CIVISTA BANCSHARES, INC. 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion focuses on the consolidated financial condition of the Company at March 31, 2024 compared to December 31, 2023, and the consolidated results of operations for the three- and nine-month periods ended March 31, 2024, compared to the same periods in 2023. This discussion should be read in conjunction with the Consolidated Financial Statements and footnotes included in this Form 10-Q. Forward-Looking Statements This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as the Company’s financial condition, anticipated operating results, cash flows, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “believe,” “belief,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results, performance or achievements to differ from those discussed in the forward-looking statements include, but are not limited to: • current and future economic and financial market conditions, including the effects of inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, an increasing federal government budget deficit, the failure of the federal government to raise the federal debt ceiling and/or possible future U.S. government shutdowns over budget disagreements, slowing gross domestic product, tariffs, a U.S. withdrawal from or renegotiation of trade agreements, trade wars, and other factors beyond our control, any of which may result in adverse impacts on our deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of our borrowers to repay their loans, and the value of the collateral securing loans made by Civista; • recent and future bank failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational impact on the banking industry as a whole, and of which could adversely affect the Company’s business, financial condition and results of operations; • adverse changes in the real estate market, which could cause increases in delinquencies and non-performing assets, including additional loan charge-offs, and could depress our income, earnings and capital; • changes in interest rates resulting from national and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, which may adversely affect interest rates, interest margins, loan demand and interest rate sensitivity; • operational risks, reputational risks, legal and compliance risks, and other risks related to potential fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, or failures, disruptions or breaches in security of our systems, including those resulting from computer viruses or cyber-attacks; • our ability to secure sensitive or confidential client information against unauthorized disclosure or access through computer systems and telecommunication networks, including those of our third-party vendors and other service providers, which may prove inadequate; • a failure in or breach of our operational or security systems or infrastructure, or those of our third-party vendors and other service providers, resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems, including as a result of cyber-attacks; • competitive pressures and factors among financial services organizations could increase significantly, including product and pricing pressures, changes to third-party relationships and our ability to recruit and retain qualified management and banking personnel; • unexpected losses of services of our key management personnel, or the inability to recruit and retain qualified personnel in the future; • risks inherent in pursuing strategic growth initiatives, including integration and other risks involved in past, pending and possible future acquisitions; • uncertainty regarding the nature, timing, cost and effect of legislative or regulatory changes in the banking industry or otherwise affecting the Company, including major reform of the regulatory oversight structure of the financial services industry and changes in laws and regulations concerning taxes, FDIC insurance premium levels, pensions, bankruptcy, consumer protection, Page 36 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) rent regulation and housing, financial accounting and reporting, environmental protection, insurance, bank products and services, bank and bank holding company capital and liquidity standards, fiduciary standards, securities and other aspects of the financial services industry; • changes in federal, state and/or local tax laws; • the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board (FASB), the SEC, the Public Company Accounting Oversight Board and other regulatory agencies, may adversely affect our reported financial condition or results of operations; • litigation and regulatory compliance exposure, including the costs and effects of any adverse developments in legal proceedings or other claims and the costs and effects of unfavorable resolution of regulatory and other governmental examinations or