10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2019

OR

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

For the transition period from                  to

Commission file number 001- 36192

Civista Bancshares, Inc.

(Exact name of registrant as specified in its charter)

Ohio	34-1558688
State or other jurisdiction of	(IRS Employer
incorporation or organization	Identification No.)

100 East Water Street, Sandusky, Ohio 44870

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading<br><br><br>Symbol(s)	Name of each exchange on which registered
Common shares, no par value	CIVB	The NASDAQ Stock Market LLC (NASDAQ Capital Market)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ☐    No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing market price as of June 30, 2019 was $336,720,623. For this purpose, shares held by non-affiliates include all outstanding common shares except those beneficially owned by the directors and executive officers of the registrant.

As of February 28, 2020, there were 16,541,000 common shares, no par value, of the registrant issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Annual Report to Shareholders for the fiscal year ended December 31, 2019 (the “2019 Annual Report”) are incorporated by reference into Parts I and II of this Form 10-K. Portions of the registrant’s Proxy Statement for the registrant’s 2020 Annual Meeting of Shareholders to be held on April 21, 2020 (the “2020 Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

INDEX

Part I
Item 1.	Business	3
Item 1A.	Risk Factors	20
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	32
Item 4.	Mine Safety Disclosures	32
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	35
Item 9A.	Controls and Procedures	35
Item 9B.	Other Information	35
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	36
Item 11.	Executive Compensation	36
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	36
Item 13.	Certain Relationships and Related Transactions, and Director Independence	36
Item 14.	Principal Accountant Fees and Services	36
Part IV
Item 15.	Exhibits and Financial Statement Schedules	37
Item 16	Form 10-K Summary	39
Signatures		40

Item 1.  Business

General Development of Business

CIVISTA BANCSHARES, INC. (“CBI”) was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Act of 1999, as amended (the “GLBA”). CBI’s office is located at 100 East Water Street, Sandusky, Ohio. CBI and its subsidiaries are sometimes referred to together as the “Company”. The Company had total consolidated assets of $2,309,557 at December 31, 2019.

CIVISTA BANK (“Civista”), owned by the Company since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Civista was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Civista surrendered its trust charter and began operation as The Citizens Banking Company. The name Civista Bank was introduced during the first quarter of 2015 to solidify our dual Citizens/Champaign brand and distinguish ourselves from the many other banks using the “Citizens” name in our existing and prospective markets. Civista maintains its main office at 100 East Water Street, Sandusky, Ohio and operates branch banking offices in the following Ohio communities: Sandusky (2), Norwalk (2), Berlin Heights, Huron, Port Clinton, Castalia, New Washington, Shelby (2), Willard, Greenwich, Plymouth, Shiloh, Akron, Dublin, Plain City, Russells Point, Urbana (2), West Liberty, Quincy, Dayton (3), Beachwood, and in the following Indiana communities: Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles. Civista also operates loan production offices in Westlake, Ohio and Fort Mitchell, Kentucky. Civista and its consolidated subsidiaries as discussed below, accounted for 99.7% of the Company’s consolidated assets at December 31, 2019.

On September 14, 2018, the Company completed its acquisition of United Community Bancorp (“UCB”), pursuant to a previously announced definitive merger agreement.  Under the terms of the agreement, UCB shareholders received 1.027 shares of the Company’s common stock and $2.54 cash in exchange for each share of UCB common stock they owned immediately prior to the merger.  The Company issued 4,277,430 shares of its common stock and paid approximately $12.7 million in cash in the merger for an aggregate merger consideration of approximately $117.3 million.  Upon closing, UCB’s banking subsidiary, United Community Bank, was merged into CBI’s banking subsidiary, Civista Bank and its eight offices in the Indiana communities of Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles and a loan production office in Fort Mitchell, Kentucky, became offices of Civista.  The systems integration of United Community Banks into Civista was completed on September 14, 2018.

FIRST CITIZENS INSURANCE AGENCY, INC. (“FCIA”) was formed in 2001 to allow the Company to participate in commission revenue generated through its third party insurance agreement. Assets of FCIA were not significant as of December 31, 2019.

WATER STREET PROPERTIES (“WSP”) was formed in 2003 to hold properties repossessed by CBI subsidiaries. Assets of WSP were not significant as of December 31, 2019.

FC REFUND SOLUTIONS, INC. (“FCRS”) was formed in 2012 to facilitate payment of individual state and federal income tax refunds.  The operations of FCRS were discontinued June 30, 2019 as a result of inactivity. The discontinued operations of FCRS will not affect the Company’s participation in the tax refund processing program.

FIRST CITIZENS INVESTMENTS, INC. (“FCI”) was formed in the fourth quarter of 2007 as a wholly-owned subsidiary of Civista to hold and manage its securities portfolio. The operations of FCI are located in Wilmington, Delaware.

FIRST CITIZENS CAPITAL LLC (“FCC”) was also formed in the fourth quarter of 2007 as a wholly-owned subsidiary of Civista to hold inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware.

CIVB RISK MANAGEMENT, INC. (“CRMI”), a wholly-owned subsidiary of the Company which was formed and began operations on December 26, 2017, is a Delaware-based captive insurance company which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.  CRMI pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.  CRMI is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

Industry Segments

CBI is a financial holding company. Through its subsidiary bank, the Company is primarily engaged in the business of community banking, which accounts for substantially all of its revenue, operating income and assets.  Refer to Consolidated Financial Statements on pages 24 through 29 of the 2019 Annual Report.

Narrative Description of Business

General

The Company’s primary business is incidental to the subsidiary bank and its subsidiaries. Civista, located in the Ohio counties of Erie, Crawford, Champaign, Cuyahoga, Franklin, Huron, Logan, Madison, Montgomery, Ottawa, Richland and Summit, in the Indiana counties of Dearborn and Ripley and in the Kentucky county of Kenton, conducts a general banking business that involves collecting customer deposits, making loans, purchasing securities, and offering Trust services.

Interest and fees on loans accounted for 70% of total revenue for 2019, 70% of total revenue for 2018, and 68% of total revenue for 2017. The Company’s primary focus of lending continues to be real estate loans, both residential and commercial in nature. Residential real estate mortgages comprised 27% of the total loan portfolio in 2019, 29% of the total loan portfolio in 2018 and 23% of the total loan portfolio in 2017. Commercial real estate loans comprised 49% of the total loan portfolio in 2019, 47% in 2018, and 51% in 2017. Commercial and agriculture loans comprised 12% of the total loan portfolio in 2019, 11% in 2018, and 13% in 2017. Civista’s loan portfolio does not include any foreign-based loans, loans to lesser-developed countries or loans to CBI.

On a parent company only basis, CBI’s primary source of funds is the receipt of dividends paid by its subsidiaries, principally Civista. The ability of Civista to pay dividends is subject to limitations under various laws and regulations and to prudent and sound banking principles. Generally, subject to certain minimum capital requirements, Civista may declare a dividend without the approval of the State of Ohio Division of Financial Institutions unless the total of the dividends in a calendar year exceeds the total net profits of the bank for the year combined with the retained profits of the bank for the two preceding years. At December 31, 2019, Civista had $53,609 of accumulated net profits available to pay dividends to CBI without approval of the Ohio Division of Financial Institutions.

The Company’s business is not seasonal, nor is it dependent on a single or small group of customers.

Competition

The market area for Civista is Erie, Crawford, Champaign, Cuyahoga, Franklin, Huron, Logan, Madison, Montgomery, Ottawa, Richland and Summit Counties in Ohio, Dearborn and Ripley Counties in Indiana and Kenton County in Kentucky. Traditional financial service competition for Civista consists of large national and regional financial institutions, community banks, thrifts and credit unions operating within Civista’s market area. Nontraditional sources of competition for loan and deposit dollars come from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds.

Civista experiences intense competition within several of its markets due to the presence of several national, regional and local financial institutions and other service providers. Civista primarily competes based on client service, convenience and responsiveness to customer needs, availability and selection of products, and rates of interest on loans and deposits. However, some of Civista’ competitors have greater resources and, as such, higher lending limits, which may adversely affect the ability of Civista to compete.

Employees

CBI has no employees. Civista employs approximately 457 full-time equivalent employees to whom a variety of benefits are provided. CBI and its subsidiaries are not parties to any collective bargaining agreements. Management considers its relationship with its employees to be good.

Supervision and Regulation

CBI and its subsidiaries are subject to extensive supervision and regulation by federal and state agencies. The regulation of financial holding companies and their subsidiaries is intended primarily for the protection of consumers, depositors, borrowers, the federal Deposit Insurance Fund and the banking system as a whole, and not for the protection of shareholders. Applicable laws and regulations restrict permissible activities and investments and require actions to protect loan, deposit, brokerage, fiduciary and other customers, as well as the federal Deposit Insurance Fund. These laws and regulations also may restrict the ability of CBI to repurchase its common shares or to receive dividends from Civista, and impose capital adequacy and liquidity requirements. The following is a summary of the regulatory agencies that supervise and regulate CBI and Civista and the statutes and regulations that have, or could have, a material impact on the Company’s business. This discussion is qualified in its entirety by reference to such statutes and regulations.

The Bank Holding Company Act: As a financial holding company, CBI is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, CBI is subject to periodic examination by the Federal Reserve Board and is required to file periodic reports regarding its operations and any additional information that the Federal Reserve Board may require. The Federal Reserve Board also has extensive enforcement authority over financial and bank holding companies, including the ability to assess civil money penalties, issue cease and desist and removal orders, and require that a financial or bank holding company divest subsidiaries, including its subsidiary banks.

Under applicable law and Federal Reserve Board policy, a financial or bank holding company is expected to act as a source of strength to each of its subsidiary banks. The Federal Reserve Board may require a financial or bank holding company to contribute additional capital to an undercapitalized subsidiary bank and may disapprove of the payment of dividends to shareholders if the Federal Reserve Board believes the payment of such dividends would be an unsafe or unsound practice.

The BHCA generally limits the activities of a bank holding company to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries and engaging in any other activities that the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident to those activities. In addition, the BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board prior to acquiring all or substantially all of the assets of any bank or another financial or bank holding company, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank not already majority-owned by it, or merging or consolidating with another financial or bank holding company.

Gramm-Leach-Bliley Act (“GLBA)”: The GLBA permits qualifying bank holding companies to elect to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature if the holding company is well capitalized and well managed and each of its subsidiary banks is well capitalized under the FDIC’s Deposit Insurance Corporation Act of 1991 prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act. In March, 2000, CBI became a financial holding company. No regulatory approval is required for a financial holding company to acquire a company, other than a bank or a savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.

