CIVISTA BANCSHARES, INC. 10-K

Item 5. Market for Registrant’s Common Equity, Related Sto ckholder Matters and Issuer Purchases of Equity Securities As of February 20, 2024, there were approximately 1,733 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) of the Company’s common shares. Information regarding the restrictions applicable to the Company’s payment of dividends is included under Item 1 of this Annual Report on Form 10-K and is incorporated herein by reference. The following table details repurchases by the Company and purchases by "affiliated purchasers" as defined in Rule 10b-18(a)(3) under the Exchange Act of the Company's common shares during the fourth quarter of 2023. Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs October 1, 2023 - October 31, 2023 - $ - $ - $ 12,003,223 November 1, 2023 - November 30, 2023 - - - - December 1, 2023 - December 31, 2023 573 18.44 - - Total 573 $ 18.44 — $ 12,003,223 On May 8, 2023, the Company announced a new common share repurchase program pursuant to which the Company is authorized to repurchase a maximum aggregate value of $13,500,000 of its outstanding common shares through May 2, 2024. As of December 31, 2023, a total of 90,423 common shares had been repurchased for an aggregate purchase price of $1,628,205 under this repurchase program. Shareholder Return Performance Set forth below is a line graph comparing the five-year cumulative return of the common shares of Civista Bancshares, Inc. (ticker symbol CIVB), based on an initial investment of $100 on December 31, 2018 and assuming reinvestment of dividends, with the cumulative return of the Standard & Poor’s 500 Index, and the S&P U.S. BMI Banks Index. The comparative indices were obtained from S&P Global Market Intelligence. 30 Annual Report on Form 10-K A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, to shareholders, upon written request to Lance A. Morrison, Secretary of Civista Bancshares, Inc., 100 East Water Street, Sandusky, Ohio 44870. Item 6. [Reserved] 31 I tem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except per share data) General The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Company’s financial condition, results of operations, liquidity and capital resources as of December 31, 2023 and 2022, and during the three-year period ended December 31, 2023. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which are included elsewhere in this report. Financial Condition At December 31, 2023, the Company’s total assets were $3,861,418, compared to $3,639,445 at December 31, 2022. Net loans and securities available for sale increased $204,798 and $2,870, respectively, cash and due from financial institutions increased $17,045 from December 31, 2022 to December 31, 2023. Other factors contributing to the change in assets are discussed in the following sections. Loans held for sale increased $1,042, or 152.6%, from $683 at December 31, 2022 to $1,725 at December 31, 2023. The increase is due to higher balances of held loans. At December 31, 2023, nine loans totaling $1,725 were held for sale as compared to seven loans totaling $683 at December 31, 2022. At December 31, 2023, the Company’s net loans totaled $2,824,568 and increased by 7.8% from $2,619,770 at December 31, 2022. The increase in net loans was spread across most segments. Commercial & Agriculture loans increased $29,643, Commercial Real Estate – Owner Occupied loans increased $6,173, Commercial Real Estate - Non-Owner Occupied loans increased $143,158, Residential Real Estate loans increased $107,060, Real Estate Construction loans increased $17,282, Lease financing receivables increased $17,845 and Farm Real Estate loans increased $63. The increases in the foregoing loan segments were offset by a decrease in Consumer and Other loans of $2,718. Maturities and Sensitivities of Loans to Changes in Interest Rates The following table shows the amount of Commercial and Agriculture, Commercial Real Estate, Residential Real Estate, Real Estate Construction, Farm Real Estate and Consumer and Other Loans and Lease financing receivables outstanding as of December 31, 2023, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates. Maturing Within one year After one but within five years After five but within fifteen years After fifteen years Total (Dollars in thousands) Commercial & Agriculture $ 91,306 $ 161,482 $ 50,689 $ 1,316 $ 304,793 Commercial Real Estate: Owner Occupied 6,742 103,779 229,599 37,201 377,321 Non-Owner Occupied 70,159 447,213 595,807 48,715 1,161,894 Residential Real Estate 5,210 30,980 240,938 382,713 659,841 Real Estate Construction 50,596 107,638 63,509 38,666 260,409 Farm Real Estate 1,085 6,938 13,311 3,437 24,771 Lease financing receivables 9,430 34,114 11,098 — 54,642 Consumer and Other 2,154 11,229 4,159 514 18,056 Total $ 236,682 $ 903,373 $ 1,209,110 $ 512,562 $ 2,861,727 32 Due After One Year Fixed Rate Variable Rate (Dollars in thousands) Commercial & Agriculture $ 162,885 $ 50,602 Commercial Real Estate: Owner Occupied 85,003 285,576 Non-Owner Occupied 307,681 784,054 Residential Real Estate 163,414 491,217 Real Estate Construction 68,075 141,738 Farm Real Estate 6,589 17,097 Lease financing receivables 45,212 — Consumer and Other 14,954 948 Total $ 853,813 $ 1,771,232 The preceding maturity information is based on contract terms at December 31, 2023 and does not include any possible “rollover” at maturity date. In the normal course of business, Civista considers and acts on the borrowers’ requests for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower’s credit history, the collateral securing the loan and the purpose for such request. 33 Analysis of the Allowance for Credit Losses The following table shows the daily average loan balances and changes in the allowance for credit losses for the years indicated. 