inquiries; • continued availability of earnings and dividends from Civista and excess capital sufficient for us to service our debt and pay dividends to our shareholders in compliance with applicable legal and regulatory requirements; • our ability to raise additional capital in the future if and when needed and/or on terms acceptable to us; • our ability to conform and comply with regulatory requirements and increasing scrutiny and evolving expectations from customers, regulatory authorities, shareholders, investors and other stakeholders with regard to our environmental, social and governance (ESG) policies and practices, which could affect our reputation and business and operating results; • our ability to anticipate and successfully keep pace with technological changes affecting the financial services industry; and • other risks identified from time-to-time in the Company’s other public documents on file with the SEC, including those risks identified in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law. Financial Condition Total assets of the Company at March 31, 2024 were $3,880,258 compared to $3,861,418 at December 31, 2023, an increase of $18,840, or 0.5%. The increase in total assets was due to increases in other securities and bank stocks of $1,220, loans held for sale of $1,991, loans of $34,722 and swap assets of $2,201. Increases in assets were partially offset by decreases in cash and cash equivalents of $9,871, accompanied by decreases in securities available for sale of $12,023 and office premises and equipment of $2,489. Total liabilities at March 31, 2024 were $3,510,599 compared to $3,489,416 at December 31, 2023, an increase of $21,183, or 0.6%. The increase in total liabilities was primarily attributable to an increase short term FHLB borrowings of $30,500 and swap liabilities of $2,201 partially offset by decreases in deposits of $4,333 and other borrowings of $1,754. Page 37 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Loans outstanding as of March 31, 2024 and December 31, 2023 were as follows: March 31, 2024 December 31, 2023 $ Change % Change Commercial & Agriculture $ 302,663 $ 304,793 $ (2,130 ) -0.7 % Commercial Real Estate—Owner Occupied 367,419 377,321 (9,902 ) -2.6 % Commercial Real Estate—Non-Owner Occupied 1,185,688 1,161,894 23,794 2.0 % Residential Real Estate 676,802 659,841 16,961 2.6 % Real Estate Construction 267,737 260,409 7,328 2.8 % Farm Real Estate 24,908 24,771 137 0.6 % Lease Financing Receivables 56,680 36,797 19,883 54.0 % Consumer and Other 16,242 18,056 (1,814 ) -10.0 % Total loans 2,898,139 2,843,882 54,257 1.9 % Allowance for credit losses (38,849 ) (37,160 ) (1,689 ) 4.5 % Net loans $ 2,859,290 $ 2,806,722 $ 52,568 1.9 % Included in Commercial & Agriculture loans above were $289 of PPP loans as of March 31, 2024 and $326 of PPP loans as of December 31, 2023. Loans held for sale increased $1,991, or 115.4%, since December 31, 2023. The increase was due to increases in both the number of loans and average loan balances held for sale. At March 31, 2024, 18 loans totaling $3,716 were held for sale as compared to 9 loans totaling $1,725 at December 31, 2023. Net loans have increased $34,722, or 1.2%, since December 31, 2023. The increase at March 31, 2024 can be attributed to increases in many categories, primarily Commercial Real Estate Non-Owner Occupied, Residential Real Estate, Construction, and Lease Financing Receivables offset by decreases in Commercial Real Estate – Owner Occupied, Commercial & Agriculture and Consumer and Other. At March 31, 2024, the net loan to deposit ratio was 95.9% compared to 94.6% at December 31, 2023. The increase in the net loan to deposit ratio is primarily the result of an increase in loans. During the first three months of 2024, provisions made to the allowances for credit losses and off-balance sheet credit exposures totaled $1,992, compared to a provision of $821 during the same period in 2023. The increase in the reserves was principally related to loan growth during the quarter and downgrading of three credits. As time progresses the results of economic conditions will require CECL model assumption inputs to change and further refinements to the estimation process may also be identified. Net charge-offs for the first three months of 2024 totaled $353, compared to net charge-offs of $128 in the first three months of 2023. For the first three months of 2024, the Company charged off a total of 16 loans. Four Commercial and Agriculture loan totaling $212, Four Lease Financing Receivables totaling $226, two Residential Real Estate loan totaling $13, one Commercial Real Estate Non-Owner Occupied loan for $174, and five Consumer and Other loans totaling $26 were charged off in the first three months of the year. In addition, during the first three months of 2024, the Company had recoveries on previously charged-off Commercial & Agriculture loans of $152, Commercial Real Estate – Non-Owner Occupied loans of $5, Residential Real Estate loans of $119, Real Estate Construction loans of $4, Commercial Real Estate – Owner Occupied loans of $3 and Consumer and Other loans of $14. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance. Management specifically evaluates loans that do not share common risk characteristics for estimates of loss. To evaluate the adequacy of the allowance for credit losses to cover probable losses in the loan portfolio, management considers specific reserve allocations for identified portfolio loans, reserves for delinquencies and historical reserve allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve. Page 38 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Management analyzes each individually evaluated Commercial & Agriculture and Commercial Real Estate loan relationship with a balance of $350 or larger, on an individual basis and designates a loan as individually evaluated when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for credit losses as a percent of total loans was 1.34% at March 31, 2024 and 1.30% at December 31, 2023. The available-for-sale security portfolio decreased by $12,023, from $618,272 at December 31, 2023 to $606,249 at March 31, 2024. Management continually evaluates our securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which the Company is exposed. These evaluations may cause the Company to change the level of funds it deploys into investment securities and change the composition of its investment securities portfolio. As of March 31, 2024, the Company was in compliance with all pledging requirements. Premises and equipment, net, decreased $2,489 from December 31, 2023 to March 31, 2024. The decrease is the result of depreciation of $2,114 and disposals of $498, partially offset by new purchases $123. Bank owned life insurance (BOLI) increased $350 from December 31, 2023 to March 31, 2024. The increase is the result of increases in the cash surrender value of the underlying insurance policies. Swap assets increased $2,201 from December 31, 2023 to March 31, 2024. The increase is primarily the result of an increase in market value. Total deposits as of March 31, 2024 and December 31, 2023 were as follows: March 31, 2024 December 31, 2023 $ Change % Change Noninterest-bearing demand $ 707,993 $ 771,699 $ (63,706 ) -8.3 % Interest-bearing demand 434,692 449,449 (14,757 ) -3.3 % Savings and money market 929,126 863,067 66,059 7.7 % Time deposits 908,884 900,813 8,071 0.9 % Total Deposits $ 2,980,695 $ 2,985,028 $ (4,333 ) -0.1 % The Company had approximately $446,955 and $499,429 of uninsured deposits as of March 31, 2024 and December 31, 2023, respectively. Uninsured deposit amounts are estimated based on the portions of customer account balances that exceed the FDIC insurance limit of $250,000. Total deposits at March 31, 2024 increased $4,333 from year-end 2023. Noninterest-bearing deposits decreased $63,706 from year-end 2023, while interest-bearing deposits, including savings and time deposits, increased $59,373 from December 31, 2023. The decrease in noninterest-bearing deposits was primarily due to a $51,700 decrease in noninterest-bearing business accounts and a $19,500 decrease in noninterest-bearing accounts related to the former tax refund processing program. The decrease in interest-bearing demand deposits was primarily due to a decrease of $11,600 in interest-bearing personal accounts, a $7,500 decrease in Jumbo NOW accounts, and a $5,200 decrease in interest-bearing business accounts, which were offset by a $13,600 increase in interest-bearing pubic fund accounts. The $66,100 increase in savings and money market accounts was primarily due to a $65,900 increase in brokered money market accounts and a $9,500 increase in business money market accounts, which increases were partially offset by a $6,400 decrease in statement savings and a $3,100 decrease in business savings accounts. Jumbo time certificates and retail time certificates increased $16,700 and $14,000, respectively; partially offset by a $21,800 decrease in brokered time deposits from year-end 2023. The year-to-date average balance of total deposits increased $146,113, compared to the average balance for the same period in 2023, mainly due to a $324,199 increase in the average balance of time deposits. Short-term FHLB advances increased $30,500 from December 31, 2023 to March 31, 2024. The increase was due to funding needs to support loan growth. Swap liabilities increased $2,201 from December 31, 2023 to March 31, 2024. The increase was the result of an increase in fair value of swap liabilities. Page 39 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Accrued expenses and other liabilities decreased $6,574 from December 31, 2023 to March 31, 2024. The