The GLBA defines “financial in nature” to include:

•	securities underwriting, dealing and market making;
•	sponsoring mutual funds and investment companies;
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•	insurance underwriting and agency;
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•	merchant banking; and
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•	activities that the Federal Reserve Board has determined to be closely related to banking.
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If a financial holding company or a subsidiary bank fails to maintain all requirements for the holding company to maintain financial holding company status, material restrictions may be placed on the activities of the financial holding company and its subsidiaries and on the ability of the holding company to enter into certain transactions and obtain regulatory approvals for new activities and transactions.  The financial holding company could also be required to divest of subsidiaries that engage in activities that are not permitted for bank holding companies that are not financial holding companies.  If restrictions are imposed on the activities of a financial holding company, the existence of such restrictions may not be made publicly available pursuant to confidentiality regulations of the bank regulatory agencies.

Transactions with Affiliates, Directors, Executive Officers and Shareholders: Transactions between Civista and its affiliates, including CBI, are subject to Sections 23A and 23B of the Federal Reserve Act, and Federal Reserve Board Regulation W, which generally limit the extent to which Civista may engage in “covered transactions” with affiliates and require that the terms of such transactions be the same, or at least as favorable, to Civista as the terms provided in a similar transaction between Civista and an unrelated party. The term “covered transaction” includes the making of loans to an affiliate, the purchase of assets from an affiliate, the issuance of a guarantee on behalf of an affiliate, the purchase of securities issued by an affiliate and other similar types of transactions.

A bank’s authority to extend credit to executive officers, directors and greater than 10% shareholders, as well as entities such persons control, is subject to Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder by the Federal Reserve Board. Among other things, these loans must be made on terms (including interest rates charged and collateral required) substantially the same as those offered to unaffiliated individuals or be made as part of a benefit or compensation program and on terms widely available to employees, and must not involve a greater than normal risk of repayment. In addition, the amount of loans a bank may make to these affiliated persons is based, in part, on the bank’s capital position, and specified approval procedures must be followed in making loans which exceed specified amounts.

Privacy Provisions: Under the GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These rules contain extensive provisions on a customer’s right to privacy of non-public personal information. Except in certain cases, an institution may not provide personal information to unaffiliated third parties unless the institution discloses that such information may be disclosed and the customer is given the opportunity to opt out of such disclosure. The privacy provisions of the GLBA affect how consumer information is conveyed to outside vendors. CBI and its subsidiaries are also subject to certain state laws that govern the use and distribution of non-public personal information.

Federal Deposit Insurance Corporation (“FDIC”): The FDIC is an independent federal agency which insures the deposits of federally-insured banks and savings associations up to certain prescribed limits and safeguards the safety and soundness of financial institutions. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States Government.

As insurer, the FDIC is authorized to conduct examinations of and to require reporting by insured institutions, including Civista, to prohibit any insured institution from engaging in any activity the FDIC determines to pose a threat to the Deposit Insurance Fund (the “DIF”), and to take enforcement actions against insured institutions. The FDIC may terminate insurance of deposits of any institution if the FDIC finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or other regulatory agency.

The FDIC assesses a quarterly deposit insurance premium on each insured institution based on risk characteristics of the institution and may also impose special assessments in emergency situations. The premiums fund the “DIF”. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the amount in the DIF as a percentage of all DIF insured deposits. In March 2016, the FDIC adopted final rules designed to meet the statutory minimum DRR of 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act. As of September 30, 2018, the DRR met the statutory minimum of 1.35%.  As a result, the previous surcharge imposed on banks with assets of $10 billion or more was lifted.  In addition, preliminary assessment credits have been determined by the FDIC for banks with assets of less than $10 billion, which had previously contributed to the increase of the DRR to 1.35%.  These credits may be redeemed beginning in the quarterly assessment period in which the DRR reaches a minimum of 1.38%, and is not to exceed the total quarterly assessment due.

In addition, all FDIC-insured institutions are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, which was established by the government to recapitalize a predecessor to the DIF. These assessments continued until the Financing Corporation bonds matured in September 2019.  The final assessment was collected on the [March] 2019 FDIC invoice.

The FDIC is authorized to prohibit any insured institution from engaging in any activity that poses a serious threat to the insurance fund and may initiate enforcement actions against a bank, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may also terminate the deposit insurance of any institution that has engaged in or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, order or condition imposed by the FDIC.

Consumer Financial Protection Bureau: The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services and certain financial services providers. The CFPB is authorized to prevent unfair, deceptive and abusive acts or practices and seeks to ensure consistent enforcement of laws so that consumers have access to fair, transparent and competitive markets for consumer financial products and services. Since it was established the CFPB has exercised extensive rulemaking and interpretive authority.

Consumer Protection Laws and Regulations: Banks are subject to regular examination to ensure compliance with federal consumer protection statutes and regulations, including, but not limited to, the following:

•	The Equal Credit Opportunity Act (prohibiting discrimination in any credit transaction on the basis of any of various criteria);
•	The Truth in Lending Act (requiring that credit terms are disclosed in a manner that permits a consumer to  understand and compare credit terms more readily and knowledgeably);
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•	The Fair Housing Act (making it unlawful for a lender to discriminate in its housing-related lending activities against any person on the basis of certain criteria);
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•	The Home Mortgage Disclosure Act (requiring financial institutions to collect data that enables regulatory agencies to determine whether financial institutions are serving the housing credit needs of the communities in which they are located); and
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•	The Real Estate Settlement Procedures Act (requiring that lenders provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibits abusive practices that increase borrowers’ costs).
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The banking regulators also use their authority under the Federal Trade Commission Act to take supervisory or enforcement action with respect to unfair or deceptive acts or practices by banks that may not necessarily fall within the scope of a specific banking or consumer finance law.

Community Reinvestment Act: The Community Reinvestment Act requires depository institutions to assist in meeting the credit needs of their market areas, including low- and moderate-income areas, consistent with safe and sound banking practice. Under this Act, each institution is required to adopt a statement for each of its market areas describing the depositary institution’s efforts to assist in its community’s credit needs. Depositary institutions are periodically examined for compliance and assigned one of four ratings: outstanding, satisfactory, needs improvement, or substantial noncompliance. The rating assigned to a financial institution is considered in connection with various applications submitted by a financial institution or its holding company to its banking regulators, including applications to acquire another financial institution or to open a new branch office. In addition, all subsidiary banks of a financial holding company must maintain a satisfactory or outstanding rating in order for the financial holding company to avoid limitations on its activities.

USA Patriot Act of 2001: The Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“the USA Patriot Act”) gives the United States Government greater powers over financial institutions to combat money laundering and terrorist access to the financial system in our country. The USA Patriot Act requires the Company to establish a program for obtaining identifying information from customers seeking to open new accounts and establish enhanced due diligence policies, procedures and controls designed to detect and report suspicious activity.

Office of Foreign Assets Control Regulation.  The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. Civista is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.

Securities and Exchange Commission ("SEC") and The Nasdaq Stock Market LLC ("Nasdaq").  CBI is also under the jurisdiction of the SEC and certain state securities commissions for matters relating to the offering and sale of its securities.  CBI is subject to the registration, disclosure, reporting and regulatory requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the regulations promulgated under each of the Securities Act and the Exchange Act, as administered by the SEC.  CBI’s common shares are listed with Nasdaq under the symbol "CIVB" and CBI is subject to the rules for Nasdaq listed companies.

Corporate Governance: As mandated by the Sarbanes-Oxley Act of 2002, the SEC has adopted rules and regulations governing, among other matters, corporate governance, auditing and accounting, executive compensation and enhanced and timely disclosure of corporate information. Nasdaq has also adopted corporate governance rules. The Board of Directors of the Company has taken a series of actions to strengthen and improve the Company’s governance practices in light of the rules of the SEC and Nasdaq. The Board of Directors has adopted charters for the Audit Committee, the Compensation Committee and the Nominating Committee, as well as a Code of Conduct (Ethics) applicable to all directors, officers and employees of the Company. In addition, in accordance with Section 302(a) of the Sarbanes-Oxley Act, written certifications by CBI’s Chief Executive Officer and Chief Financial Officer are required. These certifications attest that CBI’s quarterly and annual reports filed with the SEC do not contain any untrue statement of a material fact. See Item 9A “Controls and Procedures” in Part II of this Form 10-K for CBI’s evaluation of its disclosure controls and procedures.

Regulation of Bank Subsidiary: As an Ohio chartered bank, Civista is subject to supervision and regulation by the State of Ohio Department of Commerce, Division of Financial Institutions (the “ODFI”). In addition, Civista is a member of the Federal Reserve System and, therefore, is subject to supervision and regulation by the Federal Reserve Board. Civista is subject to periodic examinations by the ODFI, and Civista is additionally subject to periodic examinations by the Federal Reserve Board. These examinations are designed primarily for the protection of the depositors of the bank and not shareholders.

Banking subsidiaries of financial and bank holding companies are also subject to federal regulation regarding such matters as reserves, limitations on the nature and amount of loans and investments, issuance or retirement of its own securities, limitations on the payment of dividends and other aspects of banking operations.

Regulatory Capital Requirements: The Federal Reserve Board has adopted risk-based guidelines for financial holding companies and other bank holding companies as well as state member banks, and the FDIC has adopted risk-based capital guidelines for state non-member banks. The guidelines provide a systematic analytical framework which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”). In July 2013, the United States banking regulators issued new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). Community banking organizations, including CBI and Civista, began transitioning to the new rules on January 1, 2015. The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phased in from January 1, 2016 through January 1, 2019, and most deductions from common equity tier 1 capital phased in from January 1, 2015 through January 1, 2019.

The Basel III Capital Rules include (a) a minimum common equity tier 1 capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4.0%.

Common equity for the common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the common equity tier 1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus, trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).  The deductions phased in beginning in 2015 and were fully phased in as of January 1, 2019.

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the banking organization does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital conservation buffer began to phase in starting on January 1, 2016, at 0.625% of risk-weighted assets, and was increased by that amount each year until fully phased in effective January 1, 2019, at 2.5%.

In September 2019, the Federal Reserve Board, along with other federal bank regulatory agencies, issued a final rule, effective January 1, 2020, that gives community banks, including the Company, the option to calculate a simple leverage ratio to measure capital adequacy if the community banks meet certain requirements.  Under the rule, a community bank is eligible to elect the Community Bank Leverage Ratio ("CBLR") framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a leverage ratio greater than 9.0%.  Qualifying institutions that elect to use the CBLR framework and that maintain a leverage ratio of greater than 9.0% will be considered to have satisfied the risk-based and leverage capital requirements in the regulatory agencies' generally applicable capital rules and to have met the well-capitalized ratio requirements.  It is the Company’s intent to opt out of the simplified framework and continue to follow existing capital rules.

