CIVISTA BANCSHARES, INC. 10-K

Item 8. Financial Statements an d Supplementary Financial Data CIVISTA BANCSHARES, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Management’s Report on Internal Control over Financial Reporting 50 Report of Independent Registered Public Accounting Firm (FORVIS, LLP - PCAOB ID:686) 51 Consolidated Balance Sheets as of December 31, 2023 and 2022 55 Consolidated Statements of Operations for the Years ended December 31, 2023, 2022 and 2021 56 Consolidated Statements of Changes in Shareholders’ Equity for the Years ended December 31, 2023, 2022 and 2021 58 Consolidated Statements of Cash Flows for the Years ended December 31, 2023, 2022 and 202 1 59 Notes to Consolidated Financial Statements 61 49 Management’s Report on Internal Control over Financial Reporting We, as management of Civista Bancshares, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the Company’s system of internal control over financial reporting as of December 31, 2023, in relation to criteria for effective internal control over financial reporting as described in “2013 Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2023 , its system of internal control over financial reporting is effective and meets the criteria of the “2013 Internal Control – Integrated Framework”. FORVIS, LLP , independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2023. Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations. Management has assessed compliance by the Company with the designated laws and regulations relating to safety and soundness. Based on the assessment, management believes that the Company complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2023. Dennis G. Shaffer Todd A. Michel President and Chief Executive Officer Senior Vice President, Controller Sandusky, Ohio March 14, 2024 50 REPORT OF INDEPE NDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders, Board of Directors and Audit Committee Civista Bancshares, Inc. Sandusky, Ohio Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Civista Bancshares, Inc. (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2024, expressed an unqualified opinion thereon. Change in Accounting Principle As discussed in Notes 1 and 5 to the consolidated financial statements, the Company changed its method of accounting for the allowance for credit losses as of January 1, 2023 due to the adoption of Accounting Standards Update No. 2016-13, which established Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters 12F The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which they relate. Allowance for Credit Losses As discussed in Notes 1 and 5 to the consolidated financial statements, the Company’s loan portfolio and the associated allowance for credit losses (“ACL”) were $2.9 billion and $37.2 million as of December 31, 2023, respectively. The Company estimates the ACL at a level that is appropriate to cover estimated credit losses based on internal and external information relating to past events, current conditions, and reasonable and supportable forecasts. The Company uses 51 the discounted cash flow method for all loan segments to estimate expected losses on a collective (pool) basis for loans that share similar risk characteristics. For each loan segment, the Company generates cash flow projections at the instrument level adjusting payment expectations for estimated prepayment speed, curtailments, time to recovery, probability of default and loss given default. Additional qualitative adjustments are applied for risk factors that are not considered within the modeling process but are relevant in assessing the expected credit losses within the loan segments. Consideration is given to the following factors: changes in experience and depth of lending and management staff; changes in quality of credit review system; changes in nature and volume of portfolio; changes in past due, classified and nonaccrual loans; changes in economic and business conditions; changes in competition or legal and regulatory requirements; changes in concentrations within the portfolio; and changes in underlying collateral for collateral dependent loans. Loans that do not share risk characteristics are evaluated on an individual basis. We identified the valuation of the ACL as a critical audit matter. The principal considerations for that determination included the high degree of judgment and subjectivity involved in evaluating management’s estimates, particularly as it related to evaluating management’s assessment of the qualitative factors. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s significant estimates and assumptions. Our primary audit procedures performed related to the ACL included: • Obtained an understanding of the Company's process for establishing the ACL, including the qualitative and forecast factor adjustments of the ACL • Evaluated the design and tested the operating effectiveness of controls related to management's determination of the ACL, including controls over: o Management's process for identification, basis for development and related adjustments; including reasonableness, of the qualitative factor components of the ACL o Management's review of reliability and accuracy of data used to calculate and estimate the various components of the ACL, including accuracy of the calculation • Evaluated and tested the data and inputs within the ACL calculation for completeness and accuracy including mathematical accuracy for the calculation. • Evaluated the qualitative factors for appropriate identification and application including reasonableness of the basis for adjustment. • Evaluated the mathmatical accuracy of formulas used in setting qualitative factors and application of the factors to loan segments. • Utilized the assistance of the firm's internal specialists to test the mathematical operation of the model. • Evaluated the reasonableness of management's application of qualitative factor adjustments to historical loss rates in the ACL, including: o Evaluated completeness and accuracy of the information utilized as a basis for the qualitative factors to third party or internal sources o Evaluated the relevance of inputs in the calculation utilized as a basis for the qualitative factors We have served as the Company’s auditor since 2021. FORVIS, LLP Cincinnati, Ohio March 14, 2024 52 REPORT OF INDEPENDENT RE GISTERED PUBLIC ACCOUNTING FIRM To the Shareholders, Board of Directors and Audit Committee Civista Bancshares, Inc. Sandusky, Ohio Opinion on the Internal Control over Financial Reporting We have audited Civista Bancshares, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31, 2023, and our report dated March 14, 2024, expressed an unqualified opinion on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 53 Definitions and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. FORVIS, LLP Cincinnati, Ohio March 14, 2024 54 CIVISTA BANCSHARES, INC. CONSOLIDATED B ALANCE SHEETS December 31, 2023 and 2022 (Amounts in thousands, except share data) 2023 2022 ASSETS Cash and due from financial institutions $ 60,406 $ 43,361 Cash and cash equivalents 60,406 43,361 Investments in time deposits 1,225 1,477 Securities available for sale 618,272 615,402 Equity securities 2,169 2,190 Loans held for sale 1,725 683 Loans, net of allowance of $ 37,160 and $ 28,511 2,824,568 2,619,770 Other securities 29,998 33,585 Premises and equipment, net 56,769 64,018 Accrued interest receivable 12,819 11,178 Goodwill 125,520 125,695 Other intangible assets 9,508 10,759 Bank owned life insurance 61,335 53,543 Swap assets 12,481 16,579 Deferred taxes 18,357 18,449 Other assets 26,266 22,756 Total assets $ 3,861,418 $ 3,639,445 LIABILITIES Deposits Noninterest-bearing $ 771,699 $ 896,333 Interest-bearing 2,213,329 1,723,651 Total deposits 2,985,028 2,619,984 Short-term Federal Home Loan Bank advances 338,000 393,700 Long-term Federal Home Loan Bank advances 2,392 3,578 Securities sold under agreements to repurchase — 25,143 Subordinated debentures 103,943 103,799 Secured borrowings — 101,615 Other borrowings 9,859 15,516 Swap liabilities 12,481 16,579 Accrued expenses and other liabilities 37,713 24,696 Total liabilities 3,489,416 3,304,610 SHAREHOLDERS’ EQUITY Common stock, no par value, 40,000,000 shares authorized, 19,288,674 shares issued at December 31, 2023 and 19,231,061 shares issued at December 31, 2022 311,166 310,182 Accumulated earnings 183,788 156,492 Treasury stock, 3,593,250 common shares at December 31, 2023 and 3,502,827 common shares at December 31, 2022, at cost ( 75,422 ) ( 73,794 ) Accumulated other comprehensive loss ( 47,530 ) ( 58,045 ) Total shareholders’ equity 372,002 334,835 Total liabilities and shareholders’ equity $ 3,861,418 $ 3,639,445 55 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEM ENTS OF OPERATIONS Years ended December 31, 2023, 2022 and 2021 (Amounts in thousands, except per share data) 2023 2022 2021 Interest and dividend income Loans, including fees $ 160,755 $ 108,053 $ 92,882 Taxable securities 11,718 9,123 5,473 Tax-exempt securities 9,282 7,859 6,250 Federal funds sold and other 979 1,120 449 Total interest and dividend income 182,734 126,155 105,054 Interest expense Deposits 33,755 3,840 4,175 Federal Home Loan Bank advances 14,559 3,076 1,163 Subordinated debentures 4,849 3,781 955 Securities sold under agreements to repurchase and other 4,075 5,254 3,336 Total interest expense 57,238 15,951 9,629 Net interest income 125,496 110,204 95,425 Provision for credit losses 4,435 1,752 830 Net interest income after provision for credit losses 121,061 108,452 94,595 Noninterest income Service charges 7,206 7,074 5,905 Net gain on sale of securities 0 10 1,786 Net gain (loss) on equity securities ( 21 ) 118 186 Net gain on sale of loans and leases 2,908 3,397 8,042 ATM/Interchange fees 5,880 5,499 5,443 Wealth management fees 4,767 4,902 4,857 Lease revenue & residual income 7,595 2,310 — Bank owned life insurance 1,112 984 1,200 Tax refund processing fees 2,375 2,375 2,375 Swap fees 673 247 207 Other 4,668 2,160 1,451 Total noninterest income 37,163 29,076 31,452 Noninterest expense Compensation expense 58,291 51,061 44,690 Net occupancy expense 5,395 4,701 4,213 Equipment expense 11,085 5,070 1,838 Contracted data processing 2,242 2,788 1,725 FDIC Assessment 1,637 797 1,056 State franchise tax 2,026 1,975 2,184 Professional services 4,952 5,388 2,715 Amortization of intangible assets 1,579 1,296 890 ATM/Interchange expense 2,420 2,248 2,314 Marketing expense 1,352 1,513 1,103 Software maintenance expenses 4,167 3,433 2,755 Other operating expenses 12,465 10,223 12,183 Total noninterest expense 107,611 90,493 77,666 Income before income taxes 50,613 47,035 48,381 Income taxes 7,649 7,608 7,835 Net income 42,964 39,427 40,546 Net income available to common shareholders $ 42,964 $ 39,427 $ 40,546 Earnings per common share, basic $ 2.73 $ 2.60 $ 2.63 Earnings per common share, diluted $ 2.73 $ 2.60 $ 2.63 56 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENS IVE INCOME Years ended December 31, 2023, 2022 and 2021 (Amounts in thousands) 2023 2022 2021 Net income $ 42,964 $ 39,427 $ 40,546 Other comprehensive income (loss): Unrealized holding gains (loss) on available for sale securities 12,330 ( 85,517 ) ( 8,570 ) Tax effect ( 2,583 ) 18,079 1,799 Reclassification of gains recognized in net income — ( 10 ) ( 1 ) Tax effect — 2 — Pension liability adjustment 972 736 992 Tax effect ( 204 ) ( 155 ) ( 209 ) Reclassification of actuatial gain recognized in net income — — 240 Tax effect — — ( 50 ) Total other comprehensive income (loss) 10,515 ( 66,865 ) ( 5,799 ) Comprehensive income (loss) $ 53,479 $ ( 27,438 ) $ 34,747 57 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CH ANGES IN SHAREHOLDERS’ EQUITY Years ended December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) Common Shares Accumulated Treasury Accumulated Other Comprehensive Total Shareholders’ Shares Amount Earnings Stock Income (Loss) Equity Balance, December 31, 2020 15,898,032 $ 277,039 $ 93,048 $ ( 34,598 ) $ 14,619 $ 350,108 Net income 40,546 40,546 Other comprehensive loss (5,799 ) (5,799 ) Stock-based compensation 44,633 702 702 Common share dividends ($ 0.52 per share) ( 8,036 ) ( 8,036 ) Repurchase of common stock ( 988,465 ) ( 22,309 ) ( 22,309 ) Balance, December 31, 2021 14,954,200 $ 277,741 $ 125,558 $ ( 56,907 ) $ 8,820 $ 355,212 Net income 39,427 39,427 Other comprehensive income ( 66,865 ) ( 66,865 ) Stock-based compensation 36,461 819 819 Common share dividends ($ 0.56 per share) ( 8,493 ) ( 8,493 ) Stock issued for acquisition of Comunibanc Corp. 984,723 21,122 21,122 Stock issued for acquisition of Vision Financial Group, Inc. 500,293 10,500 10,500 Repurchase of common stock ( 747,443 ) — ( 16,887 ) ( 16,887 ) Balance, December 31, 2022 15,728,234 $ 310,182 $ 156,492 $ ( 73,794 ) $ ( 58,045 ) $ 334,835 Cumulative-effect adjustment for adoption of ASC 326 ( 6,069 ) Balance January 1, 2023 15,728,234 $ 310,182 $ 150,423 $ ( 73,794 ) $ ( 58,045 ) $ 328,766 Net income 42,964 42,964 Other comprehensive income 10,515 10,515 Stock-based compensation 57,613 984 984 Common share dividends ($ 0.61 per share) ( 9,599 ) ( 9,599 ) Repurchase of common stock ( 90,423 ) — ( 1,628 ) ( 1,628 ) Balance, December 31, 2023 15,695,424 $ 311,166 $ 183,788 $ ( 75,422 ) $ ( 47,530 ) $ 372,002 58 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEM ENTS OF CASH FLOWS Years ended December 31, 2023, 2022 and 2021 (Amounts in thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 42,964 $ 39,427 $ 40,546 Adjustments to reconcile net income to net cash from operating activities Time deposits amortization 7 8 8 Security amortization, net 468 1,607 1,376 Depreciation 10,760 4,456 1,976 Amortization of core deposit intangible 1,579 1,296 890 Amortization of net deferred loan fees ( 1,299 ) ( 2,859 ) ( 10,738 ) Loss on sale of fixed assets ( 82 ) 0 0 Net gain on sale of securities 0 ( 10 ) ( 1,786 ) Net (gain) loss on equity securities 21 ( 118 ) ( 186 ) Provision for loan losses 4,435 1,752 830 Loans and leases originated for sale ( 101,170 ) ( 126,507 ) ( 255,265 ) Proceeds from sale of loans and leases 103,036 131,193 268,336 Net gain on sale of loans ( 2,908 ) ( 3,397 ) ( 8,042 ) Increase in cash surrender value of bank owned life insurance ( 1,112 ) ( 984 ) ( 1,200 ) Share-based compensation 984 819 702 Deferred taxes ( 675 ) 483 1,319 Change in: Accrued interest payable 8,858 302 111 Accrued interest receivable ( 1,641 ) ( 2,049 ) 2,036 Other, net ( 1,527 ) ( 20,236 ) ( 152 ) Net cash provided by operating activities 62,698 25,183 40,761 Cash flows used for investing activities: Investments in time securities Maturities 245 1312 980 Purchases — ( 245 ) ( 245 ) Securities available for sale Maturities, prepayments and calls 23,138 49,276 61,927 Sales — 57,332 1,810 Purchases ( 14,146 ) ( 128,860 ) ( 268,309 ) Purchases of other securities ( 32,311 ) ( 16,646 ) — Redemption of other securities 35,898 1,625 3,526 Purchase of equity securities — ( 1,000 ) — Purchases of bank owned life insurance ( 7,000 ) — — Proceeds from bank owned life insurance 320 — 535 Net change in loans ( 314,499 ) ( 315,190 ) 71,072 Proceeds from sale of OREO properties — — 122 Acquisitions, net of cash — ( 51,643 ) — Premises and equipment purchases ( 3,429 ) ( 6,508 ) ( 1,927 ) Disposal of premises and equipment 0 183 13 Net cash used in investing activities ( 311,784 ) ( 410,364 ) ( 130,496 ) 59 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 2023, 2022 and 2021 (Amounts in thousands) 2023 2022 2021 Cash flows from financing activities: Increase (decrease) in deposits 365,044 ( 67,911 ) 227,303 Net change in short-term FHLB advances ( 1,186 ) 393,700 — Repayment of long-term FHLB advances ( 55,700 ) ( 93,128 ) ( 50,000 ) Change in other borrowings ( 5,657 ) ( 42,626 ) — Proceeds from subordinated debentures — — 73,386 Increase (decrease) in securities sold under repurchase agreements ( 25,143 ) ( 352 ) ( 3,419 ) Repurchase of common stock ( 1,628 ) ( 16,887 ) ( 22,309 ) Cash dividends paid ( 9,599 ) ( 8,493 ) ( 8,036 ) Net cash provided by financing activities 266,131 164,303 216,925 Increase (decrease) in cash and due from financial institutions 17,045 ( 220,878 ) 127,190 Cash and cash equivalents at beginning of year 43,361 264,239 137,049 Cash and cash equivalents at end of year $ 60,406 $ 43,361 $ 264,239 Supplemental disclosures of cash flow information: Interest paid $ 48,380 $ 10,696 $ 6,206 Income taxes paid 9,510 3,145 6,180 Transfer of loans from portfolio to other real estate owned — — 72 Securities purchased not settled — 1,338 3,524 The Company purchased all of the capital stock of Comunibanc Corp. for $ 46,090 on July 1, 2022. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 340,649 Less: common stock issued 21,122 Less: cash paid for the capital 24,968 Liabilities assumed $ 294,559 The Company purchased all of the capital stock of Vision Financial Group for $ 46,544 on October 1, 2022. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 126,852 Less: common stock issued 10,500 Less: cash paid for the capital 36,044 Liabilities assumed $ 80,308 60 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIG NIFICANT ACCOUNTING POLICIES The following is a summary of the accounting policies adopted by Civista Bancshares, Inc., which have a significant effect on the Consolidated Financial Statements. Nature of Operations and Principles of Consolidation : The Consolidated Financial Statements include the accounts of Civista Bancshares, Inc. (“CBI”) and its wholly-owned direct and indirect subsidiaries: Civista Bank (“Civista”), First Citizens Insurance Agency, Inc. (“FCIA”), Water Street Properties, Inc. (“WSP”), CIVB Risk Management, Inc. (“CRMI”), First Citizens Capital LLC (“FCC”) and First Citizens Investments, Inc. (“FCI”). The above companies together are sometimes referred to as the “Company”. Intercompany balances and transactions are eliminated in consolidation. Civista provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Cuyahoga, Franklin, Logan, Summit, Huron, Ottawa, Madison, Montgomery, Henry, Wood and Richland, in the Indiana counties of Dearborn and Ripley and in the Kentucky county of Kenton. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, our customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions. Civista Leasing and Finance ("CLF"), formerly known as Vision Financial Group, Inc. ("VFG") was acquired in the fourth quarter of 2022 as a wholly owned subsidiary of Civista. Effective as of August 31, 2023, VFG was merged with and into Civista, and CLF is now operated as a full-service general equipment leasing and financing division of Civista. The operations of CLF are located in Pittsburgh, Pennsylvania. FCIA 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 for each of the years ended December 31, 2023, 2022 and 2021 . WSP was formed to hold repossessed assets of CBI’s subsidiaries. WSP revenue was less than 1 % of total revenue for each of the years ended December 31, 2023, 2022 and 2023 . CRMI was formed in 2017 to provide property and casualty insurance coverage to CBI and its subsidiaries for which insurance may not be currently available or economically feasible in the insurance marketplace. CRMI revenue was less than 1 % of total revenue for each of the years ended December 31, 2023, 2022 and 2021 . FCC was formed as a wholly-owned subsidiary of Civista in Wilmington, Delaware to hold inter-company debt. The operations of FCC were discontinued December 31, 2021. FCI is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware. Use of Estimates : To prepare financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for credit losses, determination of goodwill impairment, fair values of financial instruments, valuation of deferred tax assets, pension obligations and other-than-temporary-impairment of securities are considered material estimates that are particularly susceptible to significant change in the near term. Cash Flows : Cash and cash equivalents include cash on hand and demand deposits with financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds purchased, short-term borrowings and repurchase agreements. The Company routinely maintains balances that exceed FDIC insured limits but believes the risk of loss is very low with respect to such deposits. 61 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities : Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold using the specific identification method. Other securities which include Federal Home Loan Bank ("FHLB") stock, Federal Reserve Bank (“FRB”) stock, Federal Agricultural Mortgage Corporation stock, United Bankers' Bancorporation Inc. (“UBBI”) stock, and Norwalk Community Development Corporation (“NCDC”) stock are carried at cost. Equity securities : Equity securities are held at fair value. Holding gains and losses are recorded in noninterest income. Dividends are recognized as income when earned. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market and loans that management no longer intends to hold for the foreseeable future, are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans and leases: Loans and leases that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan and leases losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Interest income on consumer loans is discontinued when management determines future collection is unlikely. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not received, for loans placed on nonaccrual, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. The Company provides financing leases for the purchase of business equipment. At the inception of each lease, the lease receivables, together with the present value of the estimated unguaranteed residual values are recorded as lease receivables within loans in the consolidated financial statements. Direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property, net of unamortized deferred lease origination fees and costs and unearned income. Only those costs incurred as a direct result of closing a lease transaction are capitalized and all initial direct costs are expensed immediately. Interest income on direct financing leases is recognized over the term of the lease to achieve a constant periodic rate of return on the outstanding investment. 62 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Credit Losses: On January 1, 2023 , the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") . ASU 2016-13 introduces a new credit loss methodology, Current Expected Credit Losses ("CECL"), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. ASU 2016-13 eliminates the probable initial recognition threshold previously required under Generally Accepted Accounting Principles ("GAAP") and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the reserve for credit losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The Company adopted Accounting Standards Certification ("ASC") 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the periods beginning after January 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for purchased credit deteriorated ("PCD") financial assets that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 1,668 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2023. The adoption of CECL resulted in an increase to our total allowance for credit losses (“ACL”) on loans held for investment of $ 4.3 million, an increase in allowance for credit losses on unfunded loan commitments of $ 3.4 million, a reclassification of PCI discount from loans to the ACL of $ 1.7 million, and an increase in deferred tax asset of $ 1.6 million. The Company also recorded a net reduction of retained earnings of $ 6.1 million upon adoption. The allowance for credit losses is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 63 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Portfolio Segmentation (“Pooled Loans”) Portfolio segmentation is defined as the pooling of loans based upon similar risk characteristics such that quantitative methodologies and qualitative adjustment factors for estimating the allowance for credit losses are constructed for each segment. The Company has identified nine portfolio segments of loans including Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Residential Real Estate, Real Estate Construction, Home Equity Line of Credit, Farm Real Estate, Lease Financing Receivable and Consumer and Other Loans. The allowance for credit losses for Pooled Loans is estimated based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. The Company utilized a discounted cash flow (DCF) method to estimate the quantitative portion of the allowance for credit losses for loans evaluated on a collective pooled basis. For each segment, a loss driver analysis (LDA) was performed in order to identify appropriate loss drivers and create a regression model for use in forecasting cash flows. The LDA utilized the Company’s own Federal Financial Institutions Examination Council’s (“FFIEC”) Call Report data for all segments except indirect auto and all new and unknown values. Peer data was incorporated into the analysis for all segments except indirect auto and all new and unknown values. The Company uses regression analysis to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default for the changes in the economic factors for the loss driver segments. The identified loss drivers for all segments as of December 31, 2023 are national unemployment rate and national gross domestic product growth. Peer data is utilized in our model as more statistically supportable data. The Company uses actual loss data for the lease portfolio due to a lack of appropriate peer leasing data to forecast loss drivers. Key inputs into the DCF model include loan-level detail, including the amortized cost basis of individual loans, payment structure, loss history, and forecasted loss drivers. The Company uses the central tendency midpoint seasonally adjusted forecasts from the Federal Open Market Committee (FOMC). Other key assumptions include the probability of default (PD), loss given default (LGD), and prepayment/curtailment rates. When possible, the Company utilizes its own PDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own PDs, the LDA is utilized to determine PDs based on the forecasted economic factors. In all cases, the LDA is then utilized to determine the long-term historical average, which is reached over the reversion period. When possible, the Company utilizes its own LGDs for the reasonable and supportable forecast period. When it is not possible to use the Company’s own LGDs, the LGD is derived using a method referred to as Frye Jacobs. The Frye Jacobs method is a mathematical formula that traces the relationship between LGD and PD over time and projects the LGD based on the level of PD forecasted. In all cases, the Frye Jacobs method is utilized to calculate LGDs during the reversion period and long-term historical average. Prepayment and curtailment rates were calculated based on the Company’s own data utilizing a one-year average. When the discounted cash flow method is used to determine the allowance for credit losses, management incorporates expected prepayments to determine the effective interest rate utilized to discount expected cash flow. Adjustments to the quantitative evaluation may be made to account for differences in current or expected qualitative risk characteristics such as changes in: (i) lending policies and procedures; (ii) experience and depth of lending and management staff; (iii) quality of credit review system; (iv) nature and volume of portfolio; (v) past due, classified and non accrual loans; (vi) economic and business conditions; (vii) competition or legal and regulatory requirements; (viii) concentrations within the portfolio; (ix) underlying collateral for collateral dependent loans. Purchased Credit Deteriorated (PCD) Loans The Company has purchased loans, some of which have shown evidence of credit deterioration since origination. Upon adoption of ASC 326, the Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are written off, paid off, or sold. Upon adoption of ASC 326, the allowance for credit losses was determined for each pool and added to the pool's carrying amount to establish a new amortized 64 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) cost basis. The difference between the unpaid principal balance of the pool and the new amortized cost basis is the noncredit premium or discount which will be amortized into interest income over the remaining life of the pool. Changes to the allowance for credit losses after adoption are recorded through provision expense. Individually Evaluated Loans The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, loan and lease modifications experiencing financial difficulty, and other loans deemed appropriate by management. Available for Sale (“AFS”) Debt Securities For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. Accrued Interest Receivable Upon adoption of ASU 2016-13 and its related amendments on January 1, 2023, the Company made the following elections regarding accrued interest receivable: • Presenting accrued interest receivable balances separately within another line item on the statement of financial condition. • Excluding accrued interest receivable that is included in the amortized cost of financing receivables and debt securities from related disclosure requirements. • Continuing our policy to write off accrued interest receivable by reversing interest income. For both commercial and consumer loans, the writ e off typically occurs upon becoming 90 days past due. H istorically, the Company has not experienced uncollectible accrued interest receivable on its investment securities. However, the Company would generally write off accrued interest receivable by reversing interest income if the Company does not reasonably expect to receive payments. Due to the timely manner in which accrued interest receivables are written off, the amounts of such write offs are immaterial. • Not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above. 65 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reserve for Unfunded Commitments The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. No allowance is recognized if the Company has the unconditional right to cancel the obligation. The Company is defining unconditionally cancelable in its literal sense, meaning that a commitment may be cancelled by the Company for any, or for no reason whatsoever. However, the Company in its business dealings, has no practical history of unconditionally canceling commitments. Commitments are not typically cancelled until a default or a defined condition occurs. Being that its historical practice has been to not cancel credit commitments unconditionally, the Company has made the decision to reserve for Unfunded Commitments. The Unfunded Reserve is recognized as a liability (included within other liabilities in the Consolidated Balance Sheets), with adjustments to the reserve recognized as noninterest expense in the Consolidated Statements of Operations. The Unfunded Reserve is determined by estimating expected future fundings, under each segment, and applying the expected loss rates. Expected future fundings over the estimated life of commitments are based on historical averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current funding rates are compared to historical funding rates. Estimate of credit losses are determined using the same loss rates as funded loans. 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 credit losses, consideration of impairment of goodwill, fair values of financial instruments, deferred taxes, swap assets/liabilities and pension obligations are particularly subject to change. Adoption of New Accounting Standards: In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The ASU introduces a new credit loss methodology, CECL, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods under prior GAAP, which generally require that a loss be incurred before it is recognized. For available-for-sale securities where fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk. On January 1, 2023 , the Company adopted the guidance prospectively with a cumulative adjustment to retained earnings. The Company has not restated comparative information for 2022 and, therefore, the comparative information for 2022 is reported under the old model and is not comparable to the information presented for 2023. 66 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) At adoption, the Company recognized an incremental allowance for credit losses on its loans to customers of $ 4.3 million, a liability for off-balance sheet unfunded commitments of $ 3.4 million and a reclassification of the discount on PCI loans to the ACL of $ 1.7 million. Additionally, the Company recorded a $ 6.1 million after tax decrease in retained earnings associated with the increased estimated credit losses. The “Day 1” impact of CECL adoption is summarized below: CECL Adoption Impact of CECL Adoption Adopting ASC 326 - December 31, 2022 Impact PCD Loans January 1, 2023 Allowance for Credit Losses: Commercial & Agriculture $ 3,011 $ 429 $ 390 $ 3,830 Commercial Real Estate: Owner Occupied 4,565 1,075 179 5,819 Non-Owner Occupied 14,138 ( 2,847 ) — 11,291 Residential Real Estate 3,145 2,762 386 6,293 Real Estate Construction 2,293 1,502 — 3,795 Farm Real Estate 291 ( 28 ) — 263 Lease Financing Receivable 429 1,743 635 2,807 Consumer and Other 98 201 78 377 Unallocated 541 ( 541 ) — — Total Allowance for Credit Losses $ 28,511 $ 4,296 $ 1,668 $ 34,475 Reserve for Unfunded Commitments — 3,386 — 3,386 Total Reserve for Credit Losses $ 28,511 $ 7,682 $ 1,668 $ 37,861 Retained Earnings Total Pre-tax Impact $ ( 7,682 ) Tax Effect 1,613 Decrease to Retained Earnings $ ( 6,069 ) The Company adopted Accounting Standards Certification ("ASC") 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the periods beginning after January 1, 2023 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for purchased credit deteriorated ("PCD") financial assets that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets was adjusted to reflect the addition of $ 1,668 to the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2023. The adoption of CECL resulted in an increase to our total allowance for credit losses (“ACL”) on loans held for investment of $ 4.3 million, an increase in allowance for credit losses on unfunded loan commitments of $ 3.4 million, a reclassification of PCI discount from loans to the ACL of $ 1.7 million, and an increase in deferred tax asset of $ 1.6 million. The Company also recorded a net reduction of retained earnings of $ 6.1 million upon adoption. The allowance for credit losses is evaluated on a regular basis and established through charges to earnings in the form of a provision for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. 67 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The Company did not record an allowance for available-for-sale securities on Day 1 as the investment portfolio consists primarily of debt securities explicitly or implicitly backed by the U.S. Government for which credit risk is deemed minimal. The impact going forward will depend on the composition, characteristics, and credit quality of the securities portfolio as well as the economic conditions at future reporting periods. On January 1, 2023 , the Company adopted ASU 2022-02 , Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02") . ASU 2022-02 eliminates the recognition and measurement guidance for troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. This ASU also requires enhanced disclosure for loans that have been charged off. The adoption of ASU 2022-02 provisions did not have a significant impact on the Company’s Consolidated Financial Statements. Loan Charge-off Policies: All unsecured open- and closed-ended retail loans that become past due 90 days from the contractual due date are charged off in full. In lieu of charging off the entire loan balance, loans with non-real estate collateral may be written down to the net realizable value of the collateral, if repossession of collateral is assured and in process. For open- and closed-ended loans secured by residential real estate, a current assessment of fair value is made no later than 180 days past due. Any outstanding loan balance in excess of the net realizable value of the property is charged off. All other loans are generally charged down to the net realizable value when Civista recognizes the loan is permanently impaired, which is generally after the loan is 90 days past due. Other Real Estate: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis and any deficiency in the value is charged off through the allowance. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both accelerated and straight-line methods over the estimated useful life of the asset, ranging from three to seven years for furniture and equipment and seven to fifty years for buildings and improvements. Equipment Owned Under Operating Leases: As a lessor, the Company finances equipment under leases to a wide variety of customers, from commercial and industrial to government and healthcare classified as operating leases. The equipment underlying the operating leases is reported at cost, net of accumulated depreciation, within Premises and Equipment on the Consolidated Balance Sheets. These operating lease arrangements require the lessee to make a fixed monthly rental payment over a specified lease term generally ranging from 3 years to 6 years. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over the lease term and reported in Noninterest Income on the Consolidated Statements of Operations. Leased assets are depreciated on a straight-line method over the lease term to the estimate of the equipment’s fair market value at lease termination, also referred to as “residual” value. The depreciation of these operating lease assets is reported in Noninterest Expense on the Consolidated Statements of Operations. For equipment leases, fair value may be based upon observable market prices, third-party valuations, or prices received on sales of similar assets at the end of the lease term. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. At the end of the lease, the operating lease asset is either purchased by the lessee or returned to the Company. 68 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Federal Home Loan Bank (FHLB) Stock : Civista is a member of the FHLB of Cincinnati and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $ 100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: ( a ) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted, ( b ) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance, ( c ) the impact of legislative and regulatory changes on the customer base of the FHLB, and ( d ) the liquidity position of the FHLB. With consideration given to these factors, management concluded that the FHLB stock was not impaired at December 31, 2023 or 2022 . FHLB Stock is included in Other Securities on the Consolidated Balance Sheet Federal Reserve Bank (FRB) Stock : Civista is a member of the Federal Reserve System. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. FRB Stock is included in Other Securities on the Consolidated Balance Sheet. Bank Owned Life Insurance (BOLI) : Civista has purchased BOLI policies on certain key executives. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the cash surrender value are recorded as income in the period that the change occurs. Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit intangibles arising from whole bank and branch acquisitions. These intangible assets are measured at fair value and then amortized on an accelerated method over their estimated useful lives, which range from five to twelve years . On January 1, 2023 , the Company adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is an SEC filer, such as the Company, was to adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, however, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) , which deferred the effective date for ASC 350, Intangibles – Goodwill and Other , for SEC filers that were eligible to be smaller reporting companies as of November 15, 2019, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The adoption of the ASU provisions did no t have a significant impact on the Company's Consolidated Financial Statements. 69 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Mortgage Servicing Rights : Mortgage servicing rights are recognized as assets for the allocated value of retained mortgage servicing rights on loans sold. Mortgage servicing rights are initially recorded at fair value at the date of transfer. The valuation technique uses the present value of estimated future cash flows using current market discount rates. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance to the extent that fair value is less than the capitalized asset for the grouping. Long-lived Assets: Premises and equipment and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Repurchase Agreements : Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Income Taxes : 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. The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. 70 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Stock-Based Compensation : Compensation cost is recognized for stock options and restricted stock awards issued to employees and directors, based on the fair value of these awards at the grant date. The market price of the Company’s common shares at the date of the grant is used for restricted shares. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Retirement Plans : Pension expense is the net of service and interest cost, expected return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense consists of the amount of matching contributions. Deferred compensation allocates the benefits over the years of service. Earnings per Common Share : Earnings per share is computed using the two-class method. Basic earnings per share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, which excludes participating securities. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable related to convertible preferred shares. Treasury shares are not deemed outstanding for earnings per share calculations. Comprehensive Income (Loss) : Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan. Loss Contingencies : Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that any such loss contingencies currently exist that will have a material effect on the financial statements. Restrictions on Cash : Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements. These balances do not earn interest. The required reserve amount at December 31, 2023 was $ 0 . The Company did no t have any cash pledged as collateral on its interest rate swaps with third party financial institutions at December 31, 2023 . Dividend Restriction : Banking regulations require maintaining certain capital levels and may limit the dividends paid by Civista to CBI or by CBI to shareholders. Additional information related to dividend restrictions can be found in Note 19. Fair Value of Financial Instruments : Fair values of financial instruments are estimated using relevant market information and other assumptions that reflect exit price value, as more fully disclosed in Note 17. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. 71 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Operating Segments : While the Company’s chief decision makers monitor the revenue streams of the Company’s various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment. Treasury Stock : CBI common shares that are repurchased are recorded in treasury stock at cost. Business Combinations: At the date of acquisition the Company records the assets and liabilities of acquired companies on the Consolidated Balance Sheets at their 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. 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. Changes in fair value are recorded as income or expense in the period that they occur. The Company is party to master netting arrangements with its financial institution 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, in the form of cash and marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Revisions: Certain revisions have been made to the 2022 and 2021 consolidated financial statements. The fair market value for loans disclosed in Note 17 as of December 31, 2022, was revised from $ 2,160,920 to $ 2,528,906 due to an error in the calculation. Loans and secured borrowings increased $ 101,615 in the Consolidated Balance Sheet as of December 31, 2022, for certain loan participations sold that were deemed to not qualify for sales accounting under ASC 860. Interest income and interest expense increased $ 4,902 and $ 3,312 , respectively in the Consolidated Statement of Operations as of and for the years ended December 31, 2022 and 2021 for certain loan participations sold that were deemed to not qualify for sales accounting under ASC 860. These revisions did not have a significant impact on the consolidated financial statement line items impacted and had no effect on net income. Effect of Newly Issued but Not Yet Effective Accounting Standards: In January 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, March 2020 , to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls “reference rate reform” if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. However, a deferral of the implementation of reference rate reform was issued in December of 2022, which extends the implementation to December 31, 2024. The Company is working through this transition via a multi-disciplinary project 72 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) team. However, the financial impact on our financial condition, results of operations and cash flows will depend on the population of contracts that are still outstanding on the date the underlying indexes are no longer published. In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments apply to all public entities that are required to report segment information in accordance with FASB ASC Topic 280, Segment Reporting. The amendments in the ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The amendments require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker ("CODM") and included within each reported measure of segment profit or loss. Public entities are required to disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition. In addition, public entities must provide all annual disclosures about a reportable segment’s profit or loss and assets currently required by FASB ASC Topic 280, Segment Reporting, in interim periods. The amendments clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, a public entity may report one or more of those additional measures of segment profit. However, at least one of the reported segment profit or loss measures (or the single reported measure, if only one is disclosed) should be the measure that is most consistent with the measurement principles used in measuring the corresponding amounts in the public entity’s consolidated financial statements. The Amendments require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. Finally, the amendments require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures in ASC Topic 280. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. The Company is currently evaluating the potential impacts related to the adoption of the ASU. In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures." The amendments require that public business entities on an annual basis (a) disclose specific categories in the rate reconciliation and (b) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). The amendments also require that all entities disclose on an annual basis the amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes, and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments require that all entities disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. The ASU is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company is currently evaluating the potential impacts related to the adoption of the ASU. 73 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 2 - ACQUISITIONS On July 1, 2022, CBI completed the acquisition by merger of Comunibanc Corp. in a stock and cash transaction for aggregate consideration of approximately $ 46,090 . As a result of the acquisition, the Company issued 984,723 common shares and paid approximately $ 24,968 in cash to the former shareholders of Comunibanc Corp. The Company and Comunibanc Corp. had first announced that they had entered into an agreement to merge in January of 2022. Immediately following the merger, Comunibanc Corp.’s banking subsidiary, The Henry County Bank (HCB), was merged into CBI’s banking subsidiary, Civista Bank. The assets and liabilities of Comunibanc Corp. were recorded on the Company’s Consolidated Balance Sheet at their preliminary estimated fair values as of July 1, 2022, the acquisition date. The Company recorded $ 26,209 in goodwill and $ 4,426 in core deposit intangibles, representing the principal change in goodwill and intangibles from December 31, 2021. None of the purchase price is deductible for tax purposes. At the time of the merger, Comunibanc Corp had total consolidated assets of $ 315,083 , including $ 175,500 in loans, and $ 271,081 in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of Comunibanc Corp. and HCB have been included in the Company’s Consolidated Financial Statements since the close of business on July 1, 2022. Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. The identifiable intangible assets consist of core deposit intangible which is being amortized over the estimated useful life. The gross carrying amount of the core deposit intangible at December 31, 2022 was $ 3,999 . In connection with the Comunibanc merger in 2022, the Company incurred additional third-party acquisition-related costs of $ 2.9 million. These expenses are comprised of employee benefits of $ 210.7 thousand, occupancy and equipment expenses of $ 110.7 thousand, software expense of $ 36.0 thousand, consulting and other professional fees of $ 905.2 thousand, data processing costs of $ 1.0 million and other operating expenses of $ 647.5 thousand in the Company’s Consolidated Statement of Operations for the twelve-month period ended December 31, 2022. As of December 31, 2022, the estimated future amortization expense for the core deposit intangible is as follows: Core deposit intangibles 2023 $ 739 2024 684 2025 604 2026 523 2027 443 Thereafter 1,006 $ 3,999 The following table presents financial information for the former Comunibanc Corp. included in the Consolidated Statements of Operations from the date of acquisition through December 31, 2022. Actual From Acquisition Date Through December 31, 2022 (in thousands) Net interest income after provision for loan losses $ 3,428 Noninterest income 159 Net income 1,719 74 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 2 - ACQUISITIONS (Continued) The following table presents pro forma information for the twelve-month periods ended December 31, 2022, 2021 and 2020 as if the acquisition of Comunibanc Corp. had occurred on January 1, 2020. This table has been prepared for comparative purposes only and is not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Pro Formas (unaudited) Twelve Months ended December 31, 2022 2021 2020 Net interest income after provision for loan losses $ 113,689 $ 103,583 $ 88,293 Noninterest income 29,451 32,768 29,870 Net income 39,095 42,482 34,374 Pro forma earnings per share: Basic $ 2.42 $ 2.59 $ 2.01 Diluted $ 2.42 $ 2.59 $ 2.01 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for Comunibanc Corp. Core deposit intangibles will be amortized over ten years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment. Cash paid $ 24,968 Common shares issued ( 984,723 shares) 21,122 Total $ 46,090 Net assets acquired: Cash and due from financial institutions $ 3,098 Securities available for sale 120,399 Time deposits 742 Loans, net 169,202 Other securities 1,553 Premises and equipment 4,665 Accrued interest receivable 670 Core deposit intangible 4,426 Bank owned life insurance 5,918 Other assets 3,767 Noninterest-bearing deposits ( 122,642 ) Interest-bearing deposits ( 148,552 ) Other borrowings ( 21,706 ) Other liabilities ( 1,659 ) 19,881 Goodwill resulting from Comunibanc Corp. acquisition $ 26,209 Loans purchased with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date included information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans were accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which included estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans was not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporated the estimate of the current assumptions, such as default rates, severity and prepayment speeds. 75 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 2 - ACQUISITIONS (Continued) The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2022 Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) (In Thousands) Outstanding balance $ 4,768 Carrying amount 4,121 The gross principal due under the contract for acquired receivables not subject to ASC 310-30 is $ 171.1 million. The fair value adjustment is $ 2.1 million and the contractual cash flows not expected to be collected is $ 5.7 million. The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgment in accounting for the acquisition. The amount of goodwill recorded reflects a strategic opportunity to expand into new markets that, while similar to existing markets, are projected to be more vibrant in population growth and business opportunity growth. The goodwill represents the excess purchase price over the estimated fair value of the net assets acquired. Additionally, the acquisition will provide exposure to suburbs of larger urban areas without the commitment of operating inside large metropolitan areas dominated by regional and national financial organizations. The acquisition is also expected to create synergies on the operational side of the Company by allowing noninterest expenses to be spread over a larger operating base. On October 3, 2022, CBI and Civista completed the acquisition by Civista of all of the issued and outstanding shares of capital stock of VFG for aggregate cash and stock consideration of approximately $ 46,544 . As a result of the acquisition, the Company issued 500,293 common shares and paid approximately $ 36,044 in cash. The assets and liabilities of VFG were recorded on the Company’s Consolidated Balance Sheet at their preliminary estimated fair values as of October 3, 2022, the acquisition date. The Company recorded $ 22,635 in goodwill, representing the principal change in goodwill from December 31, 2021. None of the purchase price is deductible for tax purposes. At the time of the acquisition, VFG had total consolidated assets of $ 93,870 , including $ 62,712 in loans and leases. The transaction was recorded as a purchase and, accordingly, the operating results of VFG have been included in the Company’s Consolidated Financial Statements since the close of business on October 3, 2022. Effective as of August 31, 2023, VFG was merged with and into Civista, and CLF is now operated as a full-service general equipment leasing and financing division of Civista. In connection with the VFG acquisition in 2022, the Company incurred additional third-party acquisition-related costs of $ 814.3 thousand. These expenses are comprised of consulting and other professional fees of $ 812.8 thousand and other operating expenses of $ 1.5 thousand in the Company’s Consolidated Statement of Operations for the twelve-month period ended December 31, 2022. 