2023 2022 2021 (Dollars in thousands) Total loans outstanding $ 2,861,727 $ 2,648,281 $ 2,087,258 Allowance for credit losses at year end 37,160 28,511 26,641 Loans accounted for on a nonaccrual basis 12,467 6,507 3,673 Allowance for credit losses to total loans outstanding 1.30 % 1.08 % 1.28 % Nonaccrual loans to total loans outstanding 0.44 % 0.25 % 0.18 % Allowance for credit losses to nonaccrual loans 298.07 % 438.16 % 725.32 % Average loans outstanding: Commercial & Agriculture 276,438 236,315 338,916 Commercial Real Estate—Owner Occupied 372,214 322,132 278,777 Commercial Real Estate—Non-Owner Occupied 1,086,895 896,562 755,578 Real Estate Mortgage 588,739 511,973 433,351 Real Estate Construction 254,429 179,183 176,775 Farm Real Estate 24,250 24,388 28,968 Lease financing receivables 44,014 8,382 — Consumer and Other 10,651 20,147 14,542 Loan participations sold, reflected as secured borrowings 65,167 87,846 100,250 Total average loans outstanding 2,722,797 2,286,928 2,127,157 Net charge-offs (recoveries): Commercial & Agriculture 1,122 (2 ) (150 ) Commercial Real Estate—Owner Occupied (15 ) (42 ) (7 ) Commercial Real Estate—Non-Owner Occupied (46 ) (74 ) (395 ) Real Estate Mortgage (116 ) (66 ) (182 ) Real Estate Construction (37 ) (4 ) (1 ) Farm Real Estate — (6 ) (12 ) Lease financing receivables — 23 — Consumer and Other 72 53 (36 ) Total net charge-offs (recoveries) 980 (118 ) (783 ) Ratio of net charge-offs (recoveries) during the year to average loans outstanding: Commercial & Agriculture 0.41 % (0.00 )% (0.04 )% Commercial Real Estate—Owner Occupied (0.00 )% (0.01 )% (0.00 )% Commercial Real Estate—Non-Owner Occupied (0.00 )% (0.01 )% (0.05 )% Real Estate Mortgage (0.02 )% (0.01 )% (0.04 )% Real Estate Construction (0.01 )% (0.00 )% (0.00 )% Farm Real Estate — (0.02 )% (0.04 )% Lease financing receivables — — Consumer and Other 0.11 % 0.06 % (0.04 )% Total net recoveries (charge-offs) 0.04 % (0.01 )% (0.04 )% The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy, decline in market values of collateral and deterioration of specific businesses. The determination of the balance of the allowance for credit losses is based on the CECL methodology and utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods under prior GAAP, which generally require that a loss be incurred before it is recognized. In 34 management’s judgment, the CECL methodology produces a result that is adequate to provide for probable credit losses. Allocation of Allowance for Loan Losses The following tables allocate the allowance for loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for expected lifetime credit losses. within the following categories of loans at the dates indicated. 2023 2022 Allowance Percentage of loans to total loans Allowance Percentage of loans to total loans (Dollars in thousands) Commercial & Agriculture $ 7,884 10.6 % $ 3,011 10.9 % Commercial Real Estate—Owner Occupied 4,686 13.2 4,565 14.5 Commercial Real Estate—Non-Owner Occupied 11,788 40.6 14,138 40.0 Real Estate Mortgage 8,489 23.1 3,145 21.7 Real Estate Construction 3,388 9.1 2,293 9.6 Farm Real Estate 260 0.9 291 1.0 Lease financing receivables 306 1.9 429 1.5 Consumer and Other 340 0.6 98 0.8 Unallocated 19 — 541 — $ 37,160 100.0 % $ 28,511 100.0 % 2021 Allowance Percentage of loans to total loans (Dollars in thousands) Commercial & Agriculture $ 2,600 12.3 % Commercial Real Estate—Owner Occupied 4,464 14.9 Commercial Real Estate—Non-Owner Occupied 13,860 41.5 Real Estate Mortgage 2,597 21.5 Real Estate Construction 1,810 7.9 Farm Real Estate 287 1.4 Consumer and Other 176 0.5 Unallocated 847 — $ 26,641 100 % Civista measures the adequacy of the allowance for loan losses by using the CECL methodology and utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The allowance for credit losses to total loans increased from 1.12% in 2022 to 1.30% in 2023. The unallocated reserve of Civista decreased to $19 in 2023 from $541 in 2022. Management considers both the decrease in the unallocated reserve and the end-of-period reserve number to be insignificant and within the loan policy guidelines. Securities available for sale increased by $2,870, or 0.5%, from $615,402 at December 31, 2022 to $618,272 at December 31, 2023. U.S. Treasury securities and obligations of U.S. government agencies increased $6,629, or 1.1% from $61,029 at December 31, 2022 to $67,658 at December 31, 2023. Obligations of states and political subdivisions available for sale increased by $21,351 from 2022 to 2023. Mortgage-backed securities decreased by $25,110 to total $212,015 at December 31, 2023. The Company continues to utilize letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. As of December 31, 2023, the Company was in compliance with all applicable pledging requirements. 35 Mortgage-backed securities totaled $212,015 at December 31, 2023 and none were considered unusual or “high risk” securities as defined by regulatory authorities. Of this total, $210,108 consisted of pass-through securities issued by the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”), and the remaining $1,907 of these securities were collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the mortgage-backed securities portfolio at December 31, 2023 was 2.56%. The average maturity at December 31, 2022 was approximately 14.8 years. Securities available for sale had a fair value at December 31, 2023 of $618,272. This fair value includes unrealized gains of approximately $3,059 and unrealized losses of approximately $57,679. Net unrealized losses totaled $54,620 on December 31, 2023 compared to net unrealized losses of $66,949 on December 31, 2022. The change in unrealized gains is primarily due to changes in market interest rates. Note 3 to the Consolidated Financial Statements provides additional information on unrealized gains and