shares outstanding to calculate diluted earnings per share.

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

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amounts of financial instruments with off-balance-sheet risk were as follows for June 30, 2017 and December 31, 2016:


	Contract Amount
	June 30, 2017				December 31, 2016
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitment to extend credit:
Lines of credit and construction loans	$	8,615	$	275,584	$	6,905	$	202,923
Overdraft protection		6		23,475		5		29,075
Letters of credit		624		317		600		349

	$	9,245	$	299,376	$	7,510	$	232,347

Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments included in the table above had interest rates ranging from 3.25% to 8.00% at June 30, 2017 and from 3.25% to 8.75% at December 31, 2016. Maturities extend up to 30 years.

Civista is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was $10,471 on June 30, 2017 and $2,887 on December 31, 2016.

Page 42

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(11) Pension Information

The Company sponsors a pension plan which is a noncontributory defined benefit retirement plan. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. In 2006, the Company amended the pension plan to provide that no employee could be added as a participant to the pension plan after December 31, 2006. In 2014, the Company amended the pension plan again to provide that no additional benefits would accrue beyond April 30, 2014.

Net periodic pension benefit was as follows:


	Three months ended						Six months ended
	June 30,						June 30,
	2017			2016			2017			2016
Service cost	$	—		$	—		$	—		$	—
Interest cost		171			170			338			340
Expected return on plan assets		(283	)		(274	)		(561	)		(548	)
Other components		426			83			520			166

Net periodic pension benefit	$	314		$	(21	)	$	297		$	(42	)

The total amount of pension contributions expected to be paid by the Company in 2017 is $500. The Company contributed $500 in 2016.

(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 292,576 shares available for future grants under this plan at June 30, 2017.

During each of the last three years, the Board of Directors has awarded restricted common shares to senior officers of the Company. The restricted shares vest ratably over a three-year period following the grant date. The product of the number of restricted shares granted and the grant date market price of the Company’s common shares determines the fair value of restricted shares under the Company’s 2014 Incentive Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

On January 4, 2016, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 2,730 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2016 Annual Meeting. This issuance was expensed in its entirety when the shares were issued in the amount of $32.

Page 43

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

On May 17, 2016, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 12,285 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2017 Annual Meeting. This issuance was expensed in its entirety when the shares were issued in the amount of $130.

Finally, on May 16, 2017, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 6,804 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2018 Annual Meeting. This issuance was expensed in its entirety when the shares were issued in the amount of $144.

No options had been granted under the 2014 Incentive Plan as of June 30, 2017 and 2016.

The Company classifies share-based compensation for employees with “Salaries, wages and benefits” in the consolidated statements of operations. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows, and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as an operating cash flow.

The following is a summary of the status of the Company’s restricted shares and changes therein for the three- and six-month periods ended June 30, 2017:


	Three months ended				Six months ended
	June 30, 2017				June 30, 2017
	Number of Restricted Shares		Weighted Average Grant Date Fair Value		Number of Restricted Shares			Weighted Average Grant Date Fair Value
Nonvested at beginning of period		42,138	$	15.60		37,050		$	10.77
Granted		—		—		17,898			22.15
Vested		—		—		(12,810	)		10.76
Forfeited		—		—		—			—

Nonvested at June 30, 2017		42,138	$	15.60		42,138		$	15.60

Page 44

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following is a summary of the status of the Company’s restricted shares as of June 30, 2017:


At June 30, 2017
Shares	Expense		Years
16,699	$	18		0.50
15,748		50		1.50
11,713		146		2.50
10,260		77		3.50
6,185		125		4.50

60,605	$	416		3.08

During the six months ended June 30, 2017, the Company recorded $173 of share-based compensation expense and $144 of director retainer fees for shares granted under the 2014 Incentive Plan. At June 30, 2017, the total compensation cost related to unvested awards not yet recognized is $416, which is expected to be recognized over the weighted average remaining life of the grants of 3.08 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; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

Debt securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale is determined by using market data inputs for similar securities that are observable (Level 2 inputs).