decrease is primarily the decrease in accrued interest for Brokered CD’s by $3,620 and decrease in accrued commissions & incentives of $1,846. Shareholders’ equity at March 31, 2024 was $369,659, or 9.5% of total assets, compared to $372,002, or 9.6% of total assets, at December 31, 2023. The decrease was the result of a decrease in the fair value of securities available-for-sale, net of tax, of $6,227. Net income of $6,360, partially offset by dividends on common shares of $2,510 and the purchase of treasury shares of $152 Total outstanding common shares at March 31, 2024 were 15,727,013, which increased from 15,695,424 common shares outstanding at December 31, 2023. Common shares outstanding increased due to the grant of 40,952 restricted common shares to certain officers under the Company’s 2014 Incentive Plan, offset by 8,262 common shares surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 1,101 restricted common shares forfeited. Results of Operations Three Months Ended March 31, 2024 and 2023 The Company had net income of $6,360 for the three months ended March 31, 2024, a decrease of $6,528 from net income of $12,888 for the same three months of 2023. Basic earnings per common share were $0.41 for the quarter ended March 31, 2024, compared to $0.82 for the same period in 2023. Diluted earnings per common share were $0.41 for the quarter ended March 31, 2024, compared to $0.82 for the same period in 2023. The primary reasons for the changes in net income are explained below. Net interest income for the three months ended March 31, 2024 was $28,372, a decrease of $4,229 from $32,601 for the same three months of 2023. This decrease of an increase of $12,818 in interest expense, partially offset by an increase of $7,203 in total interest income. Interest-earning assets averaged $3,552,552 during the three months ended March 31, 2024, an increase of $239,267 from $3,313,285 for the same period of 2023. The Company’s average interest-bearing liabilities increased from $2,308,975 during the three months ended March 31, 2023 to $2,720,586 during the three months ended March 31, 2024. The Company’s fully tax equivalent net interest margin for the three months ended March 31, 2024 and 2023 was 3.22% and 3.99%, respectively. Total interest and dividend income was $50,128 for the three months ended March 31, 2024, an increase of $7,203 from $42,925 of total interest and dividend income for the same period in 2023. The increase in interest and dividend income is attributable to an $6,701 increase in interest and fees on loans, a $100 increase in interest income on taxable securities and a $113 increase in tax-exempt securities. The $8,086 increase in interest and fees on loans is attributable to average balances as well as loan yield. The average balance of loans increased by $230,130, or 8.0%, to $2,880,031 for the three months ended March 31, 2024 as compared to $2,649,901 for the same period in 2023. The loan yield increased to 6.20% for the three months ended March 31, 2024, from 5.78% for the same period in 2023. Page 40 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Interest on taxable securities increased $100 to $2,934 for the three months ended March 31, 2024, compared to $2,834 for the same period in 2023. The average balance of taxable securities decreased $24,036 to $350,815 for the three months ended March 31, 2024, as compared to $374,851 for the same period in 2023. The yield on taxable securities increased 23 basis points to 3.0% for 2024, compared to 2.77% for 2023. Interest on tax-exempt securities increased $113 to $2,375 for the three months ended March 31, 2024, compared to $2,262 for the same period in 2023. The average balance of tax-exempt securities increased $14,252 to $295,388 for the three months ended March 31, 2024, as compared to $281,136 for the same period in 2023. The yield on tax-exempt securities increased 4 basis points to 3.85% for 2024, compared to 3.81% for 2023. Interest expense increased $11,432, or 110.7%, to $21,756 for the three months ended March 31, 2024, compared with $10,324 for the same period in 2023. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, accompanied by increases in rates. For the three months ended March 31, 2024, the average balance of interest-bearing liabilities increased $411,611 to $2,720,586, as compared to $2,308,975 for the same period in 2023. Interest incurred on deposits increased by 12,755 to $15,987 for the three months ended March 31, 2024, compared to $3,232 for the same period in 2023. The average balance of interest-bearing deposits increased by $593,197 to $2,272,702 for the three months ended March 31, 2024, as compared to the same period in 2023, accompanied by an increase in the rate paid on time deposits from 2.82% in 2023 to 5.33% in 2024. Interest expense incurred on short-term FHLB advances increased as a result of higher average rates on short-term FHLB advances of 5.51% for the three months ended March 31, 2024, as compared to 4.64% to the same period in 2023. Interest expense incurred on subordinated debentures increased $72, to $1,241 for the three months ended March 31, 2024, compared to $1,169 for the same period in 2023. The rate paid on subordinated debentures increased from 4.57% in 2023 to 4.79% in 2024. Page 41 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) The following table presents the condensed average balance sheets for the three months ended March 31, 2024 and 2023. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities. Three Months Ended March 31, 2024 2023 Assets: Average balance Interest Yield/ rate* Average balance Interest Yield/ rate* Interest-earning assets: Loans, including fees** $ 2,880,031 $ 44,485 6.20 % $ 2,649,901 $ 37,784 5.78 % Taxable securities 350,815 2,934 3.00 % 374,851 2,834 2.77 % Tax-exempt securities 295,388 2,375 3.85 % 281,136 2,262 3.81 % Interest-bearing deposits in other banks 26,318 334 5.09 % 7,397 45 2.47 % Total interest-earning assets $ 3,552,552 $ 50,128 5.64 % $ 3,313,285 $ 42,925 5.23 % Noninterest-earning assets: Cash and due from financial institutions 29,599 54,136 Premises and equipment, net 54,980 62,776 Accrued interest receivable 12,724 10,655 Intangible assets 134,872 135,554 Other assets 61,456 53,630 Bank owned life insurance 58,472 61,292 Less allowance for loan losses (37,356 ) (30,454 ) Total Assets $ 3,867,299 $ 3,660,874 Liabilities and Shareholders Equity: Interest-bearing liabilities: Demand and savings $ 1,383,225 $ 3,986 1.16 % $ 1,384,070 $ 1,084 0.33 % Time 902,442 12,001 5.33 % 308,400 2,148 2.82 % Short-term FHLB advances 328,687 4,515 5.51 % 372,226 4,258 4.64 % Long-term FHLB advances 2,275 13 2.29 % 3,442 19 2.24 % Other borrowings — — 0.00 % 116,200 1,643 5.73 % Subordinated debentures 103,957 1,241 4.79 % 103,814 1,169 4.57 % Repurchase Agreements — — 0.00 % 20,823 3 0.06 % Total interest-bearing liabilities $ 2,720,586 $ 21,756 3.21 % $ 2,308,975 $ 10,324 1.81 % Noninterest-bearing deposits 712,483 961,886 Other liabilities 63,778 48,854 Shareholders’ Equity 370,452 341,159 Total Liabilities and Shareholders’ Equity $ 3,867,299 $ 3,660,874 Net interest income and interest rate spread $ 28,372 2.43 % $ 32,601 3.42 % Net interest margin 3.22 % 3.99 % *—Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $632 and $601 for the periods ended March 31, 2024 and 2023, respectively. **—Average balance includes nonaccrual loans. Page 42 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the three months ended March 31, 2024 and 2023. Increase (decrease) due to: Volume (1) Rate (1) Net (Dollars in thousands) Interest income: Loans, including fees $ 3,421 $ 3,280 $ 6,701 Taxable securities (156 ) 256 100 Tax-exempt securities 62 51 113 Interest-bearing deposits in other banks 203 86 289 Total interest income $ 3,530 $ 3,673 $ 7,203 Interest expense: Demand and savings $ (1 ) $ 2,903 $ 2,902 Time 6,693 3,160 9,853 Short-term FHLB advances (535 ) 792 257 Long-term FHLB advances (7 ) 1 (6 ) Other borrowings (1,638 ) — (1,638 ) Federal funds purchased (5 ) — (5 ) Subordinated debentures 2 70 72 Repurchase agreements (3 ) — (3 ) Total interest expense $ 4,506 $ 6,926 $ 11,432 Net interest income $ (976 ) $ (3,253 ) $ (4,229 ) (1) The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate. The Company provides for loan losses through regular provisions to the allowance for loan losses. During the first quarter of 2024 we recorded a provision for credit losses of $2,042, an increase of $1,422, from $620 during the three months ended March 31, 2023. The increase in the reserves was related to a downgrade in three credits as well as loan growth during the quarter . Noninterest income for the three-month periods ended March 31, 2024 and 2023 was as follows: Three months ended March 31, 2024 2023 $ Change % Change Service charges $ 1,440 $ 1,773 $ (333 ) -18.8 % Net gain on sale of securities — — — 0.0 % Net gain (loss) on equity securities (141 ) (68 ) (73 ) 107.4 % Net gain on sale of loans and leases 863 631 232 36.8 % ATM/Interchange fees 1,383 1,353 30 2.2 % Wealth management fees 1,276 1,193 83 7.0 % Lease revenue and residual income 1,674 2,046 (372 ) 0.0 % Bank owned life insurance 350 253 97 38.3 % Tax refund processing fees — 1,900 (1,900 ) -100.0 % Swap fees 57 61 (4 ) -6.6 % Other 1,602 1,926 (324 ) -16.8 % Total noninterest income $ 8,504 $ 11,068 $ (2,564 ) -23.2 % Noninterest income for the three months ended March 31, 2024 was $8,504, a decrease of $2,564, or 23.2%, from $11,068 for the same period of 2023. The decrease was primarily due to the elimination of $1,900 in tax refund processing income, as we have exited this line of business. Service charges decreased due to the decrease in overdraft