losses. The following table sets forth the maturities of securities at December 31, 2023 and the weighted average yields of such debt securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions. Within one year After one but within five years After five but within ten years After ten years Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) Available for Sale (2) U.S. Treasury securities and obligations of U.S. government agencies $ 18,005 3.50 % $ 38,397 1.16 % $ 831 3.51 % $ 10,425 0.05 % Obligations of states and political subdivisions (1) 18,500 3.98 134,013 3.18 185,121 2.95 965 4.00 Mortgage-backed securities in government sponsored entities 563 0.93 20,644 2.78 7,164 2.47 183,644 2.54 Total $ 37,068 3.70 % $ 193,054 2.73 % $ 193,116 2.93 % $ 195,034 2.41 % (1) Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security. (2) The weighted average yield has been computed using the historical amortized cost for available-for-sale securities. Premises and equipment, net of accumulated depreciation, decreased $7,249 from December 31, 2022 to December 31, 2023. The decrease is the result of new purchases of $3,218, offset by depreciation of $10,760. Goodwill decreased by $175, from $125,695 at December 31, 2022 to $125,520 at December 31, 2023. The decrease is due to an adjustment of goodwill related to the acquisition of VFG in October 2022. Other intangible assets decreased $1,251 from year-end 2022. The decrease includes $1,580 of core deposit intangibles offset by an increase of $329 of mortgage servicing rights. Swap assets decreased $4,098 from December 31, 2022 to December 31, 2023. The decrease is primarily the result of decreases in the fair value of swap assets as compared to December 31, 2022. Bank owned life insurance (BOLI) increased $7,850 from December 31, 2022 to December 31, 2023. An additional $7 of BOLI was purchased in December 2023. The remaining difference is the result of increases in the cash surrender value of the underlying insurance policies. Deferred taxes decreased $92 from December 31, 2022 to December 31, 2023. Year-end deposit balances totaled $2,985,028 in 2023 compared to $2,619,984 in 2022, an increase of $365,044, or 13.9%. This increase in deposits at December 31, 2023 compared to December 31, 2022 included increases in certificate of deposit accounts of $585,401, or 214%, offset by decreases in noninterest bearing demand deposits of $124,634, or 13.9% in interest bearing demand accounts of $78,430, or 14.9%, in savings and money market accounts 36 of $20,129, or 2.3% and in individual retirement accounts of $3,933, or 8.5%. Average deposit balances for 2023 were $2,868,823 compared to $2,614,423 for 2022, an increase of 9.7%. Noninterest bearing deposits averaged $934,741 for 2023, compared to $937,890 for 2022, decreasing $3,149, or 0.3%. Savings, NOW, and MMDA accounts averaged $855,946 for 2023 compared to $1,423,134 for 2022, decreasing $567,188, or 39.9%. Average certificates of deposit decreased $281,549 to total an average balance of $534,947 for 2023. The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated. 2023 2022 Average balance Average rate paid Average balance Average rate paid (Dollars in thousands) Noninterest-bearing demand deposits $ 900,124 N/A $ 937,890 N/A Interest-bearing demand deposits 497,512 0.03 % 544,351 0.03 % Savings, including Money Market deposit accounts 858,551 1.15 % 878,783 0.15 % Certificates of deposit, including IRA’s 578,032 4.12 % 253,399 0.95 % $ 2,834,219 $ 2,614,423 Uninsured deposits at December 31, 2023 and 2022 were $499,429 and $563,092, respectively. Uninsured deposits as of December 31, 2023 and 2022 are based on estimates and include portions of FDIC-insured deposit accounts that exceed the insurance limit of $250,000 per separately insured depositor. Maturities of certificates of deposits and individual retirement accounts (IRAs) of more than $250,000 outstanding at December 31, 2023 are summarized as follows. Certificates of Deposits Individual Retirement Accounts Total (Dollars in thousands) 3 months or less $ 26,470 $ 0 $ 26,470 Over 3 through 6 months 25,861 1,080 26,941 Over 6 through 12 months 30,717 1,540 32,257 Over 12 months 12,185 305 12,490 $ 95,233 $ 2,925 $ 98,158 FHLB advances decreased $56,886 from December 31, 2022 to December 31, 2023. Short-term FHLB advances decreased $55,700 year over year due to an increase in over night funding. The remaining difference is long-term FHLB advances decreased due to the repayments in 2023 Other borrowings decreased $5,656 from December 31, 2022 to December 31, 2023. Other borrowings decreased due to borrowings at the CLF division. Civista no longer offers repurchase agreements in the form of sweep accounts to commercial checking account customers, as of July 2023. These repurchase agreements totaled $0 at December 31, 2023 compared to $25,143 at December 31, 2022. U.S. Treasury securities and obligations of U.S. government agencies maintained under Civista’s control were pledged as collateral for the repurchase agreements. Additional detail related to these repurchase agreements can be found in Note 12 to the Consolidated Financial Statements. Swap liabilities decreased $4,098 from December 31, 2022 to December 31, 2023. The decrease is primarily the result of decreases in the fair value of swap liabilities as compared to December 31, 2022. Total shareholders’ equity increased $37,166, or 11.1%, during 2023 to $372,002. Shareholders' equity increased due to net income of $42,964, partially offset by $9,599 of dividends on common shares and a one-time CECL adoption adjustment of $5,193. Additionally, $984 was recognized as stock-based compensation in 2023 in connection with the grant of restricted common shares. Accumulated other comprehensive income increased $9,747 due to an increase in the fair