In December 2018, the federal banking agencies issued a final rule to address regulatory capital treatment of credit loss allowances under the current expected credit loss (“CECL”) model (accounting standard).  The rule revises the federal banking agencies’ regulatory capital rules to identify which credit loss allowances under the CECL model are eligible for inclusion in regulatory capital and to provide banking organizations the option to phase in over three years the day-one adverse effects on regulatory capital that may result from the adoption of the CECL model.  The Company currently anticipates recording a one-time cumulative effect adjustment upon adoption, and does not anticipate utilizing the three year phase in.  The Company expects to maintain risk-based capital ratios in excess of "well-capitalized" after the impact of the one-time cumulative effect adjustment.

At December 31, 2019, both CBI and Civista were in compliance with all of the regulatory capital requirements to which they are subject. For CBI’s and Civista’s capital ratios, see Note 19 to the Company’s 2019 Consolidated Financial Statements.

The Federal Reserve Board has adopted regulations governing prompt corrective action to resolve the problems of capital deficient and otherwise troubled state-chartered member banks. At each successively lower defined capital category, a bank is subject to more restrictive and numerous mandatory or discretionary regulatory actions or limits, and the Federal Reserve Board has less flexibility in determining how to resolve the problems of the institution. In addition, the Federal Reserve Board generally can downgrade a bank’s capital category, notwithstanding its capital level, if, after notice and opportunity for hearings, the bank is deemed to be engaged in an unsafe or unsound practice, because it has not corrected deficiencies that resulted in it receiving a less than satisfactory examination rating on matters other than capital or it is deemed to be in an unsafe or unsound condition. Civista’s capital at December 31, 2019, met the standards for the highest capital category, a “well-capitalized” bank.

Federal Reserve Board regulations also limit the payment of dividends by Civista to CBI. Civista may not pay a dividend if it would cause Civista not to meet its capital requirements. In addition, the dividends that Civista may pay to CBI without prior approval of the Federal Reserve Board is limited to net income for the year plus its retained net income for the preceding two years.

Volcker Rule

In December 2013, five federal agencies adopted a final regulation implementing the Volcker Rule provision of the Dodd-Frank Act (the "Volcker Rule").  The Volcker Rule places limits on the trading activity of insured depository institutions and entities affiliated with a depository institution, subject to certain exceptions.  The trading activity includes a purchase or sale as principal of a security, derivative, commodity future or option on any such instruments in order to benefit from short-term price movements or to realize short-term profits.  The Volcker Rule exempts specified U.S. Government, agency and/or municipal obligations, and it excepts trading conducted in certain capacities, including as a broker or other agent, through a deferred compensation or pension plan, as a fiduciary on behalf of customers, to satisfy a debt previously contracted, repurchase and securities lending agreements and risk-mitigating hedging activities.

The Volcker Rule also prohibits a banking entity from having an ownership interest in, or substantial relationships with, a hedge fund or private equity fund, with a number of exceptions.  To the extent that Civista engages in any of the trading activities or has any ownership interest in or relationship with any of the types of funds regulated by the Volcker Rule, Civista believes that its activities and relationships fall within the scope of one or more of the exceptions provided in the Volcker Rule.

In July 2019, the five federal agencies that adopted the Volcker Rule adopted a final rule to exempt certain community banks, including Civista, from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act.  Under the final rule, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5.0% or less of total consolidated assets are excluded from the restrictions of the Volcker Rule.

Non-Banking Subsidiaries.  The Company’s non-banking subsidiaries are also subject to regulation by the Federal Reserve Board and other applicable federal and state agencies.  FCIA, as a licensed insurance agency, is subject to regulation by the Ohio Department of Insurance and the state insurance regulatory agencies of those states where it conducts business.  CRMI, as a Delaware-chartered captive insurance company, is subject to the laws and regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

Executive and Incentive Compensation

In June 2010, the Federal Reserve Board, the OCC and the FDIC issued joint interagency guidance on incentive compensation policies (“Joint Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This principles-based guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (a) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (b) be compatible with effective internal controls and risk management and (c) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.

In 2011, federal banking regulatory agencies jointly issued proposed rules on incentive-based compensation arrangements under applicable provisions of the Dodd-Frank Act (“First Proposed Rules”). The First Proposed Rules generally would have applied to financial institutions with $1.0 billion or more in assets that maintain incentive-based compensation arrangements for certain covered employees.

In May 2016, the federal bank regulatory agencies approved a second joint notice of proposed rules (the “Second Proposed Joint Rules”) designed to prohibit incentive-based compensation arrangements that encourage inappropriate risks at financial institutions. The Second Proposed Joint Rules would apply to covered financial institutions with total assets of $1 billion or more, and are still in proposed rule status. The requirements of the Second Proposed Joint Rules would differ for each of three categories of financial institutions:

•	Level 1 consists of institutions with assets of $250 billion or more;
•	Level 2 consists of institutions with assets of at least $50 billion and less than $250 billion; and
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•	Level 3 consists of institutions with assets of at least $1 billion and less than $50 billion.
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Some of the requirements would apply only to Level 1 and Level 2 institutions. For all covered institutions, including Level 3 institutions like us, the Second Proposed Joint Rules would:

•	prohibit incentive-based compensation arrangements that are “excessive” or “could lead to material financial loss;”
•	require incentive-based compensation that is consistent with a balance of risk and reward, effective management and control of risk, and effective governance; and
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•	require board oversight, recordkeeping and disclosure to the appropriate regulatory agency.
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Level 1 and Level 2 institutions would have additional requirements, including deferrals of awards to certain covered persons; potential downward adjustments, forfeitures or clawbacks; and additional risk-management and control standards, policies and procedures. In addition, certain practices and types of incentive compensation would be prohibited.

Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-Frank Act, public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee.  A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.

Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement "clawback" procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements.  This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards. The Company has implemented a clawback policy and it is posted under the “Corporate Overview” tab on the “Governance Documents” page of CBI’s Internet website.

SEC regulations require public companies such as CBI to provide various disclosures about executive compensation in annual reports and proxy statements and to present to their shareholders a non-binding vote on the approval of executive compensation.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish several lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the financial institution’s operations after a cyber attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the finanical institution or its critical service providers fall victim to this type of cyber-attack. If Civista fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and providing detailed requirements with respect to these programs, including data encryption requirements. Many states have also recently implemented or modified their data breach notification and data privacy requirements. The Company expects this trend of state-level activity in those areas to continue, and is continually monitoring developments in the states in which our customers are located.

In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its operations and to store sensitive data.  The Company employs an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. The Company employs a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of the Company’s defensive measures, the threat from cyber attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, the Company has not detected a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, Company’s systems and those of its customers and third-party service providers are under constant threat and it is possible that the Company could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Effect of Environmental Regulation

Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings or competitive position of the Company.  In the opinion of management, the Company does not have exposure to material costs associated with compliance with environmental laws and regulations or material expenditures related to environmental hazardous waste mitigation or cleanup.

The Company believes its primary exposure to environmental risk is through the lending activities of Civista.  In cases where management believes environmental risk potentially exists, Civista mitigates its environmental risk exposure by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites.  In addition, environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.

Future Legislation

Various and significant legislation affecting financial institutions and the financial industry is from time to time introduced by the U.S. Congress, as evidenced by the sweeping reforms in the Dodd-Frank Act adopted in 2010, and the rollback of the Dodd-Frank Act that began in 2018.  Many of the regulations mentioned above were adopted or amended pursuant to the Dodd-Frank Act.  Such legislation may continue to change banking statutes and regulations, and the operating environment of the Company and its subsidiaries in substantial and unpredictable ways, and such legislation could significantly increase or decrease costs of doing business, limit or expand permissible activities, and/or affect the competitive balance among financial institutions.  The enactment of the Dodd-Frank Act, the subsequent rollback and the continuing implementation of final rules and regulations thereunder, and continuing political change makes the nature and extent of future legislative and regulatory changes affecting financial institutions unpredictable.

Effects of Government Monetary Policy

The earnings of the Company are affected by general and local economic conditions and by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates to influence general economic conditions, primarily through open market acquisitions or dispositions of United States Government securities, varying the discount rate on member bank borrowings and setting reserve requirements against member and nonmember bank deposits. Federal Reserve Board monetary policies have had a significant effect on the interest income and interest expense of commercial banks, including Civista, and are expected to continue to do so in the future.

Available Information

CBI maintains an Internet website at www.civb.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate CBI’s website into this Annual Report on Form 10-K). CBI makes available free of charge on or through its Internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as well as CBI’s definitive proxy statements filed pursuant to Section 14 of the Exchange Act, as soon as reasonably practicable after CBI electronically files such material with, or furnishes it to, the SEC.

Statistical Information

The following section contains certain financial disclosures related to the Company as required under the Securities and Exchange Commission’s Industry Guide 3, “Statistical Disclosures by Bank Holding Companies”, or a specific reference as to the location of the required disclosures in the Registrant’s 2019 Annual Report to Shareholders, portions of which are incorporated in this Form 10-K by reference.

I.	Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential

Average balance sheet information and the related analysis of net interest income for the years ended December 31, 2019, 2018 and 2017 is included on pages 12 through 14—“Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate”, within Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s 2019 Annual Report to Shareholders and is incorporated into this Item I by reference.

II.	Investment Portfolio

The following table sets forth the carrying amount of securities at December 31.

	2019		2018		2017
	(Dollars in thousands)
Available for sale (1)
U.S. Treasury securities and obligations of<br><br><br>U.S. Government agencies	$	19,601	$	30,685	$	30,358
Obligations of states and political subdivisions		206,034		172,071		118,056
Mortgage-backed securities in government<br><br><br>sponsored entities		132,864		143,538		81,816
Total debt securities	$	358,499	$	346,294	$	230,230
(1)	The Corporation had no securities of an “issuer” where the aggregate carrying value of such securities exceeded ten percent of shareholders’ equity.
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The following table sets forth the maturities of securities at December 31, 2019 and the weighted average yields of such debt securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions.

	Within one year					After one<br><br><br>but within five<br><br><br>years					After five but<br><br><br>within ten years					After ten years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Available for Sale (2)
U.S. Treasury securities and<br><br><br>obligations of U.S. government<br><br><br>agencies	$	10,031		2.07	%	$	8,525		2.35	%	$	185		1.38	%	$	861		1.34	%
Obligations of states and political<br><br><br>subdivisions (1)		1,135		2.40			6,537		3.96			26,988		3.63			171,373		3.40
Mortgage-backed securities in<br><br><br>government sponsored entities		2	3.83				20,447		2.99			23,060		2.24			89,355		2.87
Total	$	11,168		2.10	%	$	35,509		3.01	%	$	50,233		2.98	%	$	261,589		3.21	%
(1)	Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security.
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(2)	The weighted average yield has been computed using the historical amortized cost for available-for-sale securities.
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III.	Loan Portfolio
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Types of Loans

The amounts of gross loans outstanding at December 31 are shown in the following table according to types of loans.