76 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 2 - ACQUISITIONS (Continued) The following table presents financial information for VFG included in the Consolidated Statements of Operations from the date of acquisition through December 31, 2022. Actual From Acquisition Date Through December 31, 2022 (in thousands) Net interest income after provision for loan losses $ 403 Noninterest income 3,926 Net loss ( 992 ) Pro forma information for the twelve-month periods ended December 31, 2022, 2021 and 2020 is not presented as the acquisition of VFG was determined to not to be a significant transaction. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for VFG. Goodwill will not be amortized, but instead will be evaluated for impairment. Cash paid $ 36,044 Common shares issued ( 250,145 shares) 5,250 Common shares issued (contingent consideration) ( 250,148 shares) 5,250 Total $ 46,544 Net assets acquired: Cash and due from financial institutions $ 6,271 Time Deposits 80 Loans, net 61,418 Premises and equipment 35,039 Other assets 1,409 Other borrowings ( 58,142 ) Other liabilities ( 22,166 ) 23,909 Goodwill resulting from VFG acquisition $ 22,635 Loans purchased with evidence of credit deterioration since origination and for which it was probable that all contractually required payments would not be collected were considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date included information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans were accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which included estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans was not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporated the estimate of the current assumptions, such as default rates, severity and prepayment speeds. 77 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 2 - ACQUISITIONS (Continued) The contingent consideration arrangement requires Civista to pay the former owners of VFG, over two years , and subject to meeting certain lease origination thresholds for each year, or meeting a combined threshold for the two years , up to a maximum amount of $ 5,250 , undiscounted. The potential undiscounted amount of all future payments Civista could be required to make under the contingent consideration arrangement is between $ 0 and $ 5,250 . The fair value of the contingent consideration arrangement of $ 5,250 was estimated based on significant inputs that are not observable in the market, which are considered Level 3 inputs in accordance with ASC Topic 820. Key assumptions include the CIVB share price at close, management’s assumptions and the probability that the vesting thresholds will be met. The common shares subject to the contingent consideration arrangement have been issued and are considered restricted with participating rights with voting, dividends and distribution rights prior to vesting or forfeiture. If the lease origination thresholds are not met, the shares issued will be forfeited. The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2022 Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30) (In Thousands) Outstanding balance $ 635 Carrying amount — The gross principal due under the contract for acquired receivables not subject to ASC 310-30 is $ 62.1 million. The fair value adjustment is $ 2.3 million and the contractual cash flows not expected to be collected is $ 658.8 thousand. The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgment in accounting for the acquisition. The amount of goodwill recorded reflects the excess purchase price over the estimated fair value of the net assets acquired. NOTE 3 - SECURITIES The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized were as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2023 U.S. Treasury securities and obligations of U.S. government agencies $ 71,418 $ 315 $ ( 4,075 ) $ 67,658 Obligations of states and political subdivisions 359,452 2,725 ( 23,578 ) 338,599 Mortgage-back securities in government sponsored entities 242,022 19 ( 30,026 ) 212,015 Total debt securities $ 672,892 $ 3,059 $ ( 57,679 ) $ 618,272 78 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2022 U.S. Treasury securities and obligations of U.S. government agencies $ 66,495 $ 20 $ ( 5,486 ) $ 61,029 Obligations of states and political subdivisions 350,104 784 ( 33,640 ) 317,248 Mortgage-back securities in government sponsored entities 265,752 15 ( 28,642 ) 237,125 Total debt securities $ 682,351 $ 819 $ ( 67,768 ) $ 615,402 The amortized cost and fair value of securities at year end 2023 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Available for sale Amortized Cost Fair Value Due in one year or less $ 2,652 $ 2,652 Due from one to five years 78,395 73,198 Due from five to ten years 38,867 37,397 Due after ten years 310,956 293,010 Mortgage-backed securities in government sponsored entities 242,022 212,015 Total securities available for sale $ 672,892 $ 618,272 Securities with a carrying value of $ 211,616 and $ 218,344 were pledged as of December 31, 2023 and 2022, respectively, to secure public deposits, other deposits and liabilities as required or permitted by law. Proceeds from sales of securities, gross realized gains and gross realized losses were as follows: 2023 2022 2021 Sale proceeds $ — $ 57,332 $ 1,810 Gross realized gains — — 1,785 Gross realized losses — — — Gains from securities called or settled by the issuer — 10 1 Debt securities with unrealized losses at year end 2023 and 2022 not recognized in income were as follows: 2023 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 $ 224 $ ( 1 ) $ 56,760 $ ( 4,074 ) $ 56,984 $ ( 4,075 ) Obligations of states and political subdivisions 19,168 ( 78 ) 162,291 ( 23,500 ) 181,459 ( 23,578 ) Mortgage-backed securities in gov’t sponsored entities 20,112 ( 522 ) 189,319 ( 29,504 ) 209,431 ( 30,026 ) Total temporarily impaired $ 39,504 $ ( 601 ) $ 408,370 $ ( 57,078 ) $ 447,874 $ ( 57,679 ) 79 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) 2022 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 $ 21,042 $ ( 880 ) $ 39,567 $ ( 4,606 ) $ 60,609 $ ( 5,486 ) Obligations of states and political subdivisions 169,594 ( 13,016 ) 73,967 ( 20,624 ) 243,561 ( 33,640 ) Mortgage-backed securities in gov’t sponsored entities 111,639 ( 4,713 ) 124,622 ( 23,929 ) 236,261 ( 28,642 ) Total temporarily impaired $ 302,275 $ ( 18,609 ) $ 238,156 $ ( 49,159 ) $ 540,431 $ ( 67,768 ) For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. The Company has assessed each available for sale security position for credit impairment. Factors considered in determining whether a loss is temporary include: • The length of time and the extent to which fair value has been below cost; • The severity of impairment; • The cause of the impairment and the financial condition and near-term prospects of the issuer; • If the Company intends to sell the investment; • If it’s more-likely-than-not the Company will be required to sell the investment before recovering its amortized cost basis; and • If the Company does not expect to recover the investment’s entire amortized cost basis (even if the Company does not intend to sell the investment). The Company’s review for impairment generally entails: • Identification and evaluation of investments that have indications of impairment; • Analysis of individual investments that have fair values less than amortized cost, including consideration of length of time each investment has been in unrealized loss position and the expected recovery period; • Evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment; and • Documentation of these analyses, as required by policy. At December 31, 2023 , the Company owned 394 securities that were considered temporarily impaired. The unrealized losses on these securities have not been recognized into income because the issuers’ bonds are of high 80 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) 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 changes in market interest rates. The Company also considers sector specific credit rating changes in its analysis. The fair value is expected to recover as the securities approach their maturity date or reset date. The Company does not intend to sell until recovery and does not believe selling will be required before recovery. The following table presents the net gains and losses on equity investments recognized in earnings at year-end 2023 and 2022, and the portion of unrealized gains and losses for the period that relates to equity investments held at year-end 2023 and 2022: 2023 2022 Net gains (losses) recognized on equity securities during the year $ ( 21 ) $ 118 Less: Net gains realized on the sale of equity securities during the period — — Unrealized gains (losses) recognized in equity securities held at December 31 $ ( 21 ) $ 118 NOTE 4 - LOANS Loans at year-end were as follows: 2023 2022 Commercial & Agriculture $ 304,793 $ 278,595 Commercial Real Estate - Owner Occupied 377,321 371,147 Commercial Real Estate - Non-Owner Occupied 1,161,894 1,018,736 Residential Real Estate 659,841 552,781 Real Estate Construction 260,409 243,127 Farm Real Estate 24,771 24,708 Lease financing receivable 54,642 36,797 Consumer and Other 18,056 20,775 Loan participations sold, reflected as secured borrowings — 101,615 Total Loans 2,861,727 2,648,281 Allowance for credit losses ( 37,160 ) ( 28,511 ) Net loans $ 2,824,567 $ 2,619,770 Included in Commercial & Agriculture loans as of December 31, 2023 and 2022 is $ 326 and $ 566 , respectively, of Paycheck Protection Program (“PPP”) loans. 81 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 4 – LOANS (Continued) Included in total loans above are deferred loan fees of $ 2,743 and $ 1,652 at December 31, 2023 and 2022, respectively. Scheduled maturities of lease financing receivables at December 31, 2023 were as follows: 2024 $ 8,834 2025 3,255 2026 5,829 2027 13,158 2028 12,468 Thereafter 11,098 Total $ 54,642 Loans to principal officers, directors, and their affiliates at year-end 2023 and 2022 were as follows: 2023 2022 Balance - Beginning of year $ 21,107 $ 17,447 New loans and advances 1,477 15,408 Repayments ( 2,205 ) ( 9,255 ) Effect of changes to related parties ( 9,829 ) ( 2,493 ) Balance - End of year $ 10,550 $ 21,107 The Company had credit lines to principal officers, directors, and their affiliates with an availability of $ 7,231 and $ 8,017 as of December 31, 2023 and 2022, respectively. Paycheck Protection Program In response to the novel COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act of 2020, as amended (the "CARES Act"), was signed into law on March 27, 2020, to provide national emergency economic relief measures. The CARES Act amended the loan program of the Small Business Administration (the "SBA"), in which Civista participates, to create a guaranteed, unsecured loan program, the Paycheck Protection Program (the "PPP"), to fund operational costs of eligible businesses, organizations and self-employed persons during the COVID-19 pandemic. During 2020, Civista processed over 2,300 PPP loans totaling $ 268.3 million. The Consolidated Appropriations Act 2021, was signed into law on December 27, 2020 to provide an additional funding of $ 284.5 billion under the PPP and the establishment of PPP Second Draw Loans under the Economic Aid to Hard-Hit Small Businesses, Nonprofit, and Venues Act (the “Relief Act”). This additional funding was made available from original PPP lenders on January 19, 2021, and the deadline (as extended) for submitting applications for PPP Second Draw Loans was May 31, 2021. Funds provided under the Relief Act were earmarked both for first time PPP borrowers (subject to original PPP eligibility and limits) as well as ‘Second Draw’ Loans for borrowers that already received an original PPP loan. During 2021, Civista received SBA approval on, and funded, 1,340 PPP loans totaling $ 131,109 under the Relief Act. At December 31, 2023 Civista had PPP loans outstanding of $ 326 . 82 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES The following tables present, by portfolio segment, the changes in the allowance for credit losses, the ending allocation of the allowance for losses and the loan balances outstanding for the years ended December 31, 2023, 2022 and 2021. Allowance for credit losses: December 31, 2023 Beginning balance CECL Adoption Day 1 Impact Impact of Adopting ASC 326 - PCD Loans 1 Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 3,011 $ 429 $ — $ ( 1,300 ) $ 177 $ 5,270 $ 7,587 Commercial Real Estate: Owner Occupied 4,565 1,075 19 — 15 ( 951 ) 4,723 Non-Owner Occupied 14,138 ( 2,847 ) — — 46 719 12,056 Residential Real Estate 3,145 2,762 166 ( 17 ) 134 2,299 8,489 Real Estate Construction 2,293 1,502 — — 37 ( 444 ) 3,388 Farm Real Estate 291 ( 28 ) — — — ( 3 ) 260 Lease Financing Receivable 429 1,743 635 — — ( 2,510 ) 297 Consumer and Other 98 201 77 ( 114 ) 43 36 341 Unallocated 541 ( 541 ) — — — 19 19 Total $ 28,511 $ 4,296 $ 897 $ ( 1,431 ) $ 452 $ 4,435 $ 37,160 1 Day 1 impact of $ 1,668 of adopting ASC 326-PCD loans was netted by changes in estimates of $ 771 For the year ended December 31, 2023, the Company provided $ 4,435 to the allowance for credit losses, as compared to a provision of $ 1,752 for the year ended December 31, 2022. The increase in the provision was to support strong organic loan growth in the portfolio. A one-time CECL adoption adjustment of $ 4,296 along with a $ 897 adjustment related to ASC 326 adoption was incurred in the first quarter of 2023. For the year ended December 31, 2023, the allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances, accompanied by an increase in classified loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of increased loan balances, partially offset by a decrease in classified loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans decreased due to a decrease in general reserves required as a result of an increase in loan balances, offset by a decrease in loss rates and classified loan balances. This was represented as a decrease in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of increased loan balances. The result was represented by an increase in the provision. The allowance for Consumer and Other loans decreased due to a decrease in loan balances. This was represented as a decrease in the provision. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio at December 31, 2022. 83 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) Allowance for loan losses: December 31, 2022 Beginning Balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 2,600 $ ( 22 ) $ 24 $ 409 $ 3,011 Commercial Real Estate: Owner Occupied 4,464 — 42 59 4,565 Non-Owner Occupied 13,860 — 74 204 14,138 Residential Real Estate 2,597 ( 97 ) 163 482 3,145 Real Estate Construction 1,810 — 4 479 2,293 Farm Real Estate 287 — 6 ( 2 ) 291 Lease Financing Receivable 0 ( 23 ) 452 429 Consumer and Other 176 ( 80 ) 27 ( 25 ) 98 Unallocated 847 — — ( 306 ) 541 Total $ 26,641 $ ( 222 ) $ 340 $ 1,752 $ 28,511 For the year ended December 31, 2022, the Company provided $ 1,752 to the allowance for loan losses, as compared to a provision of $ 830 for the year ended December 31, 2021. The increase in the provision was to support strong organic loan growth in the portfolio. Of this increase, $ 452,000 was provided to cover lease production from our CLF subsidiary since acquisition. Civista strengthened the reserve in 2020 due to the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While conditions improved in 2021 due to vaccinations and booster shots, ongoing challenges due to supply chain and workforce shortages slowed the process improvement. Our risk profile has steadily improved since peak levels, but we remain cautious given the impact of higher inflationary costs, rising interest rates and other pre-recessionary conditions that impact loan customers. Our Commercial and Commercial Real Estate portfolios have been, and are expected to continue to be, impacted the most. For the year ended December 31, 2022, the allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances, accompanied by an increase in classified loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of increased loan balances, partially offset by a decrease in classified loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of an increase in loan balances, partially offset by a decrease in loss rates and classified loan balances. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of increased loan balances. The result was represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in loan balances. This was represented as an increase in the provision. The allowance for Consumer and Other loans decreased due to a decrease in loan balances. This was represented as a decrease in the provision. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio at December 31, 2022. 