value of securities available for sale, net of tax and a $768 increase in the Company’s pension liability, net of tax. The Company repurchased treasury shares for $1,628. For further explanation of these items, see Note 1, Note 37 15 and Note 16 to the Consolidated Financial Statements. The Company paid $0.61 per common share in dividends in 2023 compared to $0.56 per common share in dividends in 2022. Total outstanding common shares at December 31, 2023 were 15,695,424, which decreased from 15,728,234 common shares outstanding at December 31, 2022. Common shares outstanding was impacted by the Company’s repurchase of 90,423 common shares during 2023 at an average repurchase price of $18.01. The Company repurchased 84,230 common shares pursuant to a stock repurchase program announced on May 8, 2023, pursuant to which the Company is authorized to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until May 2, 2024. An additional 6,193 common shares were surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 1,740 restricted common shares were forfeited. The repurchase of common shares was offset by the grant of 47,536 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. In addition, 1,817 common shares were issued to Civista directors in 2023 as a retainer payment for service on the Civista Board of Directors. Results of Operations The operating results of the Company are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Company’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities. The Company’s net income primarily depends on its net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for credit losses, service charges, gains on the sale of assets, other non-interest income, noninterest expense and income taxes. Comparison of Results of Operations for the Years Ended December 31, 2023 and December 31, 2022 Net Income The Company’s net income for the year ended December 31, 2023 was $42,964, compared to $39,427 for the year ended December 31, 2022. The change in net income was the result of the items discussed in the following sections. Net Interest Income Net interest income for 2023 was $125,496, an increase of $15,292, or 13.9%, from 2022. From 2022 to 2023, average earning assets increased 11.6%, interest income increased $56,579, and interest expense on interest-bearing liabilities increased $41,287. The Company continually examines its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes. Total interest income increased $56,579 to $182,734 for the year ended December 31, 2023, which is attributable to an increase of $52,702 in interest and fees on loans. This change was the result of an increase in the average balance of loans, accompanied by a higher yield on the portfolio. The average balance of loans increased by $523,715, or 23.8%, to $2,722,797 for the year ended December 31, 2023, as compared to $2,199,082 for the year ended December 31, 2022. The loan yield increased to 5.90% for 2023, from 4.69% in 2022. Interest on taxable securities increased $2,595 to $11,718 for the year ended December 31, 2023, compared to $9,123 for the same period in 2022. The average balance of taxable securities increased $22,372 to $363,972 for the year ended December 31, 2023, as compared to $341,600 for the year ended December 31, 2022. The yield on taxable securities increased 39 basis points to 2.88% for 2023, compared to 2.49% for 2022. Interest on tax-exempt securities increased $1,423 to $9,282 for the year ended December 31, 2023, compared to $7,859 for the same period in 2022. The average balance of tax-exempt securities increased $18,697 to $282,678 for the year ended December 31, 2023 as compared to $263,981 for the year ended December 31, 2022. The yield on tax-exempt securities increased 23 basis points to 3.79% for 2023, compared to 3.56% for 2022. 38 Total interest expense increased $41,287 or 258.8%, to $53,763 for the year ended December 31, 2023, compared with $4,732 for the same period in 2022. The increase in interest expense can be attributed to an increase in the average rate paid, accompanied by an increase in the average balance of interest-bearing liabilities. For the year ended December 31, 2023, the average balance of interest-bearing liabilities increased $398,903 to $2,405,655 , as compared to $2,006,752 for the year ended December 31, 2022. Interest incurred on deposits increased by $29,915 to $33,755 for the year ended December 31, 2023, compared to $3,840 for the same period in 2022. The increase in deposit expense was due to a increase in the average rate paid, as the average rate paid on demand and savings accounts increased from 0.15% in 2022 to 1.15% in 2023 and the average rate paid on time deposits increased from 0.95% in 2022 to 4.125% in 2023, which was coupled with an increase in the average balance of interest-bearing deposits of $258,499 for the year ended December 31, 2023 as compared to the same period in 2022. Interest expense incurred on FHLB advances and subordinated debentures increased 93.9% from 2022. The increase was due to an increase in the average balance of short-term FHLB balances and subordinated debentures to $280,887 and $66,875, respectively, accompanied by an increase in rates. The average balance of other borrowings decreased $17,823 for the period ended December 31, 2023. Refer to “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate” on pages 43 through 45 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Company’s net interest income. Provision and Allowance for Credit Losses The Company’s policy is to maintain the allowance for credit losses at a level sufficient to provide for probable losses incurred in the current portfolio. Management believes the analysis of the allowance for credit losses supported a reserve of $37,160 at December 31, 2023. The Company provides for credit