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 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.

Impaired loans: The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age

Page 45

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included as a Level 3 measurement.

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

Page 46

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Assets measured at fair value are summarized below.


	Fair Value Measurements at June 30, 2017 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	$	—	$	35,763	$	—
Obligations of states and political subdivisions		—		108,942		—
Mortgage-backed securities in government sponsored entities		—		84,735		—
Equity securities in financial institutions		—		757		—
Swap asset		—		1,706		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		1,706		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	2,966
Other real estate owned		—		—		27


	Fair Value Measurements at December 31, 2016 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	$	—	$	37,446	$	—
Obligations of states and political subdivisions		—		94,998		—
Mortgage-backed securities in government sponsored entities		—		62,642		—
Equity securities in financial institutions		—		778		—
Swap asset		—		1,839		—
Liabilities measured at fair value on a recurring basis:
Swap liability		—		1,839		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	952
Other real estate owned		—		—		37

Page 47

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2017.


	Quantitative Information about Level 3 Fair Value Measurements
June 30, 2017	Fair Value		Valuation Technique		Unobservable Input	Range	Weighted Average
Impaired loans	$	2,966		Appraisal of collateral	Appraisal adjustments	10% - 54%	35%
					Liquidation expense	0% - 10%	5%
					Holding period	0 - 30 months	20 months
Other real estate owned	$	27		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%
					Liquidation expense	0% - 10%	10%

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2016.


	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2016	Fair Value		Valuation Technique		Unobservable Input	Range	Weighted Average
Impaired loans	$	952		Appraisal of collateral	Appraisal adjustments	10% - 67%	64%
					Liquidation expense	0% - 10%	4%
					Holding period	0 - 30 months	19 months
Other real estate owned	$	37		Appraisal of collateral	Appraisal adjustments	10% - 30%	10%
					Liquidation expense	0% - 10%	10%

Page 48

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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


June 30, 2017	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	39,515	$	39,515	$	39,515	$	—	$	—
Securities available for sale		230,197		230,197		—		230,197		—
Other securities		14,225		14,225		14,225		—		—
Loans, held for sale		4,728		4,728		4,728		—		—
Loans, net of allowance for loan losses		1,087,770		1,088,242		—		—		1,088,242
Bank owned life insurance		24,839		24,839		24,839		—		—
Accrued interest receivable		3,928		3,928		3,928		—		—
Swap asset		1,706		1,706		—		1,706		—
Financial Liabilities:
Nonmaturing deposits		975,116		975,116		975,116		—		—
Time deposits		189,772		189,807		—		—		189,807
Short-term FHLB advances		48,300		48,300		48,300		—		—
Long-term FHLB advances		15,000		14,987		—		—		14,987
Securities sold under agreement to repurchase		12,730		12,730		12,730		—		—
Subordinated debentures		29,427		29,378		—		—		29,378
Accrued interest payable		101		101		101		—		—
Swap liability		1,706		1,706		—		1,706		—

Page 49

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)


December 31, 2016	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	36,695	$	36,695	$	36,695	$	—	$	—
Securities available for sale		195,864		195,864		—		195,864		—
Loans, held for sale		2,268		2,268		2,268		—		—
Loans, net of allowance for loan losses		1,042,201		1,047,329		—		—		1,047,329
Other securities		14,055		14,055		14,055		—		—
Bank owned life insurance		24,552		24,552		24,552		—		—
Accrued interest receivable		3,854		3,854		3,854		—		—
Swap asset		1,839		1,839		—		1,839		—
Financial Liabilities:
Nonmaturing deposits		913,677		913,677		913,677		—		—
Time deposits		207,426		207,784		—		—		207,784
Short-term FHLB advances		31,000		31,007		31,007		—		—
Long-term FHLB advances		17,500		17,553		—		—		17,553
Securities sold under agreement to repurchase		28,925		28,925		28,925		—		—
Subordinated debentures		29,427		27,414		—		—		27,414
Accrued interest payable		181		181		181		—		—
Swap liability		1,839		1,839		—		1,839		—

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

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

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

Loans, held-for-sale: Loans held for sale are priced individually at market rates on the day that the loan is locked for commitment to an investor. Because the holding period of such loans is typically short, the carrying value generally approximates the fair value at the time the commitment is received. All loans in

Page 50

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

the held-for-sale account conform to Fannie Mae underwriting guidelines, with specific intent of the loan being purchased by an investor at the predetermined rate structure.