	2019		2018		2017		2016		2015
	(Dollars in thousands)
Commercial and Agriculture	$	203,110	$	177,101	$	152,473	$	135,462	$	124,402
Commercial Real Estate:
Owner occupied		245,606		210,121		164,099		161,364		167,897
Non-owner occupied		592,222		523,598		425,623		395,931		348,439
Residential Real Estate		463,032		457,850		268,735		247,308		236,338
Real Estate Construction		155,825		135,195		97,531		56,293		58,898
Farm Real Estate		34,114		38,513		39,461		41,170		46,993
Consumer and other		15,061		19,563		16,739		17,978		18,560
Total	$	1,708,970	$	1,561,941	$	1,164,661	$	1,055,506	$	1,001,527

Commercial loans are those made for commercial, industrial and professional purposes to individuals, sole proprietorships, partnerships, corporations and other business enterprises. Agriculture loans are for financing agricultural production, including all costs associated with growing crops or raising livestock. Commercial and Agriculture loans may be secured, other than by real estate, or unsecured, requiring one single repayment or on an installment repayment schedule. Commercial and Agriculture loans involve certain risks relating to changes in local and national economic conditions and the resulting effect on the borrowing entities. Secured loans not collateralized by real estate mortgages maintain a loan-to-value ratio ranging from 50% in the case of certain stocks, to 100% in the case of savings or time deposit accounts. Unsecured credits rely on the financial strength and previous credit experience of the borrower and in many cases the financial strength of the principals when such credit is extended to a corporation.

Commercial Real Estate mortgage loans are made predicated on having a security interest in real property and are secured wholly or substantially by that lien on real property. Commercial Real Estate mortgage loans are generally underwritten with a maximum loan-to-value ratio of 80%.

Residential Real Estate mortgage loans and home equity lines of credit are made predicated on security interests in real property and secured wholly or substantially by those liens on real property. Such real estate mortgage loans are primarily loans secured by one-to-four family real estate. Residential Real Estate mortgage loans generally pose less risk to the Company due to the nature of the collateral being less susceptible to sudden changes in value.

Real Estate Construction loans are for the construction of residential homes, new buildings or additions to existing buildings. Generally, these loans are secured by one-to-four family real estate or commercial real estate. The Company controls disbursements in connection with construction loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost (including interest) of construction. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves inaccurate, the Company may be confronted, at or prior to the maturity of the loan, with a project having a value insufficient to assure full repayment, should the borrower default. In the event a default on a construction loan occurs and foreclosure follows, the Company must take control of the project and attempt either to arrange for completion of construction or to dispose of the unfinished project. Additional risk exists with respect to a loan made to a developer who does not have a project pre-leased or has a buyer for the property, as the developer may lack funds to pay the loan if the property does not have sufficient occupancy levels or is not sold upon completion. The Company attempts to reduce such risks on loans to developers by normally requiring that Real Estate development and construction loan projects be at least 50% pre-leased or pre-sold and that the co-borrower/guarantor has significant net worth, liquidity, and historical income to help support the project.

Consumer loans are made to individuals for household, family and other personal expenditures. These expenditures include the purchase of vehicles or furniture, educational expenses, medical expenses, taxes or vacation expenses. Consumer loans may be secured, other than by real estate, or unsecured, generally requiring repayment on an installment repayment schedule. Consumer loans pose a relatively higher credit risk. This higher risk is moderated by the use of certain loan to value limits on secured credits and aggressive collection efforts. The collectability of consumer loans is influenced by local and national economic conditions.

Letters of credit represent extensions of credit granted in the normal course of business, which are not reflected in the Company’s consolidated financial statements. As of December 31, 2019 and 2018, the Company was contingently liable for $1,400 and $1,474, respectively, with respect to outstanding letters of credit. In addition, Civista had issued lines of credit to customers. Borrowings under such lines of credit are usually for the working capital needs of the borrower. At December 31, 2019 and 2018, Civista had commitments to extend credit, excluding letters of credit, in the aggregate amounts of approximately $448,962 and $411,408, respectively. Of these amounts, $411,671 and $374,204 represented lines of credit and construction loans, and $37,291 and $37,204 represented overdraft protection commitments at December 31, 2019 and 2018, respectively. Such amounts represent the portion of total commitments that had not been used by customers as of December 31, 2019 and 2018.

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table shows the amount of commercial and agriculture, commercial real estate, residential real estate, real estate construction, farm real estate and consumer and other loans outstanding as of December 31, 2019, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates.

	Maturing
	Within<br><br><br>one year		After one<br><br><br>but within<br><br><br>five years		After five<br><br><br>years		Total
	(Dollars in thousands)
Commercial and Agriculture	$	72,587	$	75,988	$	54,535	$	203,110
Commercial Real Estate:
Owner Occupied		4,388		23,909		217,309		245,606
Non-Owner Occupied		30,148		138,419		423,655		592,222
Residential Real Estate		6,742		23,654		432,636		463,032
Real Estate Construction		22,056		62,990		70,779		155,825
Farm Real Estate		915		4,444		28,755		34,114
Consumer and Other		4,510		9,388		1,163		15,061
Total	$	141,346	$	338,792	$	1,228,832	$	1,708,970
	Interest<br><br><br>Sensitivity
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	Fixed<br><br><br>rate		Variable<br><br><br>rate
	(Dollars in thousands)
Due after one but within five years	$	158,851	$	179,940
Due after five years		191,359		1,037,474
	$	350,210	$	1,217,414

The preceding maturity information is based on contract terms at December 31, 2019 and does not include any possible “rollover” at maturity date. In the normal course of business, Civista considers and acts on the borrowers’ requests for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower’s credit history, the collateral securing the loan and the purpose for such request.

Risk Elements

The following table presents information concerning the amount of loans at December 31 that contain certain risk elements, excluding purchase credit impaired loans.

	2019		2018		2017		2016		2015
	(Dollars in thousands)
Loans accounted for on a nonaccrual basis (1)	$	5,599	$	5,869	$	6,132	$	6,943	$	9,259
Accruing loans which are contractually past due<br><br><br>90 days or more as to principal or interest<br><br><br>payments		—		—		16		9		—
Loans that have been modified in a troubled<br><br><br>debt restructuring (2)		3,004		3,024		2,888		4,180		5,085
Total	$	8,603	$	8,893	$	9,036	$	11,132	$	14,344
Impaired loans included in above totals	$	3,597	$	2,857	$	3,460	$	6,539	$	7,386
Impaired loans not included in above totals		—		—		—		—		99
Total impaired loans	$	3,597	$	2,857	$	3,460	$	6,539	$	7,485
(1)	A loan is placed on nonaccrual status when doubt exists as to the collectability of the loan, including any accrued interest. With a few immaterial exceptions, commercial and agriculture, commercial real estate, residential real estate and construction loans past due 90 days are placed on nonaccrual unless they are well collateralized and in the process of collection. Generally, consumer loans are charged-off by the time they become past due 120 days unless they are well collateralized and in the process of collection. Once a loan is placed on nonaccrual, interest is only recognized on a cash basis where future collections of principal is probable.
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(2)	Excludes loans accounted for on a nonaccrual basis and loans contractually past due 90 days or more as to principal or interest payments.
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There were no loans as of December 31, 2019, other than those disclosed above, where known information about probable credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms. There were no other interest-bearing assets that would be required to be disclosed in the table above, if such assets were loans as of December 31, 2019. The gross interest income that would have been recorded on nonaccrual loans and restructured loans in 2019 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 $571. The amount of cash-basis interest income on such loans actually included in net income in 2019 was $379.

Interest income recognition associated with impaired loans was as follows.

	2019		2018		2017		2016		2015
	(Dollars in thousands)
Interest income on impaired loans, all of which<br><br><br>was recognized on a cash basis	$	172	$	167	$	216	$	1,256	$	384

At December 31, 2019, Civista had two concentrations of loans exceeding 10% of total loans: one to Lessors of Non-Residential Buildings and Dwellings totaling $459,273, or 26.9 percent of total loans, as of December 31, 2019,

and the other to Lessors of Residential Buildings and Dwellings totaling $172,463, or 10.1 percent of total loans, as of December 31, 2019.

These segments of the portfolio are stable and have been conservatively underwritten, monitored and managed by experienced commercial bankers. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area. There were no foreign loans outstanding at December 31, 2019.

IV.	Summary of Loan Loss Experience

Analysis of the Allowance for Loan Losses

The following table shows the daily average loan balances and changes in the allowance for loan losses for the years indicated.

	2019			2018			2017			2016			2015
	(Dollars in thousands)
Daily average amount of loans net of<br><br><br>unearned income	$	1,612,975		$	1,274,779		$	1,109,069		$	1,025,908		$	981,475
Allowance for loan losses at beginning<br><br><br>of year	$	13,679		$	13,134		$	13,305		$	14,361		$	14,268
Loan charge-offs:
Commercial and Agriculture		114			249			11			880			190
Commercial Real Estate—Owner<br><br><br>Occupied		161			193			328			228			523
Commercial Real Estate—Non-Owner<br><br><br>Occupied		—			153			38			23			81
Real Estate Mortgage		294			105			400			455			1,135
Real Estate Construction		24			—			—			115			—
Farm Real Estate		—			—			—			—			—
Consumer and Other		183			203			165			125			120
Total charge-offs		776			903			942			1,826			2,049
Recoveries of loans previously charged-off:
Commercial and Agriculture		86			169			372			105			182
Commercial Real Estate—Owner<br><br><br>Occupied		289			158			69			56			187
Commercial Real Estate—Non-Owner<br><br><br>Occupied		102			28			46			1,372			115
Real Estate Mortgage		259			208			194			479			331
Real Estate Construction		3			—			44			12			5
Farm Real Estate		5			5			3			—			76
Consumer and Other		85			100			43			46			46
Total recoveries		829			668			771			2,070			942
Net recoveries (charge-offs) (1)		53			(235	)		(171	)		244			(1,107	)
Provision (credit) for loan losses (2)		1,035			780			—			(1,300	)		1,200
Allowance for loan losses at year end	$	14,767		$	13,679		$	13,134		$	13,305		$	14,361
Allowance for loan losses as a percent of<br><br><br>loans at year-end		0.86	%		0.88	%		1.13	%		1.26	%		1.43	%
Ratio of net charge-offs (recoveries) during<br><br><br>the year to average loans outstanding		(0.00	)%		0.02	%		0.02	%		(0.02	)%		0.11	%
(1)	The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy, decline in market values of collateral and deterioration of specific businesses.
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(2)	The determination of the balance of the allowance for loan losses is based on a detailed analysis of the loan portfolio and reflects an amount that, in management’s judgment, is adequate to provide for probable incurred loan losses. Such analysis is based on a review of specific loans, the character of the loan portfolio, current economic conditions, risk management practices and such other factors as management believes require current recognition in estimating probable incurred loan losses.
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Allocation of Allowance for Loan Losses

The following tables allocate the allowance for loan losses at December 31 to each loan category. The allowance has been allocated according to the amount deemed to be reasonably necessary to provide for the probable losses estimated to be incurred within the following categories of loans at the dates indicated.