losses through regular provisions to the allowance for credit losses as necessary. The amount of the provision is affected by loan charge-offs, recoveries and changes in specific and general allocations required for the allowance for credit losses. A number of factors impact the provisions for credit losses, such as the level of higher risk loans in the portfolio, changes in practices related to loans, changes in collateral values and other factors. We continue to actively manage this process and have provided to maintain the reserve at a level that assures adequate coverage ratios. Provisions for credit losses totaled $4,435 in 2023, $1,752 in 2022 and $830 in 2021. The Company’s provision for credit losses increased $2,683 during 2023, as compared to 2022, primarily to support strong organic loan growth in the portfolio. In addition, a one-time CECL adoption adjustment of $5,964 was incurred in the first quarter of 2023. Efforts are continually made to analyze each segment of the loan portfolio and quantify risk to assure that reserves are appropriate for each segment and the overall portfolio. Management specifically evaluates loans that are impaired, which includes restructured loans, to estimate potential loss. This analysis includes a review of the loss migration calculation for all loan categories as well as fluctuations and trends in various risk factors that have occurred within the portfolios’ economic life cycle. The analysis also includes assessment of qualitative factors such as credit trends, unemployment trends, vacancy trends and loan growth. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses. Management analyzes each impaired commercial and commercial real estate loan relationship with a balance of $350 or larger, on an individual basis and when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale and leases 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. Noninterest Income Noninterest income increased $8,087, or 27.8%, to $37,164 for the year ended December 31, 2023, from $29,076 for the comparable 2022 period. The increase was primarily due to increases in lease revenue of $5,285, service charges of $512, bank owned life insurance of $128 and other operating items of $2,508. Which were partially offset by decreases in net gain on equity securities of $139, and net gain on sale of loans and leases of $489. 39 Net gain on sale of loans and leases decreased by $489 for 2023, primarily as a result of a decrease in volume of loans sold. During the twelve-months ended December 31, 2023, 349 loans were sold, totaling $103,036. During the twelve-months ended December 31, 2022, 692 loans were sold, totaling $131,193. Service charges increased due to increased ATM fees of $381. Lease revenue and residual income increased due to a full year of operations for CLF. Other income increased due to increases in wire transfer fees, merchant credit card fees, loan servicing fees, amortization of mortgage servicing rights and fee income from the acquisition of CLF. Noninterest Expense Noninterest expense increased $17,118, or 18.9%, to $107,611 for the year ended December 31, 2023, from $90,493 for the comparable 2022 period. The increase was primarily due to increases in compensation expense of $7,230, net occupancy expense of $694, equipment expense of $6,015, amortization expense of $283, software expense of $734, FDIC assessments of $840 and other operating expense of $2,242, increases were partially offset by decreases in data processing expense of $546, professional services of $436, and marketing expense of $161. The increase in compensation expense was due to increased payroll, payroll taxes, employee insurance and commissions and incentives. The average full time equivalent (FTE) employees were 531 at December 31, 2023, an increase of 50 FTEs over 2022 due to a full year of the additional employees resulting from the prior year acquisitions of Comunibanc and VFG. The increase in net occupancy expense was due to increases in building repairs and maintenance and building depreciation. The increase in equipment expense was due to a general increase in computer, printer, office and security equipment costs and an increase in equipment depreciation related to the acquisition of VFG in October 2022. The increase in FDIC assessments was attributable to higher assessment multipliers charged to Civista. The increase in amortization expense is related to the a full year of amortization of assets acquired in the acquisition of Comunibanc Corp in July 2022. Software expense increase due to a general increase in legacy software maintenance contracts. Other operating expenses increased due to increases in travel, lodging and meals, donations, and bad check expense. The decrease in data processing expense was due to no additional acquisitions in 2023 compared to prior year. The decrease in professional services was due to decreases in legal and audit fees, as well as a decrease in marketing expense due to no additional marketing for new acquisitions compared to the previous year. Income Tax Expense Income tax expense was $7,649 in 2023 compared to $7,608 in 2022. Income tax expense as a percentage of pre-tax income was 15.1% in 2023 compared to 16.2% in 2022. A lower federal effective tax rate than the statutory rate of 21% in 2023 and 2022 is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits. Comparison of Results of Operations for the Years Ended December 31, 2022 and December 31, 2021 A discussion regarding our financial condition and results of operations for the year ended December 31, 2022 and year-to-year comparisons between 2022 and 2021, which are not included in this Annual Report on Form 10-K, can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and are incorporated by reference herein. 