Loans, net of allowance for loan losses: Fair values for loans, other than impaired, are estimated for portfolios of loans with similar financial characteristics. The fair value of performing loans has been estimated by discounting expected future cash flows of the underlying portfolios. The discount rates used in these calculations are generally derived from the treasury yield curve and are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate inherent in the loan. The estimated maturity is based on the Company’s historical experience with repayments for each loan classification. Changes in these significant unobservable inputs used in discounted cash flow analysis, such as the discount rate or prepayment speeds, could lead to changes in the underlying fair value.

Bank owned life insurance: The carrying value of bank owned life insurance approximates the fair value based on applicable redemption provisions.

Accrued interest receivable and payable and securities sold under agreements to repurchase: The carrying amounts for accrued interest receivable, accrued interest payable and securities sold under agreements to repurchase approximate fair value because they are generally received or paid in 90 days or less and do not present unanticipated credit concerns.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market accounts, is equal to the amount payable on demand.

The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the market rates currently offered for deposits of similar remaining maturities.

The deposits’ fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

Federal Home Loan Bank (“FHLB”) advances: Rates available to the Company for borrowed funds with similar terms and remaining maturities are used to estimate the fair value of borrowed funds.

Subordinated debentures: The fair value of subordinated debentures is based on the discounted value of contractual cash flows of the underlying debt agreements. The discount rate is estimated using the current rate for the borrowing from the FHLB with the most similar terms.

Fair value swap asset and liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date.

Page 51

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(14) Derivative Hedging Instruments

To accommodate customer need and to support the Company’s asset/liability positioning, on occasion we enter into interest rate swaps with a customer and a bank counterparty. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations.

The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of June 30, 2017.


	Notional Amount			Weighted Average Rate Received/(Paid)			Impact of a 1 basis point change in interest rates			Repricing Frequency
Derivative Assets	$	55,633			5.09	%	$	30			Monthly
Derivative Liabilities		(55,633	)		-5.09	%		(30	)		Monthly

Net Exposure	$	—					$	—

The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of December 31, 2016.


	Notional Amount			Weighted Average Rate Received/(Paid)			Impact of a 1 basis point change in interest rates			Repricing Frequency
Derivative Assets	$	52,975			5.07	%	$	30			Monthly
Derivative Liabilities		(52,975	)		-5.07	%		(30	)		Monthly

Net Exposure	$	—					$	—

The Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All hedge transactions must be approved in advance by the Lenders Loan Committee or the Directors Loan Committee of the Board of Directors.

Page 52

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(15) Qualified Affordable Housing Project Investments

The Company invests in certain qualified affordable housing projects. At June 30, 2017 and December 31, 2016, the balance of the investment for qualified affordable housing projects was $2,983 and $2,754, 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 $2,920 and $2,313 at June 30, 2017 and December 31, 2016, respectively.

During the six months ended June 30, 2017 and 2016, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $165 and $154, offset by tax credits and other benefits from its investment in affordable housing tax credits of $276 and $295, respectively. During the quarters ended June 30, 2017 and 2016, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $82 and $77, offset by tax credits and other benefits from its investment in affordable housing tax credits of $138 and $148, respectively. During the three and six months ended June 30, 2017 and 2016, the Company did not incur impairment losses related to its investment in qualified affordable housing projects.

Page 53

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

ITEM 2.