	2019				2018
	Allowance		Percentage<br><br><br>Of loans to<br><br><br>Total loans		Allowance		Percentage<br><br><br>of loans to<br><br><br>total loans
	(Dollars in thousands)
Commercial and Agriculture	$	2,219	11.9	%	$	1,747		11.3	%
Commercial Real Estate—Owner Occupied		2,541	14.4			1,962		13.5
Commercial Real Estate—Non-Owner Occupied		6,584	34.6			5,803		33.5
Real Estate Mortgage		1,582	27.1			1,531		29.3
Real Estate Construction		1,250	9.1			1,046		8.7
Farm Real Estate		344	2.0			397		2.5
Consumer and Other		247	0.9			284		1.2
Unallocated		—	—			909		—
	$	14,767	100.0	%	$	13,679		100.0	%
	2017					2016
---	---	---	---	---	---	---	---	---	---	---
	Allowance		Percentage<br><br><br>of loans to<br><br><br>total loans			Allowance		Percentage<br><br><br>of loans to<br><br><br>total loans
	(Dollars in thousands)
Commercial and Agriculture	$	1,562		13.1	%	$	2,018		12.8	%
Commercial Real Estate—Owner Occupied		2,043		14.1			2,171		15.3
Commercial Real Estate—Non-Owner Occupied		5,307		36.5			4,606		37.5
Real Estate Mortgage		1,910		23.1			3,089		23.4
Real Estate Construction		834		8.4			420		5.3
Farm Real Estate		430		3.4			442		3.9
Consumer and Other		290		1.4			314		1.7
Unallocated		758		—			245		—
	$	13,134		100.0	%	$	13,305		100.0	%
	2015
---	---	---	---	---	---
	Allowance		Percentage<br><br><br>of loans to<br><br><br>total loans
	(Dollars in thousands)
Commercial and Agriculture	$	1,478		12.4	%
Commercial Real Estate—Owner Occupied		2,467		16.8
Commercial Real Estate—Non-Owner Occupied		4,657		34.8
Real Estate Mortgage		4,086		23.6
Real Estate Construction		371		5.9
Farm Real Estate		538		4.7
Consumer and Other		382		1.9
Unallocated		382		—
	$	14,361		100.0	%

Civista measures the adequacy of the allowance for loan losses by using both specific and general components. The specific component relates to the evaluation of each loan identified as impaired. The general component consists of a pooling of commercial credits risk graded as special mention and substandard, based on portfolio experience, and general reserves, which are based on a twelve quarter loss migration analysis, adjusted for current economic factors. Loss migration rates are calculated over a twelve quarter period for all portfolio segments. Factors in the determination of the economic reserve include items such as changes in the economic and business conditions of its market, changes in lending policies and procedures, changes in loan concentrations, as well as a few others. The allowance for loan losses to total loans decreased from 0.88% in 2018 to 0.86% in 2019. The unallocated reserve of Civista decreased to $0 in 2019 from $909 in 2018. Management considers both the decrease in unallocated and the end-of-period number to be insignificant and within the loan policy guidelines.

Deposits

The average daily amount of deposits (all in domestic offices) and average rates paid on such deposits is summarized for the years indicated.

	2019					2018					2017
	Average<br><br><br>balance		Average<br><br><br>rate paid			Average<br><br><br>balance		Average<br><br><br>rate paid			Average<br><br><br>balance		Average<br><br><br>rate paid
	(Dollars in thousands)
Noninterest-bearing demand deposits	$	550,638	N/A			$	466,763	N/A			$	450,648	N/A
Interest-bearing demand deposits		296,790		0.06	%		213,904		0.06	%		189,419		0.06	%
Savings, including Money Market deposit<br><br><br>accounts		572,550		0.47	%		471,593		0.28	%		395,799		0.12	%
Certificates of deposit, including IRA’s		269,823		1.92	%		189,600		1.22	%		200,797		0.87	%
	$	1,689,801				$	1,341,860				$	1,236,663

Maturities of certificates of deposits and individual retirement accounts of $100,000 or more outstanding at December 31, 2019 are summarized as follows.

	Certificates<br><br><br>of Deposits		Individual<br><br><br>Retirement<br><br><br>Accounts		Total
	(Dollars in thousands)
3 months or less	$	16,314	$	1,894	$	18,208
Over 3 through 6 months		15,860		864		16,724
Over 6 through 12 months		38,773		3,331		42,104
Over 12 months		38,707		10,531		49,238
	$	109,654	$	16,620	$	126,274

Return on Equity and Assets

Information required by this section is incorporated herein by reference from the information appearing under the caption “Five-Year Selected Consolidated Financial Data” located on pages 1 and 2 of the 2019 Annual Report. The common share dividend payout ratio was 19.8% in 2019, 30.5% in 2018 and 16.9% in 2017.

Short-term Borrowings

See Note 10 to the consolidated financial statements (located on page 63 of the 2019 Annual Report) and “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” (located on pages 12 through 14 of the 2019 Annual Report) for the statistical disclosures for short-term borrowings for 2019, 2018 and 2017.

Item 1A. Risk Factors

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as 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, changes in financial markets or national or local economic conditions; adverse changes in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; operational risks; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in FDIC insurance premiums and assessments; changes in tax laws; accounting changes; inability to raise additional capital if and when needed in the future; unexpected losses of key management; failure, interruption or breach in security of our communications and information systems or those of our third party service providers; unforeseen litigation; increased competition in our market area; failures to manage growth and/or effectively integrate acquisitions, including our recent acquisition of UCB; future revenues of our tax refund program; climate change, natural disasters, acts of war or terrorism, and other external events; and other risks identified from time-to-time in the Company’s other public documents on file with the Securities and Exchange Commission, including those risks set forth under Item 1A of Part 1 of this Annual Report on Form 10-K.

The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions.

CHANGES IN ECONOMIC AND POLITICAL CONDITIONS COULD ADVERSELY AFFECT OUR EARNINGS THROUGH DECLINES IN DEPOSITS, LOAN DEMAND, THE ABILITY OF OUR CUSTOMERS TO REPAY LOANS AND THE VALUE OF THE COLLATERAL SECURING OUR LOANS.

Our success depends to a significant extent upon local and national economic and political conditions, as well as governmental fiscal and monetary policies. Conditions such as inflation, recession, unemployment, changes in interest rates, fiscal and monetary policy, tariffs, a U.S. withdrawal from or significant renegotiation of trade agreements, trade wars, the election of a new U.S. President in 2020, and other factors beyond our control may adversely affect Civista's deposit levels and composition, the quality of investment securities available for purchase, demand for loans, the ability of Civista's borrowers to repay their loans, and the value of the collateral securing loans made by Civista.  Recent political developments have resulted in substantial changes in economic and political conditions for the U.S. and the remainder of the world.  Disruptions in U.S. and global financial markets, and changes in oil production in the Middle East also affect the economy and stock prices in the U.S., which can affect our earnings capital, as well as the ability of our customers to repay loans. The potential effects of the United Kingdom leaving the European Union (Brexit) on the United States are still unknown. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral and our ability to sell the collateral upon foreclosure. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings and cash flows.

ADVERSE CHANGES IN THE REAL ESTATE MARKET COULD CAUSE INCREASES IN DELINQUENCIES AND NON-PERFORMING ASSETS, INCLUDING ADDITIONAL LOAN CHARGE-OFFS, AND COULD DEPRESS OUR INCOME, EARNINGS AND CAPITAL.

At December 31, 2019, approximately 27.1% and 49.0%, respectively, of our loan portfolio was comprised of residential and commercial real estate loans. Adverse changes in economic conditions both nationally and in the communities we serve have and may to cause deterioration to the value of real estate Civista uses to secure its loans. Adverse changes in the economy, deterioration of our real estate portfolio, a decrease in real estate values, an increase in unemployment, decreased or nonexistent housing price appreciation or increases in interest rates could reduce our earnings and consequently our financial condition because borrowers may not be able to repay their loans. The value of the collateral securing our loans and the quality of our loan portfolio may decline and customers may not want or need our products and services.

Any of these scenarios could cause us to make fewer loans, increase delinquencies and non-performing assets, require us to charge off a higher percentage of our loans or result in additional increases to our provision for loan losses in future periods, which could adversely affect our business, financial condition and results of operations.

CHANGES IN INTEREST RATES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR NET INTEREST INCOME.

Our results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. The spread between the yield on our interest-earning assets and our overall cost of funds has been compressed in the recent low interest rate environment, and our net interest income may continue to be adversely impacted by an extended period of continued low rates. We cannot predict or control changes in interest rates. National, regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect the movement of interest rates and our interest income and interest expense. If the interest rates paid on deposits and other borrowed funds increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowed funds.

In addition, certain assets and liabilities may react in different degrees to changes in market interest rates. For example, interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while interest rates on other types may lag behind. Some of our assets, such as adjustable rate mortgages, have features that restrict changes in their interest rates, including rate caps.

Interest rates are highly sensitive to many factors that are beyond our control. Some of these factors include:

•	inflation;
•	recession;
---	---
•	unemployment;
---	---
•	money supply;
---	---
•	international disorders; and
---	---
•	instability in domestic and foreign financial markets.
---	---

Changes in interest rates may affect the level of voluntary prepayments on our loans and may also affect the level of financing or refinancing by customers. We believe that the impact on our cost of funds from a rise in interest rates will depend on a number of factors, including but not limited to, the competitive environment in the banking sector for deposit pricing, opportunities for clients to invest in other markets such as fixed income and equity markets, and the propensity of customers to invest in their businesses. The effect on our net interest income from an increase in interest rates will ultimately depend on the extent to which the aggregate impact of loan re-pricings exceeds the impact of increases in our cost of funds.