40 Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate (Amounts in thousands): Increase (decrease) due to: Volume (1) Rate (1) Net 2023 compared to 2022 Interest income: Loans $ 22,820 $ 29,882 $ 52,702 Taxable securities 1,106 1,489 2,595 Nontaxable securities 896 527 1,423 Interest-bearing deposits in other banks (1,651 ) 1,510 (141 ) Total interest income $ 23,171 $ 33,408 $ 56,579 Interest expense: Savings and interest-bearing demand accounts $ (70 ) $ 6,317 $ 6,247 Certificates of deposit 6,014 17,654 23,668 Short-term Federal Home Loan Bank advances 10,767 1,160 11,927 Long-term Federal Home Loan Bank advances (710 ) 266 (444 ) Securities sold under repurchase agreements (6 ) (1 ) (7 ) Federal funds purchased — — — Other borrowings 5 1,063 1,068 Subordinated debentures (978 ) (194 ) (1,172 ) Total interest expense $ 15,022 $ 26,265 $ 41,287 Net interest income $ 8,149 $ 7,143 $ 15,292 2022 compared to 2021 Interest income: Loans $ 7,250 $ 7,921 $ 15,171 Taxable securities 3,457 193 3,650 Nontaxable securities 2,295 (686 ) 1,609 Interest-bearing deposits in other banks (393 ) 1,064 671 Total interest income $ 12,609 $ 8,492 $ 21,101 Interest expense: Savings and interest-bearing demand accounts $ 104 $ 119 $ 223 Certificates of deposit (128 ) (430 ) (558 ) Short-term Federal Home Loan Bank advances 2,566 — 2,566 Long-term Federal Home Loan Bank advances (556 ) (97 ) (653 ) Securities sold under repurchase agreements (3 ) (9 ) (12 ) Federal funds purchased — 5 5 Other borrowings (298 ) 2,223 1,925 Subordinated debentures 2,313 513 2,826 Total interest expense $ 3,998 $ 2,324 $ 6,322 Net interest income $ 8,611 $ 6,168 $ 14,779 (1) The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate. 41 Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential The following table sets forth, for the years ended December 31, 2023, 2022 and 2021, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and noninterest-earning assets (Amounts in thousands): 2023 2022 2021 Assets Average balance Interest Yield/ rate Average balance Interest Yield/ rate Average balance Interest Yield/ rate Interest-earning assets: Loans (1)(2)(3)(5) $ 2,722,797 $ 160,755 5.90 % $ 2,286,928 $ 108,053 4.72 % $ 2,127,157 $ 92,882 4.37 % Taxable securities (4) 363,972 11,718 2.88 % 341,600 9,123 2.49 % 232,813 5,473 2.41 % Non-taxable securities (4)(5) 282,678 9,282 3.79 % 263,981 7,859 3.56 % 217,786 6,250 3.96 % Interest-bearing deposits in other banks 21,551 979 4.54 % 146,849 1,120 0.76 % 347,573 449 0.13 % Total interest earning assets 3,390,998 182,734 5.35 % 3,039,358 126,155 4.16 % 2,925,329 105,054 3.68 % Noninterest-earning assets: Cash and due from financial institutions 39,219 84,777 35,404 Premises and equipment, net 58,456 34,577 22,617 Accrued interest receivable 11,499 8,650 8,010 Intangible assets 133,626 96,492 84,747 Other assets 63,152 50,765 37,378 Bank owned life insurance 54,211 50,076 46,435 Less allowance for loan losses (33,814 ) (27,721 ) (26,366 ) Total $ 3,717,347 $ 3,336,974 $ 3,133,554 (1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale. (2) Included in loan interest income are loan fees of $2,960 in 2023, $2,024 in 2022 and $1,661 in 2021. (3) Non-accrual loans are included in loan totals and do not have a material impact on the analysis presented. (4) Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities. (5) Yield/Rate is calculated using the tax-equivalent adjustment of 21% for 2023, 2022 and 2021. 42 Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential (Continued) The following table sets forth, for the years ended December 31, 2023, 2022 and 2021, the distribution of liabilities, including interest amounts and average rates of major categories of interest-bearing liabilities and shareholders’ equity (Amounts in thousands): 2023 2022 2021 Liabilities and Shareholders’ Equity Average balance Interest Yield/ rate Average balance Interest Yield/ rate Average balance Interest Yield/ rate Interest-bearing liabilities: Savings and interest-bearing demand accounts $ 1,356,789 $ 7,689 0.57 % $ 1,423,134 $ 1,442 0.01 % $ 1,315,220 $ 1,219 0.09 % Certificates of deposit 578,243 26,066 4.51 % 253,399 2,398 0.95 % 265,294 2,956 1.11 % Short-term Federal Home Loan Bank advances 280,887 14,493 5.16 % 66,875 2,566 3.84 % — — — Long-term Federal Home Loan Bank advances 2,909 66 2.27 % 45,325 510 1.13 % 94,041 1,163 1.24 % Other borrowings 74,025 4,058 5.48 % 91,848 5,243 5.70 % 100,250 3,312 3.30 % Securities sold under repurchase agreements 8,685 4 0.05 % 22,293 11 0.05 % 26,165 23 0.09 % Federal funds purchased 244 13 5.33 % 137 6 4.38 % 137 1 0.73 % Subordinated debentures 103,873 4,849 4.67 % 103,741 3,781 3.64 % 36,785 955 2.66 % Total interest-bearing liabilities 2,405,655 57,238 2.38 % 2,006,752 15,957 0.79 % 1,837,892 9,629 0.53 % Noninterest-bearing liabilities: Demand deposits 917,005 937,890 907,591 Other liabilities 50,963 76,189 38,868 967,968 1,014,079 946,459 Shareholders’ equity 343,724 316,143 349,203 Total $ 3,717,347 $ 3,336,974 $ 3,133,554 Net interest income and interest rate spread (1) $ 125,496 2.97 % $ 110,198 3.37 % $ 95,425 3.15 % Net interest margin (2) 3.70 % 3.65 % 3.35 % (1) Interest rate spread is calculated by subtracting the rate on average interest-bearing liabilities from the yield on average interest-earning assets. (2) Net interest margin is calculated by dividing tax-equivalent adjusted net interest income by average interest-earning assets. 