84 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) Allowance for loan losses: December 31, 2021 Beginning Balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial & Agriculture $ 2,810 $ ( 15 ) $ 165 $ ( 360 ) $ 2,600 Commercial Real Estate: Owner Occupied 4,057 — 7 400 4,464 Non-Owner Occupied 12,451 — 395 1,014 13,860 Residential Real Estate 2,484 ( 120 ) 302 ( 69 ) 2,597 Real Estate Construction 2,439 — 1 ( 630 ) 1,810 Farm Real Estate 338 — 12 ( 63 ) 287 Consumer and Other 209 ( 24 ) 60 ( 69 ) 176 Unallocated 240 — — 607 847 Total $ 25,028 $ ( 159 ) $ 942 $ 830 $ 26,641 For the year ended December 31, 2021, the Company provided $ 830 to the allowance for loan losses, as compared to a provision of $ 10,112 for the year ended December 31, 2020. The decrease in the provision was due to the stability of our credit quality metrics coupled with the stabilization and, in some cases, improvement of international, national, regional and local economic conditions that were adversely impacted by the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While vaccinations and booster shots in 2021 created some level of optimism in the business community, there remained uncertainty due to the continued concern over increased infections from the Delta and Omicron variants of COVID, and we remained cautious given the level of classified loans in the portfolio, particularly loans to borrowers in the hotel industry. The lingering economic impacts related to the COVID-19 pandemic included the loss of revenue experienced by our business clients, disruption of supply chains, higher employee wages coupled with workforce shortages and increased costs of materials and services. While some of the pressures eased in 2021, ongoing supply chain and staffing challenges, as well as inflationary pressures remained. Our Commercial and Commercial Real Estate portfolios have been, and are expected to continue to be, impacted the most. For the year ended December 31, 2021, the allowance for Commercial & Agriculture loans decreased due to a decrease in general reserves required for this type as a result of a decrease in loss rates. Commercial & Agriculture loan balances decreased during the year mainly from Civista’s participation in the PPP loan program. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of increased loan balances, offset by a decrease in classified loans balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of an increase in loan balances, offset by decreases in classified loan balances and loss rates. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in loss rates for this type of loan. The result was represented by an increase in the provision. The allowance for Real Estate Construction loans decreased due to a decrease in loan balances. This was represented as a decrease in the provision. 85 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) The following table present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of December 31, 2022. December 31, 2022 Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total Allowance for loan losses: Commercial & Agriculture $ 6 $ — $ 3,005 $ 3,011 Commercial Real Estate: Owner Occupied 3 6 4,556 4,565 Non-Owner Occupied — — 14,138 14,138 Residential Real Estate — 1 3,144 3,145 Real Estate Construction — — 2,293 2,293 Farm Real Estate — — 291 291 Lease Financing Receivables — — 429 429 Consumer and Other — — 98 98 Unallocated — — 541 541 Total $ 9 $ 7 $ 28,495 $ 28,511 Outstanding loan balances: Commercial & Agriculture $ 863 $ — $ 277,732 $ 278,595 Commercial Real Estate: Owner Occupied 1,988 232 368,927 371,147 Non-Owner Occupied 119 — 1,018,617 1,018,736 Residential Real Estate 1,414 392 550,975 552,781 Real Estate Construction — — 243,127 243,127 Farm Real Estate — — 24,708 24,708 Lease Financing Receivables — — 36,797 36,797 Consumer and Other 1 — 20,774 20,775 Total $ 4,385 $ 624 $ 2,541,657 $ 2,546,666 The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2023 and 2022. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk grading system is based on experiences with similarly graded loans. The Company’s internally assigned 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. • 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. 86 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) • Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. • Unrated – 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. Term Loans Amortized Cost Basis by Origination Year Revolving Loans Revolving Converted December 31, 2023 2023 2022 2021 2020 2019 Prior Loans to Term Total Commercial & Agriculture Pass $ 56,359 $ 64,250 $ 52,258 $ 17,622 $ 9,516 $ 14,088 $ 82,982 $ — $ 297,075 Special Mention 774 — 287 1,690 — 106 169 — 3,026 Substandard 396 86 67 131 271 73 3,668 — 4,692 Doubtful — — — — — — — — — Total Commercial & Agriculture $ 57,529 $ 64,336 $ 52,612 $ 19,443 $ 9,787 $ 14,267 $ 86,819 $ — $ 304,793 Commercial & Agriculture: Current-period gross charge-offs $ — $ 673 $ 532 $ — $ — $ 95 $ — $ — $ 1,300 Commercial Real Estate - Owner Occupied Pass $ 36,030 $ 82,502 $ 67,904 $ 56,069 $ 29,784 $ 92,750 $ 5,844 $ — $ 370,883 Special Mention 526 217 739 517 - 188 — — 2,187 Substandard — 231 — — 3,098 922 — — 4,251 Doubtful — — — — — — — — — Total Commercial Real Estate - Owner Occupied $ 36,556 $ 82,950 $ 68,643 $ 56,586 $ 32,882 $ 93,860 $ 5,844 $ — $ 377,321 Commercial Real Estate - Owner Occupied: Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial Real Estate - Non-Owner Occupied Pass $ 183,439 $ 269,334 $ 198,832 $ 136,031 $ 120,659 $ 206,267 $ 23,016 $ — $ 1,137,578 Special Mention — 5,774 6,171 — - 8,688 277 — 20,910 Substandard — — — — 122 3,284 — — 3,406 Doubtful — — — — — — — — — Total Commercial Real Estate - Non-Owner Occupied $ 183,439 $ 275,108 $ 205,003 $ 136,031 $ 120,781 $ 218,239 $ 23,293 $ — $ 1,161,894 Commercial Real Estate - Non-Owner Occupied: Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Residential Real Estate Pass $ 90,770 $ 124,695 $ 97,661 $ 71,379 $ 33,534 $ 78,894 $ 157,083 $ — $ 654,016 Special Mention — — 221 97 — 245 — — 563 Substandard 186 342 684 82 582 2,063 1,323 — 5,262 Doubtful — — — — — — — — — Total Residential Real Estate $ 90,956 $ 125,037 $ 98,566 $ 71,558 $ 34,116 $ 81,202 $ 158,406 $ — $ 659,841 Residential Real Estate: Current-period gross charge-offs $ — $ 6 $ — $ — $ — $ 11 $ — $ — $ 17 87 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) Revolving Loans Revolving Converted December 31, 2023 2023 2022 2021 2020 2019 Prior Loans to Term Total Real Estate Construction Pass $ 108,606 $ 105,222 $ 20,960 $ 6,739 $ 2,699 $ 2,635 $ 9,335 $ — $ 256,196 Special Mention — 1,226 926 2,019 — — — — 4,171 Substandard — — 42 — — — — — 42 Doubtful — — — — — — — — — Total Real Estate Construction $ 108,606 $ 106,448 $ 21,928 $ 8,758 $ 2,699 $ 2,635 $ 9,335 $ — $ 260,409 Real Estate Construction: Current-period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Farm Real Estate Pass $ 2,207 $ 967 $ 2,256 $ 4,462 $ 789 $ 12,528 $ 1,292 $ — $ 24,501 Special Mention — — — — — 20 — — 20 Substandard — — — — — 250 — — 250 Doubtful — — — — — — — — — Total Farm Real Estate $ 2,207 $ 967 $ 2,256 $ 4,462 $ 789 $ 12,798 $ 1,292 $ — $ 24,771 Farm Real Estate: Current-period charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Lease Financing Receivables Pass $ 28,177 $ 13,924 $ 6,620 $ 3,678 $ 1,725 $ 1 $ — $ — $ 54,125 Special Mention — — — — — — — — — Substandard — 8 38 61 231 17 — — 355 Doubtful — 139 — 15 8 — — — 162 Total Lease Financing Receivables $ 28,177 $ 14,071 $ 6,658 $ 3,754 $ 1,964 $ 18 $ — $ — $ 54,642 Lease Financing Receivables: Current-period charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Consumer and Other Pass $ 6,510 $ 4,135 $ 3,615 $ 1,578 $ 509 $ 248 $ 1,424 $ — $ 18,019 Special Mention — — — — — — — — — Substandard — 2 14 15 — 6 — — 37 Doubtful — — — — — — — — — Total Consumer and Other $ 6,510 $ 4,137 $ 3,629 $ 1,593 $ 509 $ 254 $ 1,424 $ — $ 18,056 Consumer and Other: Current-period charge-offs $ 6 $ 40 $ 40 $ 7 $ 13 $ 3 $ 5 $ — $ 114 Total Loans $ 513,980 $ 673,054 $ 459,295 $ 302,185 $ 203,527 $ 423,273 $ 286,413 $ — $ 2,861,727 Total Loans: Current-period charge-offs $ 7 $ 719 $ 572 $ 7 $ 13 $ 109 $ 5 $ — $ 1,431 88 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) December 31, 2022 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture $ 273,291 $ 2,558 $ 2,746 $ — $ 278,595 Commercial Real Estate: Owner Occupied 367,652 734 2,761 — 371,147 Non-Owner Occupied 1,003,942 10,947 3,847 — 1,018,736 Residential Real Estate 114,021 183 5,787 — 119,991 Real Estate Construction 198,734 — 221 — 198,955 Farm Real Estate 24,283 379 46 — 24,708 Lease Financing Receivables 36,223 — 401 173 36,797 Consumer and Other 839 — 163 — 1,002 Total $ 2,018,985 $ 14,801 $ 15,972 $ 173 $ 2,049,931 Due to the business disruptions and shut-downs due to the Covid-19 pandemic, in 2020, management offered payment deferments to a number of customers that had previously been current in all respects. Civista instituted an enhanced portfolio management process which included meeting with customers, requesting additional financial information and evaluating cashflow and adjusting risk ratings as conditions warrant. During this process we systematically downgraded a significant number of loans to recognize the increased risk attributed to the pandemic. Additionally, Civista offered longer term deferrals under Section 4013 of the Cares Act, that were also downgraded as appropriate. Based on improved financial performance, Civista upgraded 48% of criticized loans during 2022. The lodging industry was hit the hardest and recovery is taking longer for that segment. Civista believes it has prudently identified risk, assigned appropriate risk ratings, and has a comprehensive portfolio management process to identify and quantify risk. The following table presents performing and nonperforming loans based solely on payment activity for the year ended December 31, 2022 that had not been assigned an internal risk grade. December 31, 2022 Residential Real Estate Real Estate Construction Consumer and Other Total Performing $ 432,790 $ 44,172 $ 19,773 $ 496,735 Nonperforming — — — — Total $ 432,790 $ 44,172 $ 19,773 $ 496,735 89 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2023 and 2022. December 31, 2023 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Total Loans Past Due 90 Days and Accruing Commercial & Agriculture $ 1,228 $ 471 $ 1,999 $ 3,698 $ 301,095 $ 304,793 $ 73 Commercial Real Estate: Owner Occupied 4 — 123 127 377,194 377,321 — Non-Owner Occupied — — — 0 1,161,894 1,161,894 — Residential Real Estate 4,581 1,180 1,642 7,403 652,438 659,841 — Real Estate Construction — — — — 260,409 260,409 — Farm Real Estate — — — — 24,771 24,771 — Lease Financing Receivables 950 410 373 1,733 52,909 54,642 — Consumer and Other 172 23 2 197 17,859 18,056 — Total $ 6,935 $ 2,084 $ 4,139 $ 13,158 $ 2,848,569 $ 2,861,727 $ 73 December 31, 2022 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 $ 247 $ 78 $ 534 $ 859 $ 276,873 $ 863 $ 278,595 $ — Commercial Real Estate: Owner Occupied 21 13 76 110 369,049 1,988 371,147 — Non-Owner Occupied — — 1,164 1,164 1,017,453 119 1,018,736 — Residential Real Estate 3,133 857 1,107 5,097 546,270 1,414 552,781 — Real Estate Construction — — 219 219 242,908 — 243,127 — Farm Real Estate 7 — — 7 24,701 — 24,708 — Lease Financing Receivables 1,040 — 341 1,381 35,416 — 36,797 Consumer and Other 293 49 74 416 20,358 1 20,775 — Total $ 4,741 $ 997 $ 3,515 $ 9,253 $ 2,533,028 $ 4,385 $ 2,546,666 $ — The following table presents loans on nonaccrual status as of December 31, 2023. December 31, 2023 Nonaccrual loans with a related ACL Nonaccrual loans without a related ACL Total Nonaccrual loans Interest Income Recognized Commercial & Agriculture $ 914 $ 4,891 $ 5,805 $ 9 Commercial Real Estate: Owner Occupied 269 3 272 7 Non-Owner Occupied — 1,167 1,167 — Residential Real Estate — 4,633 4,633 26 Real Estate Construction — 41 41 — Farm Real Estate — — — — Lease Financing Receivables 15 492 507 — Consumer and Other — 42 42 4 Total $ 1,198 $ 11,269 $ 12,467 $ 46 90 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) The following table presents loans on nonaccrual status as of December 31, 2022, excluding PCI loans. 2022 Commercial & Agriculture $ 774 Commercial Real Estate: Owner Occupied 386 Non-Owner Occupied 1,109 Residential Real Estate 3,926 Real Estate Construction 221 Farm Real Estate — Lease Financing Receivables — Consumer and Other 91 Total $ 6,507 Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although Civista 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. 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 the borrower 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. The gross interest income that would have been recorded on nonaccrual loans in 2023, 2022 and 2021 if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $ 446 , $ 384 and $ 307 , respectively. The amount of interest income on such loans recognized on a cash basi s was $ 343 in 2023 , $ 451 in 2022 and $ 716 in 2021. TDRs and Loan Modifications: Prior to the adoption of ASU 2022-02, a modification of a loan constitutes a TDR when Civista for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Civista 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 estimate s. TDRs accounted for $ 7 of the allowance for credit losses as of December 31, 2022 and $ 18 as of December 31, 2021. There were no loans modified in a TDR during the twelve month period ended December 31, 2022 and 2021. 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 originations loans, so modified loans present a higher risk of loss than do new origination loans. During the periods ended December 31, 2022 and 2021 , there were no defaults on loans that were modified and considered TDRs during the previous twelve months. 91 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) In accordance with the adoption of ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , accounting guidance for TDRs for creditors has been eliminated. New guidance with respect to recognition, measurement, and disclosures of loans for borrowers experiencing financial difficulties supersedes guidance on TDRs. Under ASU 2022-02, the Company is required to evaluate whether a loan modification represents a new loan or a continuation of an existing loan. The amendment enhanced existing disclosure requirements and introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension. There were no loans modified to borrowers experiencing financial difficulty during the period ended December 31, 2023. Individually Evaluated Loans: Larger ( greater than $350 ) Commercial & Agricultural and Commercial Real Estate loan relationships, and Residential Real Estate and Consumer loans that are part of a larger relationship are tested for impairment on a quarterly basis. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. The Company’s policy for recognizing interest income on impaired loans does not differ from its overall policy for interest recognition. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans. December 31, 2023 Real Estate Other Allowance for Credit Losses Commercial & Agriculture $ — $ 4,674 $ 945 Commercial Real Estate: Owner Occupied 308 — 37 Non-Owner Occupied 1,167 — 268 Residential Real Estate 149 — — Real Estate Construction — — — Farm Real Estate — — — Lease Financing Receivables — 61 15 Consumer and Other — — — Total $ 1,624 $ 4,735 $ 1,265 Collateral-dependent loans consist primarily of Residential Real Estate, Commercial Real Estate and Commercial and Agricultural loans. These loans are individually evaluated when foreclosure is probable or when the repayment of the loan is expected to be provided substantially through the operation or sale of the underlying collateral. In the case of Commercial and Agricultural loans secured by equipment, the fair value of the collateral is estimated by third-party valuation experts. Loan balances are charged down to the underlying collateral value when they are deemed uncollectible. Note that the Company did not elect to use the collateral maintenance agreement practical expedient available under CECL. 92 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) 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 December 31, 2022. December 31, 2022 Recorded Investment Unpaid Principal Balance Related Allowance With no related allowance recorded: Commercial Real Estate: Owner Occupied $ 82 $ 82 Non-Owner Occupied — — Residential Real Estate 385 410 Farm Real Estate — — Total 467 492 With an allowance recorded: Commercial Real Estate: Owner Occupied 150 150 $ 6 Residential Real Estate 7 11 1 Total 157 161 7 Total: Commercial & Agriculture — — — Commercial Real Estate: Owner Occupied 232 232 6 Non-Owner Occupied — — — Residential Real Estate 392 421 1 Farm Real Estate — — — Total $ 624 $ 653 $ 7 The following tables include the average recorded investment and interest income recognized for impaired financing receivables as of, and for the years ended, December 31, 2022 and 2021 . For the year ended: December 31, 2022 December 31, 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial & Agriculture $ 86 $ 3 $ 15 $ 0 Commercial Real Estate: Owner Occupied 406 22 396 18 Non-Owner Occupied 35 1 23 1 Residential Real Estate 614 33 629 31 Farm Real Estate 381 14 569 24 Total $ 1,522 $ 73 $ 1,632 $ 74 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 December 31, 2023 and 2022 , there were no foreclosed assets included in Other assets. As of December 31, 2023 and 2022, the Company had initiat ed formal foreclosure procedures on $ 1,018 and $ 399 , respectively, of Residential Real Estate loans. 93 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR CREDIT LOSSES (Continued) Changes in the amortizable yield for PCI loans were as follows, since acquisition: At December 31, 2022 At December 31, 2021 (In Thousands) (In Thousands) Balance at beginning of period $ 217 $ 225 Acquisition of PCI loans — — Accretion ( 36 ) ( 77 ) Transfers from non-accretable to accretable 33 69 Balance at end of period $ 214 $ 217 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At December 31, 2022 At December 31, 2021 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 $ 5,220 $ 512 Carrying amount 4,386 290 There was no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2023 and 2022, respectively. Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from a contractual obligation to extend credit. The allowance for credit losses on off-balance-sheet credit exposures is adjusted within other non-interest expense on the Consolidated Statements of Operations. The estimated credit loss includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate of expected credit loss is based on the historical loss rate for the loan class in which the loan commitments would be classified as if funded. The following table lists the allowance for credit losses on off-balance sheet credit exposures as of December 31, 2023: Twelve Months Ended December 31, 2023 2022 Beginning of Period — — CECL adoption adjustments 3,386 — Charge-offs — — Recoveries — — Provision 515 — End of Period $ 3,901 — 94 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS) The following table presents the components of other comprehensive income (loss), net of tax, as of December 31, 2023, 2022 and 2021: Before Tax Tax Effect Net of Tax Year Ended December 31, 2023 Net unrealized losses on investment securities: Other comprehensive loss before reclassifications $ 12,330 $ 2,583 $ 9,747 Amounts reclassified from accumulated other comprehensive loss — — — Net unrealized losses on investment securities 12,330 2,583 9,747 Defined benefit plans: Other comprehensive income before reclassifications 972 204 768 Amounts reclassified from accumulated other comprehensive income — — — Defined benefit plans, net 972 204 768 Other comprehensive loss $ 13,302 $ 2,787 $ 10,515 Year Ended December 31, 2022 Net unrealized losses on investment securities: Other comprehensive loss before reclassifications $ ( 85,517 ) $ ( 18,079 ) $ ( 67,438 ) Amounts reclassified from accumulated other comprehensive loss ( 10 ) ( 2 ) ( 8 ) Net unrealized losses on investment securities ( 85,527 ) ( 18,081 ) ( 67,446 ) Defined benefit plans: Other comprehensive income before reclassifications 736 155 581 Amounts reclassified from accumulated other comprehensive income — — — Defined benefit plans, net 736 155 581 Other comprehensive loss $ ( 84,791 ) $ ( 17,926 ) $ ( 66,865 ) Year Ended December 31, 2021 Net unrealized losses on investment securities: Other comprehensive loss before reclassifications $ ( 8,570 ) $ ( 1,799 ) $ ( 6,771 ) Amounts reclassified from accumulated other comprehensive loss ( 1 ) — ( 1 ) Net unrealized losses on investment securities ( 8,571 ) ( 1,799 ) ( 6,772 ) Defined benefit plans: Other comprehensive income before reclassifications 992 209 783 Amounts reclassified from accumulated other comprehensive income 240 50 190 Defined benefit plans, net 1,232 259 973 Other comprehensive loss $ ( 7,339 ) $ ( 1,540 ) $ ( 5,799 ) 95 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS ) (Continued) The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, as of December 31, 2023, 2022 and 2021. For the Year Ended December 31, 2023 For the Year Ended December 31, 2022 For the Year Ended December 31, 2021 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 Unrealized Gains and Losses on Available for Sale Securities Defined Benefit Pension Items Total Beginning balance $ ( 52,771 ) $ ( 5,274 ) $ ( 58,045 ) $ 14,675 $ ( 5,855 ) $ 8,820 $ 21,447 $ ( 6,828 ) $ 14,619 Other comprehensive income (loss) before classifications 9,747 768 10,515 ( 67,438 ) 581 ( 66,857 ) ( 6,771 ) 783 ( 5,988 ) Amounts reclassified from accumulated other comprehensive income (loss) 0 — 0 ( 8 ) — ( 8 ) ( 1 ) 190 189 Net current-period other comprehensive income(loss) 9,747 768 10,515 ( 67,446 ) 581 ( 66,865 ) ( 6,772 ) 973 ( 5,799 ) Ending balance $ ( 43,024 ) $ ( 4,506 ) $ ( 47,530 ) $ ( 52,771 ) $ ( 5,274 ) $ ( 58,045 ) $ 14,675 $ ( 5,855 ) $ 8,820 The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss as of December 31, 2023, 2022 and 2021. Amount Reclassified from Accumulated Other Comprehensive Loss (a) For the year ended December 31, Details about Accumulated Other Comprehensive Income (Loss) Components 2023 2022 2021 Affected Line Item in the Statement Where Net Income is Presented Unrealized gains (losses) on available for sale securities $ 0 $ 10 $ 1 Net gain on sale of securities Tax effect — ( 2 ) — Income taxes 0 8 1 Amortization of defined benefit pension items Actuarial losses — (b) — (b) ( 240 ) (b) Other operating expenses Tax effect — — 50 Income taxes — — ( 190 ) Total reclassifications for the period $ — $ 8 $ ( 189 ) (a) Amounts in parentheses indicate expenses and other amounts indicate income. (b) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. 96 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 7 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows: At December 31, 2023 2022 Land and improvements $ 8,392 $ 7,919 Buildings and improvements 39,874 35,138 Furniture and equipment 61,335 63,033 Total 109,601 106,090 Accumulated depreciation ( 52,832 ) ( 42,072 ) Premises and equipment, net $ 56,769 $ 64,018 Depreciation expense was $ 10,760 in 2023 , $ 4,456 in 2022 and $ 1,976 in 2021. The increase in depreciation expense in 2023 was in large part due to operating leases at the CLF division which are treated as fixed assets. NOTE 8 - GOODWILL AND INTANGIBLE ASSETS The carrying amount of goodwill has decreased $ 175 since December 31, 2022 as a result of a deferred tax correction related to the CLF acquisition, as discussed in Note 2. The balance of goodwill was $ 125,520 at December 31, 2023 and $ 125,695 at December 31, 2022. Management 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. Management performed an evaluation of the Company’s goodwill during the fourth quarter of 2023. Based on this test, management concluded that the Company’s goodwill was not impaired at December 31, 2023. Acquired intangible assets were as follows as of year-end. 2023 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Core deposit intangible assets(1): Core deposit intangibles 12,668 6,178 6,490 12,953 4,883 8,070 Total core deposit intangible assets $ 12,668 $ 6,178 $ 6,490 $ 12,953 $ 4,883 $ 8,070 (1) Excludes fully amortized core deposit intangible assets Aggregate core deposit intangible amortization expense was $ 1,579 , $ 1,296 and $ 890 for 2023, 2022 and 2021, respectively. 97 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 8 - GOODWILL AND INTANGIBLE ASSETS (Continued) Activity for mortgage servicing rights (MSRs) and the related valuation allowance follows: 2023 2022 Mortgage Servicing Rights: Beginning of year $ 2,689 $ 2,642 Additions 659 397 Disposals — — Amortized to expense 330 350 Other Charges — — Change in valuation allowance — — End of year $ 3,018 $ 2,689 Valuation allowance: Beginning of year $ — $ — Additions expensed — — Reductions credited to operations — — Direct write-offs — — End of year $ — $ — The unpaid principal balance of mortgage loans serviced for third parties was $ 442,635 at December 31, 2023 , compared to $ 456,149 at December 31, 2022 and $ 405,786 at December 31, 2021. Aggregate mortgage servicing rights (MSRs) amortization was $ 330 , $ 350 and $ 572 for 2023, 2022 and 2021, respectively. Mortgage loan contractual servicing fees were $ 1,137 , $ 1,063 and $ 947 for 2023, 2022 and 2021, respectively. Mortgage loan contractual servicing fees are included in Other income on the Consolidated Statements of Operations. The fair value of servicing right s was $ 3,018 an d $ 2,689 at year-end 2023 and 2022, respectively. Fair value at year-end 2023 was determined using a discount rate of 12.0 %, prepayment speeds ranging from 4.6 % to 11.0 %, depending on the stratification of the specific right, and a weighted average default rate of 0.0 %. Fair value at year-end 2022 was determined using a discount rate of 12.0 %, prepayment speeds ranging from 5.0 % to 20.0 %, depending on the stratification of the specific right, and a default rate of 0.14 %. Estimated amortization expense for each of the next five years and thereafter is as follows: MSRs Core deposit intangibles Total 2024 $ 170 $ 1,489 $ 1,659 2025 169 1,311 1,480 2026 167 1,193 1,360 2027 163 1,071 1,234 2028 155 782 937 Thereafter 2,194 644 2,838 $ 3,018 $ 6,490 $ 9,508 98 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 9 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 2023 and 2022 were as follows: 2023 2022 Demand $ 449,449 $ 527,879 Savings and Money markets 863,067 876,427 Certificates of Deposit: $250 and over 92,933 45,380 Other 765,734 227,886 Individual Retirement Accounts 42,146 46,079 Total $ 2,213,329 $ 1,723,651 Scheduled maturities of certificates of deposit ("CDs"), including IRAs, at December 31, 2023 were as follows: 2024 $ 867,436 2025 16,991 2026 8,261 2027 4,822 2028 2,500 Thereafter 803 Total $ 900,813 Deposits from the Company’s principal shareholders, officers, directors, and their affiliates at year-end 2023 and 2022 were $ 11,546 an d $ 10,166 , respectively. As of December 31, 2023, CDs and IRAs totaling $ 98,158 met or exceeded t he FDIC’s insurance limit of $ 250,000 . As of December 31, 2023, brokered deposits totaled $ 517,190 . NOTE 10 - SHORT-TERM BORROWINGS Short-term borrowings, which consist of federal funds purchased and other short-term borrowings are summarized as follows: At December 31, 2023 At December 31, 2022 Federal Funds Purchased Short-term Borrowings Federal Funds Purchased Short-term Borrowings Outstanding balance at year end $ — $ 338,000 $ — $ 393,700 Maximum indebtedness during the year — 521,500 50,000 435,500 Average balance during the year — 280,887 137 66,875 Average rate paid during the year — 5.12 % 4.38 % 3.84 % Interest rate on year end balance — 5.41 % — 4.24 % Average balances during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances. These borrowing transactions can range from overnight to six months in maturity. The average maturity wa s one day at December 31, 2023 . 99 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS Long-term advances from the FHLB were $ 2,392 and $ 3,578 at December 31, 2023 and December 31, 2022 , respectively. Outstanding balances have a maturity dates between July 2024 and June 2028 with fixed rates ranging from 1.18 % to 2.97 %. The average rate on outstanding advances was 2.31 % at December 31, 2023. Outstanding advances are prepayable in whole or in part and could be subject to a termination fee. Other borrowings totaled $ 9,860 at December 31, 2023, and included borrowings from the CLF division of Civista. The weighted average rate on these borrowings was 5.74 % and the weighted average life was 39 months . Scheduled principal reductions of FHLB advances outstanding at December 31, 2023 were as follows: 2024 $ 940 2025 636 2026 469 2027 273 2028 74 Thereafter — Total $ 2,392 In addition to FHLB borrowings, the Company had outstanding letters of credit with the FHLB totaling $ 24,400 and $ 57,510 at year-end 2023 and 2022 , respectively, used for pledging to secure public funds. FHLB borrowings and the letters of credit were collateralized by FHLB stock and by $ 1,044,027 and $ 932,373 of residential mortgage loans under a blanket lien arrangement at year-end 2023 and 2022, respectively. The Company had a FHLB maximum borrowing capacity of $ 791,637 as of December 31, 2023 , with remaining borrowing capacity of approximately $ 426,845 . The borrowing arrangement with the FHLB is subject to annual renewal. The maximum borrowing capacity is recalculated at least quarterly. NOTE 12 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Effective in July 2023, the company no longer sells securities under agreement to repurchase. Prior to that time, securities sold under agreements to repurchase were used to facilitate the needs of our customers as well as to facilitate our short-term funding needs. Securities sold under repurchase agreements were 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 were maintained with our safekeeping agents. 100 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 12 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued) The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of December 31, 2023 and 2022. All of the repurchase agreements are overnight agreements. December 31, 2023 December 31, 2022 Securities pledged for repurchase agreements: U.S. Treasury securities $ — $ 25,143 Obligations of U.S. government agencies — — Total securities pledged $ — $ 25,143 Gross amount of recognized liabilities for repurchase agreements $ — $ 25,143 Amounts related to agreements not included in offsetting disclosures above $ — $ — Information concerning securities sold under agreements to repurchase was as follows: 2023 2022 2021 Outstanding balance at year end $ — $ 25,143 $ 25,495 Average balance during the year 8,685 24,390 24,390 Average interest rate during the year 0.05 % 0.05 % 0.09 % Maximum month-end balance during the year $ 21,658 $ 26,044 $ 34,200 Weighted average interest rate at year end — 0.05 % 0.05 % NOTE 13 - SUBORDINATED DEBENTURES The following table summarizes the Company's subordinated debentures at December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Subordinated Note - fixed interest rate until November 30, 2026 then variable interest rate equal to SOFR plus 2.19 %, the rate was 3.25 % at December 31, 2023 and 2022, respectively - $ 75,000 maturing December 31, 2031 $ 73,594 $ 73,450 First Citizens Statutory Trust II - variable interest equal to 3-month CME Term SOFR plus 3.15 %, which was 8.81 % and 6.79 % at December 31, 2023 2022, respectively - $ 7,732 maturing March 26, 2033 7,732 7,732 First Citizens Statutory Trust III - variable interest equal to 3-month LIBOR Term SOFR plus 2.25 %, which was 7.91 % and 5.78 % at December 31, 2023 and 2022, respectively - $ 12,887 maturing September 20, 2034 12,887 12,887 First Citizens Statutory Trust IV - variable interest equal to 3-month CME Term SOFR plus 1.60 %, which was 7.27 % and 4.89 % at December 31, 2023 and 2022, respectively - $ 5,155 maturing March 23, 2037 5,155 5,155 Futura TPF Trust I - variable interest rate equal to 3-month CME Term SOFR plus 1.66 %, which was 7.33 % and 4.95 % at December 31, 2023 and 2022, and respectively - $ 2,578 maturing June 15, 2035 2,578 2,578 Futura TPF Trust II - variable interest rate equal to 3-month CME Term SOFR plus 1.66 %, which was 7.33 % and 4.95 % at December 31, 2023 and 2022, respectively - $ 2,070 maturing June 15, 2035 1,997 1,997 Total subordinated debentures $ 103,943 $ 103,799 101 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 13 - SUBORDINATED DEBENTURES (Continued) On November 30, 2021, the Company entered into a Subordinated Note Purchase Agreement pursuant to which the Company sold and issued $ 75,000 aggregate principal amount of its 3.25 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Notes"). The Notes have a stated maturity of December 31, 2031 . The Notes initially bear interest at a fixed rate of 3.25 % per annum, from and including November 30, 2021, to but excluding December 1, 2026, with interest payable semi-annually in arrears. From and including December 1, 2026, to but excluding the stated maturity date or early redemption date, the interest rate will reset quarterly to an annual floating rate equal the then-current benchmark rate, which will initially be the three-month Secured Overnight Financing Rate (SOFR) plus 219 basis points, with interest during such period payable quarterly in arrears. If three-month SOFR cannot be determined during the applicable floating rate period, a different index will be determined and used in accordance with the terms of the Notes and underlying Indenture. Prior to December 1, 2026, the Company may redeem the Notes, in whole but not in part, only under certain limited circumstances as set forth in the Indenture. On or after December 1, 2026, the Company may, at its option, redeem the Notes, in whole or in part, on any interest payment date, subject to the receipt of any required regulatory approvals. Any redemption by the Company would be at a redemption price equal to 100 % of the principal amount of the Notes to be redeemed plus accrued and unpaid interest to but excluding the date of redemption. On March 26, 2003, the Company formed First Citizens Statutory Trust II. The Company issued $ 7,700 of subordinated debentures to First Citizens Statutory Trust II in exchange for ownership of all the common securities of the First Citizens Statutory Trust II. The Company is not considered the primary beneficiary of First Citizens Statutory Trust II; therefore, the trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company's investment in the common stock of the trust was $ 232 and is included in Other assets. On September 20, 2004, the Company formed First Citizens Statutory Trust III. The Company issued $ 12,900 of subordinated debentures to First Citizens Statutory Trust III in exchange for ownership of all the common securities of the First Citizens Statutory Trust III. The Company is not considered the primary beneficiary of First Citizens Statutory Trust III; therefore, the trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company's investment in the common stock of the trust was $ 387 and is included in Other assets. On March 23, 2007, the Company formed First Citizens Statutory Trust IV. The Company issued $ 5,200 of subordinated debentures to First Citizens Statutory Trust IV in exchange for ownership of all the common securities of the First Citizens Statutory Trust IV. The Company is not considered the primary beneficiary of First Citizens Statutory Trust IV; therefore, the trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company's investment in the common stock of the trust was $ 155 and is included in Other assets. In conjunction with the acquisition of Futura Banc Corp. ("Futura") on December 17, 2007, the Company assumed $ 4,700 of subordinated debentures that were recorded at a fair value of $ 4,600 at the time of acquisition. On June 15, 2005, Futura issued $ 2,600 of subordinated debentures to Futura TPF Trust I in exchange for ownership of all the common securities of the trust. On June 15, 2005, Futura issued $ 2,100 of subordinated debentures to Futura TPF Trust II in exchange for ownership of all the common securities of the trust. The Company is not considered the primary beneficiary of Futura TPF Trust I or Futura TPF Trust II; therefore, the trusts are not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company's investment in the common stock of the trusts was $ 148 and is included in Other assets. For all the debentures mentioned above, interest is payable quarterly. The debentures and the common securities issued by each of the trusts are redeemable in whole or in part on dates specified in the trust indenture document. All of the subordinated debentures mentioned above may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. 