ADVERSE CHANGES IN FINANCIAL MARKETS MAY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.

Although we primarily invest in securities issued by United States government agencies and sponsored entities and United States state and local governments with limited credit risk, certain of our investment securities possess higher credit risk since they represent beneficial interests in structured investments collateralized by residential mortgages, debt obligations and other similar assets.  Even securities issued by United States government agencies and sponsored entities may entail risk depending on political and economic changes.  Regardless of the level of credit risk, all investment securities are subject to changes in market value due to changing interest rates, implied credit spreads and credit ratings.

A transition away from LIBOR as a reference rate for financial contracts could negatively our income and expenses and the value of various financial contracts.

LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives.  LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021.  It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark.  Benchmarks that are used in place of LIBOR, such as the Secured Overnight Finance Rate, may perform differently than LIBOR, and such alternative benchmarks may also perform differently in the future than they have in the past. The use of alternative benchmarks may also have other consequences that cannot currently be anticipated.  It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to exist.

The Company’s primary exposure to LIBOR relates to its promissory notes with borrowers, swap contracts with clients, offsetting swap contracts with third parties related to the swap contracts with clients, the Company’s LIBOR-based borrowings (if any), and Civista’s swap contracts which can be tied to LIBOR.  The Company’s contracts generally include a LIBOR term (for example, one month, three month, or one year) plus an incremental margin rate.  The Company is working through this transition via a multi-disciplinary project team.

WE ARE EXPOSED TO OPERATIONAL RISK.

We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.

We may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyber-attacks, spikes in transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters. Although we have programs in place related to business continuity, disaster recovery and information security to maintain the confidentiality, integrity and availability of our systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers, loss of data privacy and loss or liability to us.  Any failure or interruption in our operations or information systems, or any security or data breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a loss of customer business, subject us to regulatory intervention or expose us to civil litigation and financial loss or liability, any of which could have a material adverse effect on us.

Given the volume of transactions we process, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process our transaction volume may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate.

Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by governmental regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to potential litigation and regulatory action.

UNAUTHORIZED DISCLOSURE OF SENSITIVE OR CONFIDENTIAL CLIENT INFORMATION OR BREACHES IN SECURITY OF OUR SYSTEMS, COULD SEVERELY HARM OUR BUSINESS.

As part of our financial institution business, we collect, process and store sensitive consumer data by utilizing computer systems and telecommunications networks operated by both us and third-party service providers.  Our necessary dependence upon automated systems to record and process transactions poses the risk that technical system flaws, employee errors, tampering or manipulation of those systems, or attacks by third parties will result in losses and may be difficult to detect.  We have security and backup and recovery systems in place, as well as a business continuity plan, to ensure the computer systems will not be inoperable, to the extent possible. The Company also routinely reviews documentation of such controls and backups related to third-party service providers. Our inability to use or access these information systems at critical points in time could unfavorably impact the timeliness and efficiency of our business operations.  In recent years, some banks have experienced denial of service attacks in which individuals or organizations flood the bank's website with extraordinarily high volumes of traffic, with the goal and effect of disrupting the ability of the bank to process transactions.

We could be adversely affected if one of our employees causes a significant operational break-down or failure, either as a result of human error or where an individual purposefully sabotages or fraudulently manipulates our operations or systems. We are further exposed to the risk that the third-party service providers may be unable to fulfill their contractual obligations (or will be subject to the same risks as faced by us). These disruptions may interfere with service to our customers, cause additional regulatory scrutiny and result in a financial loss or liability.

Misconduct by employees could include fraudulent, improper or unauthorized activities on behalf of clients or improper use of confidential information.  We may not be able to prevent employee errors or misconduct, and the precautions we take to detect this type of activity might not be effective in all cases.  Employee errors or misconduct could subject us to civil claims for negligence or regulatory enforcement actions, including fines and restrictions on our business.

In addition, there have been instances where financial institutions have been victims of fraudulent activity in which criminals pose as customers to initiate wire and automated clearinghouse transactions out of customer accounts.  Although we have policies and procedures in place to verify the authenticity of our customers, we cannot assure that such policies and procedures will prevent all fraudulent transfers.  Such activity can result in financial liability and harm to our reputation.

We have implemented security controls to prevent unauthorized access to the computer systems and require our third-party service providers to maintain similar controls. However, we cannot be certain that these measures will be successful. A security breach of our computer systems and loss of confidential information, such as customer account numbers and related information, could result in a loss of customers’ confidence and, thus, loss of business. In addition, unauthorized access to or use of sensitive data could subject us to litigation and liability and costs to prevent further such occurrences.

Further, we may be impacted by data breaches at retailers and other third parties who participate in data interchanges with us and our customers that involve the theft of customer credit and debit card data, which may include the theft of our debit card personal identification numbers (PINs) and commercial card information used to make purchases at such retailers and other third parties. Such data breaches could result in us incurring significant expenses to reissue debit cards and cover losses, which could result in a material adverse effect on our results of operations. To date, we have not experienced any material losses relating to cyber-attacks or other information security breaches, but there can be no assurance that we will not suffer such attacks or attempted breaches, or incur resulting losses in the future.  Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, and our plans to continue to implement internet and mobile banking capabilities to meet customer demand.  As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance its protective measures or to investigate and remediate any security vulnerabilities.

Our assets at risk for cyber-attacks include financial assets and non-public information belonging to customers. We use several third-party vendors who have access to our assets via electronic media. Certain cyber security risks arise due to this access, including cyber espionage, blackmail, ransom, and theft. As cyber and other data security threats continue to evolve, we may be required to expend significant additional resources to continue to modify and enhance our protective measures or to investigate and remediate any security vulnerabilities.

All of the types of cyber incidents discussed above could result in damage to our reputation, loss of customer business, costs of incentives to customers or business partners in order to maintain their relationships, litigation, increased regulatory scrutiny and potential enforcement actions, repairs of system damage, increased investments in cybersecurity (such as obtaining additional technology, making organizational changes, deploying additional personnel, training personnel and engaging consultants), increased insurance premiums, and loss of investor confidence and a reduction in the price of our common shares, all of which could result in financial loss and material adverse effects on our results of operations and financial condition.

Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause a material financial loss.

The Bank Secrecy Act and the USA Patriot Act contain anti-money laundering and financial transparency provisions intended to detect and prevent the use of the U.S. financial system for money laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the USA Patriot Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. Financial Crimes Enforcement Network (also known as FinCEN), a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service.

There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (also known as OFAC). If the Company’s policies, procedures, and systems are deemed deficient, or if the policies, procedures, and systems of the financial institutions that the Company has already acquired or may acquire in the future are deficient, the Company may be subject to liability, including fines and regulatory actions such as restrictions on the Company’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including acquisition plans, which could negatively impact our business, financial condition, and results of operations.  Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the Company.

We are at risk of increased losses from fraud.

Criminals are committing fraud at an increasing rate and are using more sophisticated techniques.  In some cases, these individuals are part of larger criminal rings, which allow them to be more effective.  Such fraudulent activity has taken many forms, ranging from debit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information, or impersonation of clients through the use of falsified or stolen credentials.  Additionally, an individual or business entity may properly identify itself, yet seek to establish a business relationship for the purpose of perpetrating fraud.  An emerging type of fraud even involves the creation of synthetic identification in which fraudsters "create" individuals for the purpose of perpetrating fraud.  Further, in addition to fraud committed directly against the Company, the Company may suffer losses as a result of fraudulent activity committed against third parties.  Increased deployment of technologies, such as chip card technology, defray and reduce certain aspects of fraud; however, criminals are turning to other sources to steal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer and thereby commit fraud.

Our business could be adversely affected through third parties who perform significant operational services on our behalf.

The third parties performing operational services for the Company are subject to risks similar to those faced by the Company relating to cybersecurity, breakdowns or failures of their own systems, or misconduct of their employees.  Like many other community banks, Civista also relies, in significant part, on a single vendor for the systems which allow Civista to provide banking services to Civista’s customers, for which the systems are maintained on Civista’s behalf by this single vendor.

One or more of the third parties utilized by us may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by such third party.  Certain of these third parties may have limited indemnification obligations to us in the event of a cybersecurity event or operational disruption, or may not have the financial capacity to satisfy their indemnification obligations.

Financial or operational difficulties of a third party provider could also impair our operations if those difficulties interfere with such third party’s ability to serve the Company.  If a critical third-party provider is unable to meet the needs of the Company in a timely manner, or if the services or products provided by such third party are terminated or otherwise delayed and if the Company is not able to develop alternative sources for these services and products quickly and cost-effectively, our business could be materially adversely effected.

Additionally, regulatory guidance adopted by federal banking regulators addressing how banks select, engage and manage their third-party relationships, affects the circumstances and conditions under which we work with third parties and the cost of managing such relationships.

WE MAY ELECT OR NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, BUT CAPITAL MAY NOT BE AVAILABLE WHEN IT IS NEEDED.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, federal banking agencies have recently finalized extensive changes to their capital requirements, including the adoption of the final “Basel III” rules as discussed above, which result in higher capital requirements and more restrictive leverage and liquidity ratios than those previously in place. If we experience significant loan losses, addition capital may need to be infused.  In addition, we may elect to raise additional capital to support business growth and/or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital.  Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and are based on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.

STRONG COMPETITION WITHIN OUR MARKET AREA MAY REDUCE OUR ABILITY TO ATTRACT AND RETAIN DEPOSITS AND ORIGINATE LOANS.

We face competition both in originating loans and in attracting deposits within our market area, which includes North Central, West Central, South Western Ohio, South Eastern Indiana and Northern Kentucky. We compete for clients by offering personal service and competitive rates on our loans and deposit products. The type of institutions we compete with include large regional financial institutions, community banks, thrifts and credit unions operating within our market areas. Nontraditional sources of competition for loan and deposit dollars come from captive auto finance companies, mortgage banking companies, internet banks, brokerage companies, insurance companies and direct mutual funds. As a result of their size and ability to achieve economies of scale, certain of our competitors offer a broader range of products and services than we offer. We expect competition to remain intense in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. In addition, to stay competitive in our markets we may need to adjust the interest rates on our products to match the rates offered by our competitors, which could adversely affect our net interest margin. As a result, our profitability depends upon our continued ability to successfully compete in our market areas while achieving our investment objectives.

We operate in a highly regulated industry, and the laws and regulations that govern our operations, corporate governance, executive compensation and financial accounting, or reporting, including changes in, or failure to comply with the same, may adversely affect the Company.