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

Introduction

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2017 compared to December 31, 2016, and the consolidated results of operations for the three- and six-month period ended June 30, 2017, compared to the same period in 2016. This discussion should be read in conjunction with the consolidated financial statements and footnotes included in this Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as the Company’s financial condition, anticipated operating results, cash flows, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “believe,” “belief,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results, performance or achievements to differ from results discussed in the forward-looking statements include, but are not limited to, changes in financial markets or national or local economic conditions; sustained weakness or deterioration in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and assessments; changes in tax laws; failure of or breach in our information and data processing systems; unforeseen litigation; and other risks identified from time-to-time in the Company’s other public documents on file with the SEC, including those risks identified in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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.

Page 54

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Financial Condition

Total assets of the Company at June 30, 2017 were $1,462,015 compared to $1,377,263 at December 31, 2016, an increase of $84,752, or 6.2%. The increase in total assets was mainly attributable to increases in securities available for sale, loans held for sale and loans. Total liabilities at June 30, 2017 were $1,283,172 compared to $1,239,647 at December 31, 2016, an increase of $43,525, or 3.5%. The increase in total liabilities was mainly attributable to increases in total deposits, FHLB overnight advances and accrued interest, taxes and other expenses offset by a decrease in securities sold under agreements to repurchase.

Loans outstanding as of June 30, 2017 and December 31, 2016 were as follows:


	June 30, 2017			December 31, 2016
Commercial & Agriculture	$	143,708		$	135,462
Commercial Real Estate—Owner Occupied		172,262			161,364
Commercial Real Estate—Non-Owner Occupied		405,876			395,931
Residential Real Estate		258,580			247,308
Real Estate Construction		63,538			56,293
Farm Real Estate		39,069			41,170
Consumer and Other		17,784			17,978

Total loans		1,100,817			1,055,506
Allowance for loan losses		(13,047	)		(13,305	)

Net loans	$	1,087,770		$	1,042,201

Net loans have increased $45,569 or 4.4% since December 31, 2016. The Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate and Real Estate Construction loan portfolios increased $8,246, $10,898, $9,945, $11,272 and $7,245, respectively, since December 31, 2016, while the Farm Real Estate and Consumer and Other loan portfolios decreased $2,101 and $194, respectively, since December 31, 2016.

Loans held for sale have increased $2,460 or 108.5% since December 31, 2016, due to an increase in originations. At June 30, 2017, the net loan to deposit ratio was 93.4% compared to 93.0% at December 31, 2016.

During the first six months of 2017, there were no provisions made to the allowance for loan losses from earnings. During the first six months of 2016, the Company received a payoff on a nonperforming loan. This particular loan had been analyzed previously and had been charged down based on a deterioration of real estate collateral values during the recent recession. As a result of the payoff of the loan, the Company recovered the charged down amount of approximately $1,303. The result of the transaction was a credit of $1,300 from the allowance for loan losses during the six months of operations

Page 55

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

in 2016. Net charge-offs for the first six months of 2017 totaled $258, compared to a net recovery $1,486 in the first six months of 2016. For the first six months of 2017, the Company charged off a total of thirty-three loans. Fourteen Real Estate Mortgage loans totaling $196, one Commercial and Agriculture loan totaling $1, three Commercial Real Estate – Owner Occupied loans totaling $210 and fifteen Consumer and Other loans totaling $81 were charged off in the first six months of the year. In addition, during the first six months of 2017, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $83, Commercial Real Estate – Owner Occupied loans of $18, Commercial Real Estate – Non-Owner Occupied loans of $9, Real Estate Mortgage loans of $87, Real Estate Construction loans of $19 and Consumer and Other loans of $14. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans decreased by $155 since December 31, 2016, which was due to a decrease in loans on nonaccrual status of $190 and an increase in loans past due 90 days and accruing of $35. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance.

Management specifically evaluates loans that are impaired for estimates of loss. To evaluate the adequacy of the allowance for loan losses to cover probable losses in the portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve.

Management analyzes each impaired Commercial and Commercial Real Estate loan relationship with a balance of $350 or larger, on an individual basis and designates a loan as impaired when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicate that underlying cash flows are not adequate to meet its debt service requirements. In addition, loans held for sale are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for loan losses as a percent of total loans was 1.19% at June 30, 2017 and 1.26% at December 31, 2016.