fees of $375. Other income decreased as result of a $1,500 nonrecurring fee which was collected in 2023 associated with the renewal of the Civista's contract with MasterCard. Net gain (loss) on equity securities decreased as a result of market value decreases. Net gain on sale of loans increased primarily as a result of an increase Page 43 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) in average loan balance. During the three-months ended March 31, 2024, 53 loans were sold, totaling $11,438. During the three-months ended March 31, 2023, 63 loans were sold, totaling $9,739. Noninterest expense for the three-month periods ended March 31, 2024 and 2023 was as follows: Three months ended March 31, 2024 2023 $ Change % Change Compensation expense $ 15,457 $ 15,105 $ 352 2.3 % Net occupancy expense 1,368 1,359 9 0.7 % Equipment expense 2,535 2,761 (226 ) -8.2 % Contracted data processing 545 520 25 4.8 % FDIC assessment 484 248 236 95.2 % State franchise tax 485 526 (41 ) -7.8 % Professional services 1,149 1,555 (406 ) -26.1 % Amortization of intangible assets 391 398 (7 ) -1.8 % ATM/Interchange expense 625 580 45 7.8 % Marketing 479 505 (26 ) -5.1 % Software maintenance expense 1,189 878 311 35.4 % Other 2,982 2,997 (15 ) -0.5 % Total noninterest expense $ 27,689 $ 27,432 $ 257 0.9 % Noninterest expense for the three months ended March 31, 2024 was $27,689, an increase of $257, or 0.9%, from $27,432 reported for the same period of 2023. The primary reasons for the increase were increases in compensation expense, net occupancy, contracted data processing expense, FDIC assessment, ATM/Interchange expense, and software maintenance expense, offset by decreases in equipment expense, state franchise tax, professional services, amortization expense, marketing, and other operating expenses. The increase in compensation expense was due to increased salaries, payroll taxes and employee insurance. The average full time equivalent (FTE) employees were 539 at March 31, 2024, an increase of seven FTEs over the same period of 2023. Equipment expenses decreased due to a decrease in equipment depreciation. The quarter-over-quarter increase in FDIC assessments was attributable to higher average consolidated assets and average tangible equity. The decrease in state franchise tax expense was attributable to lower estimated tax payments during the first quarter of 2024 as compared to the same period in 2023. Professional services decreased $400 due to advisory fees for the renegotiation of Civista's MasterCard contract which was paid in 2023. The increase in software maintenance expense is primarily due of our digital banking platform. Income tax expense for the three months ended March 31, 2024 totaled $835, down $1,694 compared to the same period in 2023. The effective tax rates for the three-month periods ended March 31, 2024 and 2023 were 11.8% and 16.4%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits, tax-deductible captive insurance premiums and bank owned life insurance income. Page 44 Civista Bancshares, Inc. Management’s Discussion and Analysis of Financial Condition and Results of Operations Form 10-Q (Amounts in thousands, except share data) Capital Resources Shareholders’ equity totaled $369,659 at March 31, 2024, compared to $372,002 at December 31, 2023. Shareholders’ equity decreased during the first three months of 2024 as a result of a decrease in the fair value of securities available-for-sale, net of tax, of $12,023, dividends on common shares of $2,510, partially offset by net income of $6,528. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of March 31, 2024 and December 31, 2023 as identified in the following table: Total Risk Based Capital Tier I Risk Based Capital CET1 Risk Based Capital Leverage Ratio Company Ratios—March 31, 2024 14.5 % 10.8 % 9.8 % 8.6 % Company Ratios—December 31, 2023 14.4 % 10.7 % 9.7 % 8.8 % For Capital Adequacy Purposes 8.0 % 6.0 % 4.5 % 4.0 % To Be Well Capitalized Under Prompt Corrective Action Provisions 10.0 % 8.0 % 6.5 % 5.0 % Liquidity The Company maintains a conservative liquidity position. All securities, with the exception of equity securities, are classified as available-for-sale. Securities, with maturities of one year or less, totaled $5,246, or 0.87% of the total security portfolio at March 31, 2024. The available-for-sale portfolio helps to provide the Company with the ability to meet its funding needs. The Condensed Consolidated Statements of Cash Flows (Unaudited) contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings. As reported in the Condensed Consolidated Statements of Cash Flows (Unaudited), our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $254 and $19,794 for the three months ended March 31, 2024 and 2023, respectively. The primary additions to cash from operating activities are from proceeds from the sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used by investing activities was $33,674 and $38,635 for the three months ended March 31, 2024 and 2023, respectively, principally reflecting our loan and investment security activities. Cash provided by and used for deposits and purchase of treasury shares comprised most of our financing activities, which resulted in net cash provided by of $23,324 and $28,203 for the three months ended March 31, 2024 and 2023, respectively. Future loan demand of Civista may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, and the sale of securities classified as available-for-sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. Through its correspondent banks, Civista maintains federal funds borrowing lines totaling $50,000. As of March 31, 2024, Civista had total credit availability with the FHLB of $840,582 with standby letters of credit totaling $24,400 and a remaining borrowing capacity of approximately $445,471. In addition, CBI maintains a credit line with a third party lender totaling $15,000. No borrowings were outstanding by CBI under this credit line as of March 31, 2024. Page 45 Civista Bancshares, Inc. Quantitative and Qualitative Disclosures About Market Risk Form 10-Q (Amounts in thousands, except share data) ITEM 3. Quantitative and Qualitat ive Disclosures About Market Risk The Company’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure. Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Company’s safety and soundness. Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality. The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issue policy statements and guidance on sound practices for managing interest-rate risk, which form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The guidance also outlines fundamental elements of sound management and discusses the importance of these elements in the context of managing interest-rate risk. The guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment. Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company’s primary asset/liability management technique is the measurement of the Company’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell. If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities. Page 46 Civista Bancshares, Inc. Quantitative and Qualitative Disclosures About Market Risk Form 10-Q (Amounts in thousands, except share data) Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. The Company has not purchased derivative financial instruments to hedge interest rate risk in the past and does not currently intend to purchase such instruments in the near future. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refinance its obligations at new, lower rates. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short-term or due on demand, while most of its assets may be invested in long-term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Company. The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2023 and March 31, 2024, based on certain prepayment and account decay assumptions that management believes are reasonable. The table shows the changes in the Company’s net portfolio value (in amount and percent) that would result from hypothetical interest rate increases of 200 basis points and 100 basis points and interest rate decreases of 100 basis points and 200 basis points at March 31, 2024 and December 31, 2023. Net Portfolio Value March 31, 2024 December 31, 2023 Change in Rates Dollar Amount Dollar Change Percent Change Dollar Amount Dollar Change Percent Change +200bp 565,611 10,377 2 % 603,656 (4,077 ) (1 )% +100bp 563,089 7,855 1 % 608,399 666 0 % Base 555,234 — — 607,733 — — -100bp 545,886 (9,348 ) (2 )% 605,047 (2,686 ) (0 )% -200bp 524,525 (30,709 ) (6 )% 591,305 (16,428 ) (3 )% The change in net portfolio value from December 31, 2023 to March 31, 2024, can be attributed to a couple of factors. The yield remains inverted and is lower than at the end of the year. Additionally, both the volume and mix of assets and funding sources has changed. The volume of loans has increased, and the asset mix remains centered on loans. The volume of other borrowings has increased and non-maturing deposits have decreased. The volume and mix shifts from the end of the year contributed to a decrease in the base net portfolio value. Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values. A 200 basis point change in the rates up scenario would lead to a slightly larger decrease in the market value of liabilities than assets. Accordingly, we see an increase in the net portfolio value. A 200 basis points change in the rates down scenario would lead to a larger increase in the market value of liabilities than in assets, leading to a decrease in the net portfolio value. Page 47 Civista Bancshares, Inc. Controls and Procedures Form 10-Q (Amounts in thousands, except share data)