102 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 14 - INCOME TAXES Income taxes were as follows for the years ended December 31: 2023 2022 2021 Current $ 8,256 $ 6,973 $ 5,111 State 68 152 587 Deferred ( 675 ) 483 1,319 Income taxes $ 7,649 $ 7,608 $ 7,017 Effective tax rates differed from the statutory federal income tax rate of 21 % in 2023, 2022 and 2021 due to the following: 2023 2022 2021 Income taxes computed at the statutory federal tax rate $ 10,629 $ 9,878 $ 9,988 Add (subtract) tax effect of: Nontaxable interest income, net of nondeductible interest expense ( 1,938 ) ( 1,666 ) ( 1,315 ) Low income housing tax credit ( 620 ) ( 679 ) ( 1,402 ) Cash surrender value of BOLI ( 233 ) ( 207 ) ( 252 ) Other ( 189 ) 282 ( 2 ) Income tax expense $ 7,649 $ 7,608 $ 7,017 Year-end deferred tax assets and liabilities were due to the following: 2023 2022 Deferred tax assets Lease liability $ 343 — Allowance for credit losses 7,711 6,106 Deferred compensation 1,155 1,143 Unfunded commitment liability 819 — Pension costs — — Intangible assets 103 154 Net operating loss carryforward 6 699 Deferred loan fees 576 347 Unrealized loss on securities available for sale 11,633 14,218 Unrealized loss on securities purchased 1,976 1,966 Other 923 295 Deferred tax asset 25,245 24,928 Deferred tax liabilities Tax depreciation in excess of book depreciation ( 2,625 ) ( 2,124 ) Discount accretion on securities ( 502 ) ( 244 ) FHLB stock dividends ( 223 ) ( 822 ) Purchase accounting adjustments ( 1,841 ) ( 2,220 ) Unrealized gain on securities available for sale — — Right of use asset ( 343 ) — Prepaids ( 314 ) ( 334 ) Other ( 1,040 ) ( 735 ) Deferred tax liability ( 6,888 ) ( 6,479 ) Net deferred tax asset $ 18,357 $ 18,449 103 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 14 - INCOME TAXES (Continued) At December 31, 2023, the Company had $ 30 in net operating losses subject to 382 limitations. No valuation allowance was established at December 31, 2023 and 2022, due to the Company’s ability to carryforward net operating losses to taxes paid in future years and certain tax strategies, coupled with the anticipated future income as evidenced by the Company’s earning potential. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company’s federal tax returns for taxable years through 2019 h ave been closed for purposes of examination by the Internal Revenue Service. NOTE 15 - RETIREMENT PLANS The Company sponsors a savings and retirement 401(k) plan , which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) pl an was $ 1,608 , $ 1,377 and $ 1,258 in 2023, 2022 and 2021 , respectively. The Company’s matching contribution is 10 0% of an employee’s first three percent contributed and 50% of the next two percent contributed. The Company also sponsors a pension plan which is a noncontributory defined benefit retirement plan for all employees who have attained the age of 20 1 ⁄ 2 , completed six months of service and work 1,000 or more hours per year. 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 April 2014, the Company amended the pension plan again to provide that no additional benefits would accrue beyond April 30, 2014. In October 2015, the Company, on behalf of it and its subsidiaries, entered into Pension Shortfall Agreements (the “Shortfall Agreements”) with ten employees of Civista. When the Company ceased accruals to its defined benefit pension plan on April 30, 2014, the circumstances of some participants with limited periods until their anticipated retirement dates would not permit them to use other available alternatives to make up for the shortfall in their expected pension. The Company calculated the total amount of the shortfall for each of the referenced individuals after considering its contributions to other retirement benefits. Pension shortfall expense was $ 118 i n 2023 , $ 145 in 2022 and $ 135 in 2021. Included in pension shortfall expense was interest expense, totaling $ 36 , $ 24 and $ 15 in 2023, 2022 and 2021, respectively, which was also recorded in and credited to the accounts of the ten individuals covered by this plan. 104 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) Information about the pension plan is as follows: 2023 2022 Change in benefit obligation: Beginning benefit obligation $ 10,123 $ 15,384 Service cost — — Interest cost 454 392 Curtailment gain — — Settlement loss — — Actuarial (gain)/loss ( 637 ) ( 3,455 ) Benefits paid ( 1,921 ) ( 2,198 ) Settlement payments — — Ending benefit obligation 8,019 10,123 Change in plan assets, at fair value: Beginning plan assets 10,934 15,120 Actual return 940 ( 1,988 ) Employer contribution — — Benefits paid ( 1,921 ) ( 2,198 ) Settlement payments — — Administrative expenses — — Ending plan assets 9,953 10,934 Funded status at end of year $ 1,934 $ 811 Amounts recognized in accumulated other comprehensive income (loss) at December 31, consist of unrecognized actuarial loss of $ 4,506 , net of $ 1,198 t ax in 2023 and $ 5,274 , net of $ 1,402 tax in 2022. The accumulated benefit obligation for the defined benefit pension plan was $ 8,019 at December 31, 2023 and $ 10,123 at December 31, 2022. The components of net periodic pension expense were as follows: 2023 2022 2021 Service cost $ — $ — $ — Interest cost 454 392 378 Expected return on plan assets ( 605 ) ( 732 ) ( 574 ) Net amortization and deferral — — 240 Net periodic pension cos t (benefit) ( 151 ) ( 340 ) 44 Additional loss due to settlement — — — Total pension cost (benefit) $ ( 151 ) $ ( 340 ) $ 44 Net loss (gain) recognized in other comprehensive income $ ( 972 ) $ ( 736 ) $ ( 854 ) Total recognized in net periodic benefit cost and other comprehensive loss (before tax) $ ( 1,123 ) $ ( 1,076 ) $ ( 810 ) The components of net periodic benefit cost other than the service cost component are included in the line item “Other operating expenses” in the Consolidated Statement of Operations. The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fisca l year is $ 169 . T he Company incurred settlement costs in 2023, 2022 and 2021 of $ 0 , $ 0 and $( 18 ), respectively. 105 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) The weighted average assumptions used to determine benefit obligations at year-end were as follows: 2023 2022 2021 Discount rate on benefit obligation 4.76 % 4.95 % 2.74 % Long-term rate of return on plan assets 5.53 % 4.84 % 3.84 % Rate of compensation increase 0.00 % 0.00 % 0.00 % The weighted average assumptions used to determine net periodic pension cost were as follows: 2023 2022 2021 Discount rate on benefit obligation 4.95 % 2.74 % 2.39 % Long-term rate of return on plan assets 4.84 % 3.84 % 4.44 % Rate of compensation increase 0.00 % 0.00 % 0.00 % The Company uses long-term market rates to determine the discount rate on the benefit obligation. Declines in the discount rate lead to increases in the actuarial loss related to the benefit obligation. The expectation for long-term rate of return on the pension assets and the expected rate of compensation increases are reviewed periodically by management in consultation with outside actuaries and primary investment consultants. Factors considered in setting and adjusting these rates are historic and projected rates of return on the portfolio and historic and estimated rates of increases of compensation. Since the pension plan is frozen, the rate of compensation increase used to determine the benefit obligation for 2023, 2022 and 2021 was zero . The Company’s pension plan asset allocation at year-end 2023 and 2022 and target allocation for 2024 by asset category are as follows: Target Allocation Percentage of Plan Assets at Year-end Asset Category 2024 2023 2022 Equity securities 0 - 30 % 20.0 % 20.0 % Debt securities 70 - 100 80.0 80.0 Total 100.0 % 100.0 % The Company developed the pension plan investment policies and strategies for plan assets with its pension management firm. The assets are currently invested in seven diversified investment funds, which include four equity funds and three bond funds. The long-term guidelines from above were created to maximize the return on portfolio assets while reducing the risk of the portfolio. The management firm may allocate assets among the separate accounts within the established long-term guidelines. Transfers among these accounts will be at the management firm’s discretion based on their investment outlook and the investment strategies that are outlined at periodic meetings with the Company. The expected long-term rate of return on the plan assets was 5.53 % in 2023 and 4.84 % in 2022. This return is based on the expected return for each of the asset categories, weighted based on the target allocation for each class. The Company does no t expect to make any contribution to its pension plan in 2024. Employer contributions totaled $ 0 in 2023 and 2022 . A decrease in the benefit obligations, offset by a decrease in the fair value of plan assets led to an increase in the funded status from $ 811 at December 31, 2022 to a funded status of $ 1,934 at December 31, 2023. Common/Collective Trust Funds Common/Collective Trust Funds are valued at the daily net asset value ("NAV") as reported by the funds. These funds are not traded in an active market or exchange, and the NAV per unit is calculated by dividing the net assets of the fund by the number of units outstanding, which includes observable inputs. The method described above may 106 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the pension plan believes its valuation method is appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient are not required to be categorized in the fair value hierarchy tables. Fair Value of Investments in Entities That Use NAV The following table summarizes investments measured at fair value based on NAV per share as of December 31, 2023 and 2022, respectively: December 31, 2023 Fair Value Unfunded Commitments Redemption Frequency (if currently eligible) Redemption Notice Period Common/collective trust funds $ 9,953 N/A Daily Daily December 31, 2022 Fair Value Unfunded Commitments Redemption Frequency (if currently eligible) Redemption Notice Period Common/collective trust funds $ 10,934 N/A Daily Daily The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the pension plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Expected benefit payments, which reflect expected future service, are as follows: 2024 $ 315 2025 359 2026 398 2027 431 2028 453 2029 through 2033 3,278 Total $ 5,234 Supplemental Executive Retirement Plan Civista established a supplemental executive retirement plan (“SERP”) in 2011, which covers key members of management. The SERP was amended and restated effective January 1, 2024. Under the SERP, participants will receive annually, following retirement, a percentage of their base compensations at the time of their retirement for a maximum of ten years . The SERP liability recorded at December 31, 2023, was $ 4,083 , c ompared to $ 4,028 at December 31, 2022. The expense related to the SERP was $ 233 , $ 420 and $ 404 for 2023, 2022 and 2021, respectively. Distributions to participants made in 2023, 2022 and 2021 totaled $ 176 , $ 173 , and $ 167 , respectively. 107 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 16 - EQUITY INCENTIVE PLAN At the Company’s 2014 annual meeting, the shareholders adopted the Company’s 2014 Incentive Plan (“2014 Incentive Plan”). The 2014 Incentive Plan authorizes the Company to grant options, stock awards, stock units and other awards for up to 375,000 common shares of the Company. There were 60,049 s hares available for grants under this plan at December 31, 2023. No options had been granted under the 2014 Incentive Plan as of December 31, 2023 and 2022. In recent 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. During the twelve months ended December 31, 2023, 2022 and 2021, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. An aggregate of 11,817 , 8,098 and 8,792 common shares were issued to Civista directors in 2022, 2021 and 2021, respectively, as payment of their retainer for their service on the Civista Board of Directors. The issuances were expensed in their entirety when the shares were issued in the amounts of $ 189 , $ 196 and $ 196 , respectively. The Company includes share-based compensation for employees as “Compensation expense” in the Consolidated Statements of Operations. The following is a summary of the status of the Company’s restricted shares, and changes therein during the twelve months ended December 31, 2023: December 31, 2023 Number of Restricted Shares Weighted Average Grant Date Fair Value Nonvested at beginning of period 70,096 $ 21.88 Granted 47,536 21.85 Vested ( 30,222 ) 21.62 Forfeited ( 1,740 ) 21.74 Nonvested at end of period 85,670 21.88 The following is a summary of the status of the Company’s awarded restricted shares as of December 31, 2023: At December 31, 2023 Date of Award Shares Remaining Expense Remaining Vesting Period (Years) March 14, 2019 1,924 $ 0 0.00 March 14, 2020 4,265 41 1.00 March 3, 2021 7,776 91 1.00 March 3, 2021 6,793 0 0.00 March 3, 2022 9,554 164 3.00 March 3, 2022 10,421 128 1.00 March 14, 2023 17,103 275 4.00 March 14, 2023 27,834 405 2.00 85,670 $ 1,104 2.05 108 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 16 - EQUITY INCENTIVE PLAN During the twelve months ended December 31, 2023, 2022 and 2021, the Company recorded share-based compensation expense of $ 801 , $ 630 and $ 506 , respectively, and director retainer fees of $ 182 , $ 189 and $ 196 , respectively, for shares granted under the 2014 Incentive Plan. At December 31, 2023, the total compensation cost related to unvested awards not yet recognized was $ 1,104 , which is expected to be recognized over the weighted average remaining life of the grants of 2.05 years. NOTE 17 - FAIR VALUE MEASUREMENT GAAP establishes a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows: 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. 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 has two types of equity securities, one is not actively traded in an open market, while the other is listed on an exchange and is less frequently traded. The fair value of equity securities available for sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable. (Level 2 inputs). Fair value swap asset/liability: The fair value of swap assets and liabilities is based on an external derivative model using data inputs as of the valuation date and classified Level 2. Collateral Dependent Loans: The Company generally measures impairment on impaired loans 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 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 in the table below as a Level 3 measurement. Mortgage servicing rights: Mortgage servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are those that the Company believes market participants would use in estimating future net servicing income. Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors. Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation. 109 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 17 - FAIR VALUE MEASUREMENT (Continued) Assets and liabilities measured at fair value are summarized below. Fair Value Measurements at December 31, 2023 using: (Level 1) (Level 2) (Level 3) Assets measured at fair value on a recurring basis: Securities available for sale U.S. Treasury securities and obligations of U.S. Government agencies $ — $ 67,658 $ — Obligations of states and political subdivisions — 338,599 — Mortgage-backed securities in government sponsored entities — 212,015 — Total securities available for sale — 618,272 — Equity securities — 2,169 — Swap asset — 12,481 — Liabilities measured at fair value on a recurring basis: Swap liability — 12,481 — Assets measured at fair value on a nonrecurring basis: Mortgage servicing rights $ — $ — $ 3,018 Fair Value Measurements at December 31, 2022 using: (Level 1) (Level 2) (Level 3) Assets measured at fair value on a recurring basis: Securities available for sale U.S. Treasury securities and obligations of U.S. Government agencies $ — $ 61,029 $ — Obligations of states and political subdivisions — 317,248 — Mortgage-backed securities in government sponsored entities — 237,125 — Total securities available for sale — 615,402 — Equity securities — 2,190 — Swap asset — 16,579 — Liabilities measured at fair value on a recurring basis: Swap liability — 16,579 — Assets measured at fair value on a nonrecurring basis: Mortgage servicing rights $ — $ — $ 2,689 110 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 17 - FAIR VALUE MEASUREMENT (Continued) The following tables 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, 2023 and 2022. Quantitative Information about Level 3 Fair Value Measurements December 31, 2023 Fair Value Valuation Technique Unobservable Input Range Weighted Average Mortgage Servicing Rights $ 3,018 Discounted Cash Flows Constant Prepayment Rate 4.6 % - 11 % 6 % Discount Rate 12 % 12 % Quantitative Information about Level 3 Fair Value Measurements December 31, 2022 Fair Value Valuation Technique Unobservable Input Range Weighted Average Mortgage Servicing Rights $ 2,689 Discounted Cash Flows Constant Prepayment Rate 5 % - 20 % 7 % Discount Rate 12 % 12 % The carrying amount and fair value of financial instruments carried at amortized cost were as follows: December 31, 2023 Carrying Amount Total Fair Value Level 1 Level 2 Level 3 Financial Assets: Cash and due from financial institutions $ 60,406 $ 60,406 $ 60,406 $ — $ — Other securities 29,998 29,998 29,998 — — Loans, held for sale 1,725 1,725 1,725 — — Loans, net of allowance for loan losses 2,824,568 2,679,988 — — 2,679,988 Bank owned life insurance 61,335 61,335 61,335 — — Accrued interest receivable 12,819 12,819 12,819 — — Financial Liabilities: Nonmaturing deposits 2,084,216 2,084,216 2,084,216 — — Time deposits 900,812 899,443 — — 899,443 Short-term FHLB advances 338,000 337,267 337,267 — — Long-term FHLB advances 2,392 2,419 — — 2,419 Securities sold under agreement to repurchase — — — — — Subordinated debentures 103,943 101,563 — — 101,563 Other borrowings 9,859 9,859 — — 9,859 Accrued interest payable 9,525 9,525 9,525 — — 111 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 17 - FAIR VALUE MEASUREMENT (Continued) December 31, 2022 Carrying Amount Total Fair Value Level 1 Level 2 Level 3 Financial Assets: Cash and due from financial institutions $ 43,361 $ 43,361 $ 43,361 $ — $ — Other securities 33,585 33,585 33,585 — — Loans, held for sale 683 698 698 — — Loans, net of allowance for loan losses 2,619,770 2,528,906 — — 2,528,906 Bank owned life insurance 53,543 53,543 53,543 — — Accrued interest receivable 11,178 11,178 11,178 — — Financial Liabilities: Nonmaturing deposits 2,300,215 2,300,215 2,300,215 — — Time deposits 319,769 318,886 — — 318,886 Short-term FHLB advances 393,700 393,247 393,247 — — Long-term FHLB advances 3,578 3,534 — — 3,534 Securities sold under agreement to repurchase 25,143 25,143 25,143 — — Subordinated debentures 103,799 98,513 — — 98,513 Other borrowings 15,516 15,806 — — 15,806 Accrued interest payable 668 668 668 — — NOTE 18 - 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 customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to 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 the commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end. 2023 2022 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to extend credit: Lines of credit and construction loans $ 58,318 $ 668,893 $ 42,184 $ 599,185 Overdraft protection 10 59,489 10 45,182 Letters of credit 821 273 960 630 $ 59,149 $ 728,655 $ 43,154 $ 644,997 Commitments to make loans are generally made for a period of one year or less. Fixed-rate loan commitments included above had interest rates ranging from 3.5 % to 8.5 % at December 31, 2023 and 3.25 % to 8.00 % at December 31, 2022 . Maturities extend up to 30 years. Civista is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was $ 0 on December 31, 2023 and December 31, 2022, respectively. CBI and Civista are parties to various claims and proceedings arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such proceedings and claims will not be material to the consolidated balance sheet or results of operations. 