43 Liquidity and Capital Resources Civista maintains a conservative liquidity position. All securities are classified as available for sale. At December 31, 2023, securities with maturities of one year or less totaled $2,652, or 0.4% of the total securities portfolio. The available for sale portfolio helps to provide Civista with the ability to meet its funding needs. The Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings. Net cash provided by operating activities was $62,698, $25,183, and $40,761 for 2023, 2022 and 2021, respectively. The primary additions to cash from operating activities are from net income, adjusted for amortization of intangible assets, amortization of securities net of accretion, the provision for credit losses, depreciation and proceeds from sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used for investing activities was $311,784, $410,364, and $130,496 in 2023, 2022 and 2021, respectively, principally reflecting our loan and investment security activities. Deposits and borrowings comprised most of our financing activities, which resulted in net cash provided of $266,131, $164,303, and $216,925 in 2023, 2022 and 2021, respectively. Future loan demand of Civista can be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. As of December 31, 2023, Civista had total credit availability with the FHLB of $791,637, of which $364,792 was outstanding, including standby letters of credit of $24,400. On a separate entity basis, CBI’s primary source of funds is dividends paid by its subsidiaries, primarily by Civista. Generally, subject to applicable minimum capital requirements, Civista may declare and pay a dividend without the approval of the Federal Reserve Bank of Cleveland (the “Federal Reserve Bank”) and the ODFI, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. At December 31, 2023, Civista was able to pay approximately $56,886 of dividends to CBI without obtaining regulatory approval. During 2023, Civista paid dividends totaling $28,100 to CBI. This represented approximately 65 percent of Civista’s earnings for the year. The Company manages its liquidity and capital through quarterly Asset/Liability Management Committee (ALCO) meetings. The ALCO discusses issues like those in the above paragraphs as well as others that may affect the future liquidity and capital position of the Company. The ALCO also examines interest rate risk and the effect that changes in rates will have on the Company. For more information about interest rate risk, please refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” section below. Capital Adequacy Shareholders’ equity totaled $372,002 at December 31, 2023 compared to $334,835 at December 31, 2022. The increase in shareholders’ equity resulted primarily from net income of $42,964, which was partially offset by a $768 net increase in the Company’s pension liability and an increase in the fair value of securities available for sale, net of tax, of $9,747, together with dividends on common shares of $9,599 and repurchase of common shares totaling $1,628 during 2023 pursuant to the Company’s publicly-announced share purchase programs. During the first quarter of 2015, the Company adopted the new BASEL III regulatory capital framework as approved by the federal banking agencies. In addition to the other required capital ratios, the BASEL III rules also require the Company to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets (as these terms are defined in the BASEL III rules). Under the BASEL III rules, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of December 31, 2023 and 2022 as identified in the following table: Total Risk Based Capital Tier I Risk Based Capital CET1 Risk Based Capital Leverage Ratio Company Ratios—December 31, 2023 14.4 % 10.7 % 9.7 % 8.8 % Company Ratios—December 31, 2022 14.1 % 10.4 % 9.4 % 8.7 % For Capital Adequacy Purposes 8.0 % 6.0 % 4.5 % 4.0 % To Be Well Capitalized Under Prompt Corrective Action Provisions 10.0 % 8.0 % 6.5 % 5.0 % 44 Common equity for the CET1 risk-based capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions. Tier 1 capital includes common equity as defined for the CET1 risk-based capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions. Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to certain eligibility criteria, less applicable deductions. The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). Under applicable regulatory guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The BASEL III regulatory capital rules and regulations also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of at least 2.5 percent composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. Effects of Inflation The Company’s balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds. During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. However, no clear evidence exists of a relationship between the purchasing power of an entity’s net positive monetary position and its future earnings. Moreover, the Company’s ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. As part of the asset/liability management process, management reviews and monitors information and projections on inflation as published by the Federal Reserve Board and other sources. This information speaks to inflation as determined by its impact on consumer prices and also the correlation of inflation and interest rates. This information is but one component in an asset/liability management process designed to limit the impact of inflation on the Company. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated. Fair Value of Financial Instruments The Company has disclosed the fair value of its financial instruments at December 31, 2023 and 2022 in Note 17 to the Consolidated Financial Statements. The fair value of loans at December 31, 2023 was 94.9% of the carrying value compared to 96.5% at December 31, 2022. The fair value of deposits at December 31, 2023 was 100.0% of the carrying value compared to 100.0% at December 31, 2022. Changes in fair value were primarily due to changes in the discount values used to measure fair value. 45 Item 7A. Quantitative and Qualitat ive Disclosures About Market Risk The Company’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Company’s safety and soundness. Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality. The Federal Reserve Board, together with the OCC and FDIC, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company’s primary asset/liability management technique is the measurement of the Company’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities. Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities and matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refinance its obligations at new, lower rates. The Company does not have significant derivative financial instruments and does not intend to purchase a significant amount of such instruments in the near future. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short term or due on demand, while most of its assets may be invested in long term loans or securities. Accordingly, 46 the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Also, FHLB advances and wholesale borrowings may be used as important sources of liquidity for the Company. The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2023 and 2022, based on certain prepayment and account decay assumptions that management believes are reasonable. Although the Company had derivative financial instruments as of December 31, 2023 and 2022, the changes in fair value of the assets and liabilities of the underlying contracts offset each other. For more information about derivative financial instruments see Note 22 to the Consolidated Financial Statements. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Company’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates. Net Portfolio Value December 31, 2023 December 31, 2022 Change in Rates Dollar Amount Dollar Change Percent Change Dollar Amount Dollar Change Percent Change +200bp $ 603,656 $ (4,077 ) (1 )% $ 571,328 $ 14,733 3 % +100bp 608,399 666 0 % 566,596 10,001 2 % Base 607,733 — — 556,595 — — -100bp 605,047 (2,686 ) (0 )% 548,575 (8,020 ) (1 )% -200bp 591,305 (16,428 ) (3 )% 526,702 (29,893 ) (5 )% The change in net portfolio value from December 31, 2022 to December 31, 2023, can be attributed to a couple of factors. The yield remains inverted, and the short end has steepened since the end of the year. Additionally, both the volume and mix of assets and funding sources has changed. The volume of loans has increased, and the asset mix remains centered on loans. The volume of certificates of deposit has increased and both non-maturing deposits and borrowed money have decreased. The volume and mix shifts from the end of the year contributed to an increase in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. A 200 basis point change in the rates up scenario would lead to a slightly larger decrease in the market value of assets than liabilities. Accordingly, we see a decrease in the net portfolio value. A 200 basis points change in the rates down scenario would lead to a larger increase in the market value of liabilities than in assets, leading to a decrease in the net portfolio value. Critical Accounting Policies Allowance for Credit losses: The allowance for credit losses is regularly reviewed by management to determine that the amount is considered adequate to absorb probable losses in the loan portfolio. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed impaired loans, the pooling of commercial credits risk graded as special mention and substandard that are not individually analyzed, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other items. Those judgments and assumptions that are most critical to the application of this accounting policy are assessing the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk ratings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors, including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees. Note 1 and Note 5 to the Consolidated Financial Statements provide additional information regarding the Allowance for Credit losses. 47 Goodwill: The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. Management estimated the fair value of the Reporting Unit as of the measurement date utilizing four valuation approaches: the comparable transactions approach, the control premium approach, the public market peers control premium approach and the discounted cash flow approach. These approaches were all considered in reaching a conclusion on fair value. The estimated fair value of the Reporting Unit was then compared to the current carrying value to determine if impairment had occurred. It is our opinion that, as of the November 30, 2023 measurement date, the aggregate fair value of the Reporting Unit exceeds the carrying value of the Reporting Unit. Therefore management concluded that goodwill was not impaired and made no adjustment in 2023. Income Taxes: Management’s determination of the realization of net deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management analyzes material tax positions taken in any income tax return for any tax jurisdiction and determines the likelihood of the positions being sustained in a tax examination. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Available for Sale (“AFS”) Debt Securities: For AFS securities in an unrealized loss position, management assesses whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. Pension Benefits: Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Our pension benefits are described further in Note 15 of the “Notes to Consolidated Financial Statements.” Derivative Financial Instruments : In the ordinary course of business, the Company enters into derivative financial instruments in connection with its asset/liability management activities and to accommodate the needs of its customers. Derivative financial instruments are stated at fair value on the Consolidated Statement of Conditions with changes in fair value reposted in current earnings. 48