The banking industry is highly regulated. We are subject to supervision, regulation and examination by various federal and state regulators, including the Federal Reserve Board, the SEC, the CFPB, the FDIC, Financial Industry Regulatory Authority, Inc. (also known as FINRA), and various state regulatory agencies.  The statutory and regulatory framework that governs the Company is generally designed to protect depositors and customers, the Deposit Insurance Fund, the U.S. banking and financial system, and financial markets as a whole and not to protect shareholders.  These laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities (including foreclosure and collection practices), limit the dividends or distributions that we can pay, and impose certain specific accounting requirements that may be more restrictive and may result in greater or earlier charges to earnings or reductions in capital than would otherwise be required under generally accepted accounting principles in the United States of America.  Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs.  Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years in response to the perceived state of the financial services industry, as well as other factors such as technological and market changes. Such regulation and supervision may increase our costs and limit our ability to pursue business opportunities.  Further, our failure to comply with these laws and regulations, even if the failure was inadvertent or reflects a difference in interpretation, could subject the Company to restrictions on business activities, fines, and other penalties, any of which could adversely affect results of operations, the capital base, and the price of our common shares.  Further, any new laws, rules, or regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition.

LEGISLATIVE OR REGULATORY CHANGES OR ACTIONS COULD ADVERSELY IMPACT OUR BUSINESS.

The financial services industry is extensively regulated. We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations. These laws and regulations are primarily intended for the protection of consumers, depositors, borrowers and the deposit insurance fund, not to benefit our shareholders.

Regulations affecting banks and financial services businesses are undergoing continuous change, and management cannot predict the effect of those changes.  While such changes are generally intended to lessen the regulatory burden on financial institutions, the impact of any changes to laws and regulations or other actions by regulatory agencies could adversely affect our business. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on the operation of an institution and the ability to determine the adequacy of an institution’s allowance for loan losses. Failure to comply with applicable laws, regulations and policies could result in sanctions being imposed by the regulatory agencies, including the imposition of civil money penalties, which could have a material adverse effect on our operations and financial condition. Even the reduction of regulatory restrictions could have an adverse effect on us if such lessening of restrictions increases competition within our industry or market areas.

In light of conditions in the global financial markets and the global economy that occurred in the last decade, regulators increased their focus on the regulation of the financial services industry. In the last several years, the United States Congress and the federal bank regulators have acted on an unprecedented scale in responding to the stresses experienced in the global financial markets. Some of the laws enacted by Congress and regulations promulgated by federal bank regulators subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business and results of operations. In addition to laws, regulations and supervisory and enforcement actions directed at the operations of banks, proposals to reform the housing finance market contemplate winding down Fannie Mae and Freddie Mac, which could negatively affect our sales of loans.

DEPOSIT INSURANCE PREMIUMS MAY INCREASE AND HAVE A NEGATIVE EFFECT ON THE COMPANY’S RESULTS OF OPERATIONS.

The DIF maintained by the FDIC to resolve bank failures is funded by fees assessed on insured depository institutions. The costs of resolving bank failures increased for a period of time and decreased the DIF. The FDIC collected a special assessment in 2009 to replenish the DIF and also required a prepayment of an estimated amount of future deposit insurance premiums. If the costs of future bank failures increase, the deposit insurance premiums required to be paid by Civista may also increase. The FDIC recently adopted rules revising its assessments in a manner benefitting banks with assets totaling less than $10 billion. There can be no assurance, however, that assessments will not be changed in the future.

OUR ALLOWANCE FOR LOAN LOSSES MAY PROVE TO BE INSUFFICIENT TO ABSORB POTENTIAL LOSSES IN OUR LOAN PORTFOLIO.

We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, the credit quality of the loan portfolio, the collateral supporting the loans and the performance of customers relative to their financial obligations with us. However, every loan we make carries a risk of non-payment. This risk is affected by, among other things, cash flow of the borrower and/or the project being financed, changes and uncertainties as to the future value of the collateral securing such loan, the credit history of the particular borrower, changes in economic and industry conditions, and the duration of the loan.

The amount of future losses is also susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the allowance for loan losses will be adequate in the future. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance, which would adversely affect our earnings. Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Moreover, the Financial Accounting Standards Board ("FASB") has changed its requirements for establishing the allowance for loan losses.

On June 16, 2016, the FASB issued Accounting Standard Update ("ASU") 2016-13 "Financial Instruments - Credit Losses", which replaces the incurred loss model with an expected loss model, and is referred to as the current expected credit loss ("CECL") model.  Under the incurred loss model, loans are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.  The FASB voted to defer the effective date for this ASU for smaller reporting companies, such as the Company, to annual reporting periods and interim reporting periods within those annual periods, beginning after December 15, 2022. Under the CECL model, financial institutions will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.  If the methodologies and assumptions that we use in the CECL model are proven to be incorrect, or inadequate, the allowance for credit losses may not be sufficient, resulting in the need for additional allowance for credit losses to be established, which could have a material adverse impact on our financial condition and results of operations.

Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our financial condition and results of operations.

OUR BUSINESS AND FINANCIAL RESULTS ARE SUBJECT TO RISKS ASSOCIATED WITH THE CREDITWORTHINESS OF OUR CUSTOMERS AND COUNTERPARTIES.

Credit risk is inherent in the financial services business and results from, among other things, extending credit to customers, purchasing securities, and entering into financial derivative transactions and certain guarantee contracts. Credit risk is one of our most significant risks, particularly given the high percentage of our assets represented directly or indirectly by loans, and the importance of lending to our overall business. We manage credit risk by assessing and monitoring the creditworthiness of our customers and counterparties and by diversifying our loan portfolio. Many factors impact credit risk.

A borrower’s ability to repay a loan can be adversely affected by individual factors, such as business performance, job losses or health issues. A weak or deteriorating economy and changes in the United States or global markets also could adversely impact the ability of our borrowers to repay outstanding loans. Any decrease in our borrowers’ ability to repay loans would result in higher levels of nonperforming loans, net charge-offs, and provision for loan losses.

Despite maintaining a diversified loan portfolio, in the ordinary course of business, we may have concentrated credit exposure to a particular person or entity, industry, region or counterparty. Events adversely affecting specific customers, industries, regions or markets, a decrease in the credit quality of a customer base or an adverse change in the risk profile of a market, industry, or group of customers could adversely affect us.

Our credit risk may be exacerbated when collateral held by us to secure obligations to us cannot be realized upon or is liquidated at prices that are not sufficient to recover the full amount of the loan or derivative exposure due us.

Due in part to improvement in local and general economic conditions, as well as actions we have taken to manage our loan portfolio, our provision for loan losses has declined since the end of the recent recession.  However, if we experience higher levels of provision for loan losses in the future, our net income could be negatively affected.

CHANGES IN TAX LAWS COULD ADVERSELY AFFECT OUR PERFORMANCE

We are subject to extensive federal, state and local taxes, including income, excise, sales/use, payroll, franchise, withholding and ad valorem taxes. Changes to tax laws could have a material adverse effect on our results of operations, fair values of net deferred tax assets and obligations of states and political subdivisions held in our investment securities portfolio. In addition, our customers are subject to a wide variety of federal, state and local taxes. Changes in taxes paid by our customers may adversely affect their ability to purchase homes or consumer products, which could adversely affect their demand for our loans and deposit products. In addition, such negative effects on our customers could result in defaults on the loans we have made and decrease the value of mortgage-backed securities in which we have invested.

We are subject to examinations and challenges by tax authorities.

In the normal course of business, we are routinely subject to examinations and challenges from federal and state tax authorities regarding positions taken regarding their respective tax returns.  State tax authorities have become increasingly aggressive in challenging tax positions taken by financial institutions, especially those positions relating to tax compliance and calculation of taxes subject to apportionment.  Any challenge or examination by a tax authority may result in adjustments to the timing or amount of taxable net worth or taxable income, or deductions or the allocation of income among tax jurisdictions.

Management believes it has taken appropriate positions with respect to all tax returns and does not anticipate that any examination would have a material impact on our Consolidated Financial Statements.  However, the outcome of such examinations and ultimate resolution of any resulting assessments are inherently difficult to predict.  Thus, no assurance can be given that our tax liability for any tax year open to examination will be as reflected in our current and historical Consolidated Financial Statements.

Accounting changes could impact our reported financial condition or results of operations.

The accounting standard setters, including the Financial Accounting Standards Board (the FASB), the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. The pace of change continues to accelerate and changes in accounting standards can be hard to predict and could materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively, resulting in the restatement of prior period financial statements.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make significant estimates that affect the financial statements. Due to the inherent nature of these estimates, actual results may vary materially from management’s estimates. In June 2016, FASB issued a new accounting standard for recognizing current expected credit losses, commonly referred to as CECL.  CECL will result in earlier recognition of credit losses and requires consideration of not only past and current events but also reasonable and supportable forecasts that affect collectability. The Company will be required to comply with the new standard in the first quarter of 2023.  Upon adoption of CECL, credit loss allowances may increase, which would decrease retained earnings and regulatory capital.  The federal banking regulators have adopted a regulation that will allow banks to phase in the day-one impact of CECL on regulatory capital over three years.  CECL implementation poses operational risk, including the failure to properly transition internal processes or systems, which could lead to call report errors, financial misstatements, or operational losses.

WE RELY HEAVILY ON OUR MANAGEMENT TEAM, AND THE UNEXPECTED LOSS OF KEY MANAGEMENT MAY ADVERSELY AFFECT OUR OPERATIONS.

Our success to date has been strongly influenced by our ability to attract and to retain senior management experienced in banking in the markets we serve. Our ability to retain executive officers and the current management teams will continue to be important to successful implementation of our strategies. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results.

WE NEED TO CONSTANTLY UPDATE OUR TECHNOLOGY IN ORDER TO COMPETE AND MEET CUSTOMER DEMANDS.

The financial services market, including banking services, is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. Our future success will depend, in part, on our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations. Some of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could negatively affect our growth, revenue and profit.

WE MAY BE THE SUBJECT OF LITIGATION WHICH COULD RESULT IN LEGAL LIABILITY AND DAMAGE TO OUR BUSINESS AND REPUTATION.

From time to time, we may be subject to claims or legal action from customers, employees or others. Financial institutions like CBI and Civista are facing a growing number of significant class actions, including those based on the manner of calculation of interest on loans and the assessment of overdraft fees. Future litigation could include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. We are also involved from time to time in other reviews, investigations and proceedings (both formal and informal) by governmental and other agencies regarding our business. These matters also could result in adverse judgments, settlements, fines, penalties, injunctions or other relief. Like other large financial institutions, we are also subject to risk from potential employee misconduct, including non-compliance with policies and improper use or disclosure of confidential information. Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations and/or cause significant reputational harm to our business.