The available for sale security portfolio increased by $34,333, from $195,864 at December 31, 2016 to $230,197 at June 30, 2017. The increase in the available for sale security portfolio is due to the investment of the net proceeds from the public offering completed by the Company on February 24, 2017. 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, 2017, the Company was in compliance with all pledging requirements.

Premises and equipment, net, have decreased $143 from December 31, 2016 to June 30, 2017. The decrease is the result of new purchases of $535, offset by disposals, net of gains of $72, depreciation of $603 and the transfer of $3 of assets to premises and equipment held for sale.

Page 56

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Bank owned life insurance (BOLI) increased $287 from December 31, 2016 to June 30, 2017. The difference is the result of increases in the cash surrender value of the underlying insurance policies.

Total deposits as of June 30, 2017 and December 31, 2016 are as follows:


	June 30, 2017		December 31, 2016
Noninterest-bearing demand	$	391,619	$	345,588
Interest-bearing demand		195,313		183,759
Savings and money market		388,184		384,330
Time deposits		189,772		207,426

Total Deposits	$	1,164,888	$	1,121,103

Total deposits at June 30, 2017 increased $43,785 from year-end 2016. Noninterest-bearing deposits increased $46,031 from year-end 2016, while interest-bearing deposits, including savings and time deposits, decreased $2,246 from December 31, 2016. The increase in noninterest-bearing deposits was primarily due to an increase in commercial accounts related to the Company’s participation in a tax refund processing program, which added noninterest-bearing deposits of $43,147. This increase is temporary as transactions are processed and is expected to return to levels more consistent with December 31, 2016 over the next quarter. The interest-bearing deposit decrease was mainly due to decreases in time deposits. The year-to-date average balance of total deposits increased $6,222 compared to the average balance of the same period in 2016 due to increases in cash related to the tax refund processing program and savings and money market accounts. The increase in average balance is due to increases of $19,522 in demand deposit accounts, $11,748 in money market accounts, $8,819 in NOW accounts and $10,169 in statement saving accounts, offset by decreases of $19,439 in time certificates, $6,005 in CDARS deposits and $11,247 in interest-bearing public funds.

FHLB advances increased $14,800 from December 31, 2016 to June 30, 2017. The increase is due to an increase in overnight funds of $17,300. In addition, on January 11, 2017, an FHLB advance in the amount of $2,500 matured. This advance had terms of one hundred and twenty months with a fixed rate of 4.25%. The advance was not replaced. Securities sold under agreements to repurchase, which tend to fluctuate, have decreased $16,195 from December 31, 2016 to June 30, 2017.

Accrued interest, taxes and other expenses increased $1,135 from December 31, 2016 to June 30, 2017. The increase is primarily the result of a security purchase that will settle in July.

Shareholders’ equity at June 30, 2017 was $178,843, or 12.2% of total assets, compared to $137,616, or 10.0% of total assets, at December 31, 2016. The increase in the ratio of equity to total assets was the result of increases in total assets as well as shareholders’ equity. The increase in shareholders’ equity

Page 57

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

resulted primarily from the completion of the Company’s public offering of its common stock on February 24, 2017, which resulted in net proceeds of $32,821. Shareholders’ equity was also positively impacted by net income of $8,231, a decrease in the Company’s pension liability, net of tax, of $343, an increase in the fair value of securities available for sale, net of tax, of $1,258 and offset by dividends on preferred stock and common stock of $627 and $1,116, respectively. Total outstanding common shares at June 30, 2017 were 10,169,181. Total outstanding common shares at December 31, 2016 were 8,343,509. The increase in common shares outstanding is the result of a public offering of 1,610,000 shares completed on February 24, 2017, the conversion of 1,494 shares of the Company’s previously issued preferred shares into 190,970 common shares and the grant of 24,702 restricted common shares to certain officers under the Company’s 2014 Incentive Plan.