112 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 19 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS CBI and Civista (collectively, the “Companies”) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary -actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Companies must meet specific capital guidelines that involve quantitative measures of the Companies’ assets, liabilities, and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Companies’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Companies to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets, and Tier 1 capital to average assets. Management believes, as of December 31, 2023, that the Companies met all capital adequacy requirements to which they were subject. As of December 31, 2023, and 2022, the most recent notification from the Federal Reserve Bank categorized Civista as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Civista must maintain minimum total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed Civista’s category. The Company’s and Civista’s actual capital levels and minimum required capital levels at December 31, 2023 and 2022 were as follows: To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Purposes Amount Ratio Amount Ratio Amount Ratio 2023 Total Risk Based Capital Consolidated $ 429,080 14.4 % $ 237,604 8.0 % n/a n/a Civista 400,047 13.5 236,568 8.0 $ 295,710 10.0 % Tier I Risk Based Capital Consolidated 318,322 10.7 178,203 6.0 n/a n/a Civista 363,033 12.3 177,426 6.0 236,568 8.0 CET1 Risk Based Capital Consolidated 288,895 9.7 133,652 4.5 n/a n/a Civista 363,033 12.3 133,069 4.5 192,211 6.5 Leverage Consolidated 318,322 8.8 145,489 4.0 n/a n/a Civista 363,033 10.0 145,245 4.0 181,556 5.0 2022 Total Risk Based Capital Consolidated $ 395,125 14.1 % $ 217,681 8.0 % n/a n/a Civista 366,377 12.9 219,357 8.0 $ 274,196 10.0 % Tier I Risk Based Capital Consolidated 293,164 10.4 163,261 6.0 n/a n/a Civista 337,866 11.9 164,517 6.0 219,357 8.0 CET1 Risk Based Capital Consolidated 263,736 9.4 122,446 4.5 n/a n/a Civista 337,866 11.9 123,388 4.5 178,227 6.5 Leverage Consolidated 293,164 8.7 131,479 4.0 n/a n/a Civista 337,866 10.0 131,240 4.0 164,050 5.0 113 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 19 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued) CBI’s primary source of funds for paying dividends to its shareholders and for operating expense is the cash accumulated from dividends received from Civista. Payment of dividends by Civista to CBI is subject to restrictions by Civista’s regulatory agencies. These restrictions generally limit dividends to the current and prior two years retained earnings as defined by the regulations. In addition, dividends may not reduce capital levels below minimum regulatory capital requirements. At December 31, 2023, Civista had $ 56,886 of net profits available to pay dividends to CBI without requiring regulatory approval. NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of CBI follows: December 31, Condensed Balance Sheets 2023 2022 Assets: Cash $ 8,331 $ 21,812 Equity securities 2,169 2,190 Investment in bank subsidiary 450,791 414,263 Investment in nonbank subsidiaries 3,917 3,236 Other assets 12,354 3,332 Total assets $ 477,562 $ 444,833 Liabilities: Deferred income taxes and other liabilities $ 1,618 $ 6,199 Subordinated debentures 103,943 103,799 Total liabilities 105,561 109,998 Shareholders’ Equity: Common stock 311,166 310,182 Accumulated earnings 183,787 156,492 Treasury stock ( 75,422 ) ( 73,794 ) Accumulated other comprehensive loss ( 47,530 ) ( 58,045 ) Total shareholders’ equity 372,001 334,835 Total liabilities and shareholders’ equity $ 477,562 $ 444,833 For the years ended December 31, Condensed Statements of Operations 2023 2022 2021 Dividends from bank subsidiaries $ 28,100 $ 26,300 $ 19,900 Dividends from non-bank subsidiaries 1,390 1,150 1,000 Interest expense ( 4,849 ) ( 3,781 ) ( 956 ) Pension expense 150 340 ( 47 ) Other expense, net ( 1,518 ) ( 2,384 ) ( 1,004 ) Income before equity in undistributed net earnings of subsidiaries 23,273 21,625 18,893 Income tax benefit 1,309 1,140 425 Equity in undistributed net earnings of subsidiaries 18,382 16,662 21,228 Net income $ 42,964 $ 39,427 $ 40,546 Comprehensive income (loss) $ 53,489 $ ( 27,438 ) $ 34,747 114 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued) For the years ended December 31, Condensed Statements of Cash Flows 2023 2022 2021 Operating activities: Net income $ 42,964 $ 39,427 $ 40,546 Adjustment to reconcile net income to net cash from operating activities: Change in other assets and other liabilities ( 12,836 ) 4,587 2,495 Equity in undistributed net earnings of subsidiaries ( 18,382 ) ( 16,662 ) ( 21,228 ) Net cash provided by operating activities 11,746 27,352 21,813 Investing activities: Disposal of minority interest — — 11,500 Acquisition and additional capitalization of subsidiary, net of cash acquired ( 14,000 ) ( 25,960 ) ( 50,000 ) Net cash used in investing activities ( 14,000 ) ( 25,960 ) ( 38,500 ) Financing activities: Proceeds from subordinated debenture, net of issuance costs — — 73,386 Purchase of treasury stock ( 1,628 ) ( 16,887 ) ( 22,309 ) Cash dividends paid ( 9,599 ) ( 8,493 ) ( 8,036 ) Net cash provided by (used in) financing activities ( 11,227 ) ( 25,380 ) 43,041 Net change in cash and cash equivalents ( 13,481 ) ( 23,988 ) 26,354 Cash and cash equivalents at beginning of year 21,812 45,800 19,446 Cash and cash equivalents at end of year $ 8,331 $ 21,812 $ 45,800 115 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 21 - EARNINGS PER COMMON SHARE The factors used in the earnings per share computation follow. 2023 2022 2021 Basic Net income $ 42,964 $ 39,427 $ 40,546 Less allocation of earnings and dividends to participating securities 1,583 498 173 Net income available to common shareholders—basic $ 41,381 $ 38,929 $ 40,373 Weighted average common shares outstanding 15,734,624 15,162,032 15,408,863 Less average participating securities 579,857 191,402 65,648 Weighted average number of shares outstanding used in the calculation of basic earnings per common share 15,154,767 14,970,630 15,343,215 Basic earnings per share $ 2.73 $ 2.60 $ 2.63 Diluted Net income available to common shareholders—basic $ 41,381 $ 38,929 $ 40,373 Net income available to common shareholders—diluted $ 41,381 $ 38,929 $ 40,373 Weighted average common shares outstanding used in the calculation of earnings per common share basic 15,154,767 14,970,630 15,343,215 Average shares and dilutive potential common shares outstanding—diluted 15,154,767 14,970,630 15,343,215 Diluted earnings per share $ 2.73 $ 2.60 $ 2.63 Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding for 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. NOTE 22 - 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 interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations unless a significant difference in credit risk emerges between the counterparties at either end of one of the swap contracts. None of the Company’s derivatives are designated as hedging instruments. 116 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 22 - DERIVATIVE HEDGING INSTRUMENTS (Continued) The Company presents derivative positions gross on the balance sheet for customers and net for financial institution counterparty positions subject to master netting arrangements. The following table reflects the derivatives recorded on the balance sheet as of December 31: 2023 2022 Notional Amount Fair Value Notional Amount Fair Value Included in other assets: Interest rate swaps with loan customers in an asset position $ 44,773 $ 2,114 $ 6,980 $ 269 Counterparty positions with financial institutions in an asset position 228,873 10,367 212,570 16,310 Total included in other assets $ 12,481 $ 16,579 Included in accrued expenses and other liabilities: Interest rate swaps with loan customers in a liability position $ 184,100 $ 12,481 $ 205,590 $ 16,579 Counterparty positions with financial institutions in an asset position — — — — Counterparty positions with financial institutions in a liability position — — — — Total included in accrued expenses and other liabilities $ 12,481 $ 16,579 Gross notional positions with customers $ 228,873 $ 212,570 Gross notional positions with financial institution counterparties $ 228,873 $ 212,570 The effect of swap fair value changes on the Consolidated Statement of Operations for the years ended December 31, 2023, 2022 and 2021 are as follows: Location of Amount of Gain or (Loss) Derivatives Gain or (Loss) Recognized in Not Designated Recognized in Income on Derivatives as Hedging Instruments Income on Derivative 2023 2022 2021 Interest rate swaps related to customer loans Other income $ — $ — $ 64 Total $ — $ — $ 64 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. The Company classifies changes in the fair value of derivatives with “Other” in the Consolidated Statements of Operation. Any fees paid to enter the swap contract at inception are recognized in earnings when received. Such fees amounted to $ 673 a nd $ 247 during the years ended December 31, 2023 and 2022, respectively. The Company did no t have any cash or securities pledged as collateral on its interest rate swaps with third party financial institutions at December 31, 2023 or 2022 . 117 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 23 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS The Company invests in qualified affordable housing projects. At December 31, 2023 and 2022, the balance of the Company’s investments in qualified affordable housing projects was $ 15,122 and $ 14,149 , respectively. These balances are reflected in the Other assets line on the Consolidated Balance Sheet. The unfunded commitments related to the investments in qualified affordab le housing projects totaled $ 5,722 and $ 5,634 at December 31, 2023 and 2022, respectively. These balances are reflected in the Accrued expenses and other liabilities line on the Consolidated Balance Sheet. During the years ended December 31, 2023, 2022 and 2021, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $ 1,035 , $ 1,086 and $ 818 , respectively, which was included within pre-tax income on the Consolidated Statements of Operations. Additionally, during the years ended December 31, 2023, 2022 and 2021, the Company recognized tax credits and other benefits from its investments in affordable housing tax credits of $ 1,655 , $ 1,391 and $ 1,402 , respectively. During the years ended December 31, 2023, 2022 and 2021 , the Company did no t incur impairment losses related to its investment in qualified affordable housing projects. NOTE 24 – REVENUE RECOGNITION The Company accounts for revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers. Revenue associated with financial instruments, including revenue from loans and securities are outside the scope of the new standard and accounted for under existing GAAP. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in scope of the new guidance. Noninterest revenue streams in-scope of ASC 606 are discussed below. Service Charges Service charges consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM/Interchange Fees Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. Wealth Management Fees Wealth management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received in the following month through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. 118 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 24 – REVENUE RECOGNITION (Continued) Tax Refund Processing Fees The Company facilitates the payment of federal and state income tax refunds in partnership with a third-party vendor. Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Company has received the refund from the federal or state government. As part of this agreement the Company earns fee income, the majority of which is received in the first quarter of the year. The Company’s fee income revenue is recognized based on the estimated percent of business completed by each date. Other Other noninterest income consists of other recurring revenue streams such as check order fees, wire transfer fees, safety deposit box rental fees, item processing fees and other miscellaneous revenue streams. Check order income mainly represents fees charged to customers for checks. Wire transfer fees represent revenue from processing wire transfers. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Item processing fee income represents fees charged to other financial institutions for processing their transactions. Payment is typically received in the following month. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2023, 2022 and 2021. For the years ended December 31, 2023 2022 2021 Noninterest Income In-scope of Topic 606: Service charges $ 7,206 $ 7,074 $ 5,905 ATM/Interchange fees 5,880 5,499 5,443 Wealth management fees 4,767 4,902 4,857 Tax refund processing fees 2,375 2,375 2,375 Other 10,220 4,686 1,055 Noninterest Income (in-scope of Topic 606) 30,448 24,536 19,635 Noninterest Income (out-of-scope of Topic 606) 6,715 4,540 11,817 Total Noninterest Income $ 37,163 $ 29,076 $ 31,452 NOTE 25 - LEASES We have operating leases for several branch locations and office space. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. We also lease certain office equipment under operating leases. Many of our leases include both lease (e.g., minimum rent payments) and non-lease (e.g., common-area or other maintenance costs) components. The Company accounts for each component separately based on the standalone price of each component. In addition, we have several operating leases with lease terms of less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our right-of-use (ROU) assets and lease liabilities. Most leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion. The majority of renewals to extend the lease terms are included in our ROU assets and lease liabilities as they are reasonably certain of exercise. As most of our leases do not provide an implicit rate, we use the fully collateralized FHLB borrowing rate, commensurate with the lease terms based on the information available at the lease commencement date in determining the present value of the lease payments. 119 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023, 2022 and 2021 (Amounts in thousands, except share data) NOTE 25 – LEASES (Continued) The balance sheet information related to our operating leases were as follows as of December 31, 2023 and 2022: Classification on the Consolidated Balance Sheet December 31, 2023 December 31, 2022 Assets: Operating lease Other assets $ 1,632 $ 2,108 Liabilities: Operating lease Accrued expenses and other liabilities $ 1,632 $ 2,108 The cost components of our operating leases were as follows for the periods ended December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Lease cost Operating lease cost $ 499 $ 445 Short-term lease cost 160 182 Sublease income ( 26 ) ( 29 ) Total lease cost $ 633 $ 598 Maturities of our lease liabilities for all operating leases for each of the next five years and thereafter is as follows: 2024 $ 635 2025 459 2026 412 2027 292 2028 - Thereafter - Total lease payments $ 1,798 Less: Imputed Interest 166 Present value of lease liabilities $ 1,632 The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 31, 2023: Weighted-average remaining lease term - operating leases (years) 4.29 Weighted-average discount rate - operating leases 2.89 % The Company is the lessor of equipment under operating leases to a wide variety of customers, from commercial and industrial to government and healthcare. The operating lease assets are presented on the balance sheet as Premises and equipment. The Company records lease revenue over the term of the lease and retains ownership of the related assets which are depreciated over the estimated useful life, normally two to six years . The Company also leases equipment to customers under direct financing leases. At the inception of each lease, the lease receivables, together with the present value of the estimated unguaranteed residual values are presented on the balance sheet as Loans. The excess of the lease receivables and residual values over the cost of the equipment is recorded as unearned lease income and will be recognized over the lease term, normally two to six years as well. 120 Item 9. Changes in and Disagreements With Acco untants on Accounting and Financial Disclosure The Company has had no disagreements with its independent accountants on matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure required to be reported under this Item.