Results of Operations

Six Months Ended June 30, 2017 and 2016

The Company had net income of $8,231 for the six months ended June 30, 2017, a decrease of $1,675 from net income of $9,906 for the same six months of 2016. Basic earnings per common share were $0.79 for the period ended June 30, 2017, compared to $1.16 for the same period in 2016. Diluted earnings per common share were $0.68 for the period ended June 30, 2017, compared to $0.91 for the same period in 2016. The primary reasons for the changes in net income are explained below.

Net interest income for the six months ended June 30, 2017 was $26,261, an increase of $1,086 from $25,175 in the same six months of 2016. Total interest income for the six months ended June 30, 2017 was $27,920, an increase of $1,129 from $26,791 in the same six months of 2016. Average earning assets increased 3.4% during the six months ended June 30, 2017 as compared to the same period in 2016. Average loans and non-taxable securities for the first six months of 2016 increased 7.2% and 11.3%, respectively, compared to the first six months of last year. The increases were offset by a decrease in interest-bearing deposits in other banks. Interest-bearing deposits in other banks decreased mainly due to our tax refund processing program. The timing of cash inflows and outflows leads to large, but temporary, fluctuations in cash on deposit. The yield on the loan portfolio decreased 17 basis points for the first six months of 2017 compared to the first six months of last year. The yield on earning assets increased 4 basis points for the first six months of 2017 compared to the first six months of last year. Total interest expense for the six months ended June 30, 2017 was $1,659, an increase of $43 from $1,616 in the same six months of 2016. Interest expense on time deposits decreased $108 in the first six months of 2017 compared to the same period in 2016. Average time deposits for the first six months of 2017 decreased 14.7% compared to the first six months of 2016. Interest expense on demand and savings accounts, FHLB borrowings and trust preferred securities increased $26, $57 and $69, respectively, in the first six months of 2017 compared to the same period in 2016. The interest rate paid on FHLB borrowings during the first six months of 2017 decreased 20 basis points as compared to the same period in 2016, while the average balance increased 49.4%. The interest rate paid on trust preferred securities during the first six months of 2017 increased 48 basis points as compared to the same period in 2016. The Company’s net interest margin for the six months ended June 30, 2017 was 3.86% compared to 3.81% for the period ended June 30, 2016.

Page 58

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

The following table presents the condensed average balance sheets for the six months ended June 30, 2017 and 2016. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 34% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.


	Six Months Ended June 30,
	2017								2016
Assets:	Average balance			Interest		Yield/ rate*			Average balance			Interest		Yield/ rate*
Interest-earning assets:
Loans, including fees	$	1,080,307		$	24,189		4.52	%	$	1,008,203		$	23,487		4.69	%
Taxable securities		141,253			1,787		2.58	%		138,517			1,622		2.39	%
Tax-exempt securities		83,506			1,496		5.63	%		75,011			1,315		5.67	%
Interest-bearing deposits in other banks		112,695			448		0.80	%		149,046			367		0.50	%

Total interest-earning assets	$	1,417,761			27,920		4.09	%	$	1,370,777			26,791		4.05	%

Noninterest-earning assets:
Cash and due from financial institutions		68,144								76,208
Premises and equipment, net		18,125								16,801
Accrued interest receivable		4,439								4,327
Intangible assets		28,753								29,366
Other assets		10,069								9,876
Bank owned life insurance		24,675								22,506
Less allowance for loan losses		(13,242	)							(14,562	)

Total Assets	$	1,558,724							$	1,515,299

Liabilities and Shareholders Equity:
Interest-bearing liabilities:
Demand and savings	$	576,936		$	253		0.09	%	$	559,901		$	227		0.08	%
Time		175,614			639		0.73	%		205,949			747		0.73	%
FHLB		42,634			258		1.22	%		28,537			201		1.42	%
Subordinated debentures		29,427			499		3.42	%		29,427			430		2.94	%
Repurchase Agreements		20,767			10		0.10	%		22,122			11		0.10	%

Total interest-bearing liabilities	$	845,378			1,659		0.40	%	$	845,936			1,616		0.38	%

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company