Climate change, severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.

Natural disasters, including severe weather events of increasing strength and frequency due to climate change, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business or upon third parties who perform operational services for us or our customers.  Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

WE DEPEND UPON THE ACCURACY AND COMPLETENESS OF INFORMATION ABOUT CUSTOMERS AND OTHER PARTIES.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information provided to us by customers and other parties, including financial statements and other financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to a business, we may assume that the customer’s audited financial statements conform with accounting principles generally accepted in the United States and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We may also rely on the audit report covering those financial statements. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with generally accepted accounting principles or that are materially misleading, or on other financial information that is incomplete or materially misleading.

WE COULD FACE LEGAL AND REGULATORY RISK ARISING OUT OF OUR RESIDENTIAL MORTGAGE BUSINESS.

Numerous federal and state governmental, legislative and regulatory authorities are investigating practices in the business of mortgage and home equity loan lending and servicing and in the mortgage-related insurance and reinsurance industries. We could face the risk of class actions, other litigation and claims from: the owners of or purchasers of such loans originated or serviced by us, homeowners involved in foreclosure proceedings or various mortgage-related insurance programs, downstream purchasers of homes sold after foreclosure, title insurers, and other potential claimants. Included among these claims are claims from purchasers of mortgage and home equity loans seeking the repurchase of loans where the loans allegedly breached origination covenants and representations and warranties made to the purchasers in the purchase and sale agreements. The CFPB has issued new rules for mortgage origination and mortgage servicing. Both the origination and servicing rules create new private rights of action for consumers against lenders and servicers in the event of certain violations.

WE MAY BE REQUIRED TO REPURCHASE LOANS WE HAVE SOLD OR INDEMNIFY LOAN PURCHASERS UNDER THE TERMS OF THE SALE AGREEMENTS, WHICH COULD ADVERSELY AFFECT OUR LIQUIDITY, RESULTS OF OPERATIONS AND FINANCIAL STATEMENTS.

When Civista sells a mortgage loan, it agrees to repurchase or substitute a mortgage loan if it is later found to have breached any representation or warranty Civista made about the loan or if the borrower is later found to have committed fraud in connection with the origination of the loan. While we have underwriting policies and procedures designed to avoid breaches of representations and warranties as well as borrower fraud, there can be no assurance that no breach or fraud will ever occur. Required repurchases, substitutions or indemnifications could have an adverse effect on our liquidity, results of operations and financial statements.

WE DO NOT HAVE ASSURANCE REGARDING THE FUTURE REVENUES OF OUR TAX REFUND PROGRAM.

The revenues from our tax refund program are based upon a contract with a third party. While the contract has a term of three years expiring October 31, 2022 and contains provisions for automatic renewal after that term, the amount to be paid to us is not fixed for any period after 2020. As a result, the amount paid to us may fluctuate after 2020, and there is no assurance that the parties will be able to negotiate compensation that is acceptable to us after that year.

FUTURE ACQUISITIONS OR OTHER EXPANSION MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND RESULT OF OPERATIONS.

In the future, we may acquire other financial institutions or branches or assets of other financial institutions. We may also open new branches, enter into new lines of business, or offer new products or services. Any such acquisition or expansion of our business will involve a number of expenses and risks, which may include some or all of the following:

•	the time and expense associated with identifying and evaluating potential acquisitions or expansions;
•	the potential inaccuracy of estimates and judgments used to evaluate credit, operations, management and market risk with respect to target institutions;
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•	the time and costs of evaluating new markets, hiring local management and opening new offices, and the delay between commencing these activities and the generation of profits from the expansion;
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•	any financing required in connection with an acquisition or expansion;
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•	the diversion of management’s attention to the negotiation of a transaction and the integration of the operations and personnel of the combining businesses;
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•	entry into unfamiliar markets and the introduction of new products and services into our existing business;
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•	the possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and
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•	the risk of loss of key employees and customers.
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We may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we expect. Neither can we assure that integration efforts for any future acquisitions will be successful. We may issue equity securities in connection with acquisitions, which could dilute the economic and voting interests of our existing shareholders.

WE ARE A HOLDING COMPANY AND DEPEND ON OUR SUBSIDIARY BANK FOR DIVIDENDS.

As a financial holding company, we are a legal entity separate and distinct from our subsidiaries and affiliates. Our principal source of funds to support our operations, pay dividends on our common and preferred shares and service our debt is dividends from our subsidiary bank, Civista. In the event that Civista is unable to pay dividends to us, we may not be able to service our debt, pay our other obligations or pay dividends on our common or preferred shares. Accordingly, our inability to receive dividends from Civista could also have a material adverse effect on our business, financial condition and results of operations.

Various federal and state statutory provisions and regulations limit the amount of dividends that Civista may pay to us without regulatory approval. Generally, subject to certain minimum capital requirements, Civista may declare a dividend without the approval of the State of Ohio Division of Financial Institutions so long as the total amount of the dividends in a calendar year does not exceed Civista’s total net income for that year combined with its retained net income for the two preceding years. In addition, the Federal Reserve has issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings. Thus, the ability of Civista to pay dividends in the future is currently influenced, and could be further influenced, by bank regulatory policies and capital guidelines and may restrict our ability to declare and pay dividends on our common or preferred shares.

THE MARKET PRICE OF OUR COMMON SHARES MAY BE SUBJECT TO FLUCTUATIONS AND VOLATILITY.

The market price of our common shares may fluctuate significantly due to, among other things, changes in market sentiment regarding our operations or business prospects, the banking industry generally or the macroeconomic outlook. Factors that could impact our trading price include:

•	our operating and financial results, including how those results vary from the expectations of management, securities analysts and investors;
•	developments in our business or operations or in the financial sector generally;
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•	future offerings by us of debt or preferred shares, which would be senior to our common shares upon liquidation and for purposes of dividend distributions;
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•	legislative or regulatory changes affecting our industry generally or our business and operations specifically;
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•	the operating and stock price performance of companies that investors consider to be comparable to us;
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•	announcements of strategic developments, acquisitions and other material events by us or our competitors;
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•	actions by our current shareholders, including future sales of common shares by existing shareholders, including our directors and executive officers; and
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•	other changes in U.S. or global financial markets, global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.
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Equity markets in general and our common shares in particular have experienced considerable volatility over the past few years. The market price of our common shares may continue to be subject to volatility unrelated to our operating performance or business prospects. Increased volatility could result in a decline in the market price of our common shares.

THE SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON SHARES OR SECURITIES CONVERTIBLE INTO OUR COMMON SHARES IN THE PUBLIC MARKET COULD DEPRESS THE PRICE OF OUR COMMON SHARES.

In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide fluctuations that have not necessarily been related to their operating performance. Therefore, our shareholders may not be able to sell their shares at the volumes, prices, or times that they desire. We cannot predict the effect, if any, that future sales of our common shares or securities convertible into our common shares in the market, or availability of shares of our common shares or securities convertible into our common shares for sale in the market, will have on the market price of our common shares. We can give no assurance that sales of substantial amounts of our common shares or securities convertible into our common shares in the market, or the potential for large amounts of sales in the market, would not cause the price of our securities to decline or impair our ability to raise capital through sales of our common shares.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

CBI neither owns nor leases any properties. Civista owns its main office at 100 East Water Street, Sandusky, Ohio, which is also the office of CBI. Civista also owns branch banking offices in the following Ohio and Indiana communities: Sandusky (2), Norwalk, Berlin Heights, Castalia, Port Clinton, New Washington, Shelby (2), Greenwich, Plymouth, Shiloh, Dublin, Plain City, Russells Point, Urbana (2), Dayton (2), Quincy, Beachwood, Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles. Civista leases branch banking offices in the Ohio communities of Akron, Huron, Norwalk, West Liberty, Dayton, Beachwood and Willard. Civista also leases loan production offices in Westlake, Ohio and Fort Mitchell, Kentucky.

Item 3. Legal Proceedings

In the ordinary course of their respective businesses, CBI or Civista or their respective properties may be named or otherwise subject as a plaintiff, defendant or other party to various pending and threatened legal proceedings and various actual and potential claims. In view of the inherent difficulty of predicting the outcome of such matters, CBI cannot state what the eventual outcome of any such matters will be. However, based on current knowledge and after consultation with legal counsel, management believes these proceedings will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of CBI or Civista.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Information regarding the market in which CBI’s common shares are traded is incorporated herein by reference from the information appearing under the caption “Common Shares and Shareholder Matters” located on page 3 of the 2019 Annual Report.

As of February 21, 2020, there were approximately 1,668 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) of the Company’s common shares.

Information regarding the restrictions applicable to the Company’s payment of dividends is included under Item 1 of this Annual Report on Form 10-K and is incorporated herein by reference.

The Company did not repurchase any of its common shares during the fourth quarter ended December 31, 2019.

Item 6. Selected Financial Data

Information required by this item is incorporated herein by reference from the information appearing under the caption “Five-Year Selected Consolidated Financial Data” located on pages 1 and 2 of the 2019 Annual Report.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Information required by this item is incorporated herein by reference from the information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located on pages 4 through 17 of the 2019 Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Information required by this item is incorporated herein by reference from the disclosures included under the caption “Quantitative and Qualitative Disclosures About Market Risk” on pages 17 through 19 of the 2019 Annual Report.

Item 8. Financial Statements and Supplementary Financial Data

Civista Bancshares, Inc.’s Report of Independent Auditors and Consolidated Financial Statements and accompanying notes are listed below and are incorporated herein by reference from pages 23 through 86 of the 2019 Annual Report (included as Exhibit 13.1 hereto). The supplementary financial information specified by Item 302 of Regulation S-K, is included in Note 23 - “Quarterly Financial Data (Unaudited)” to the consolidated financial statements found on page 81 of the 2019 Annual Report.

Report of Independent Registered Public Accounting Firm on Financial Statements

Consolidated Balance Sheets

December 31, 2019 and 2018

Consolidated Statements of Operations

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows

For the years ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

Item 9. Changes in and Disagreements with Accountants 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.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Principal Accounting Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15 under the Exchange Act, as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based upon that evaluation, our Chief Executive Officer and Principal Accounting Officer concluded that our disclosure controls and procedures as of December 31, 2019, were effective.

Reports on Internal Control Over Financial Reporting

The “Management’s Report on Internal Control over Financial Reporting” and the “Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting” located on pages 21 through 22 of the 2019 Annual Report are incorporated herein by reference.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

There was no information the Company was required to disclose in a current report on Form 8-K during the fourth quarter of 2019 that was not reported.

Item 10. Directors, Executive Officers, and Corporate Governance

The information contained under the captions “Proposal 1 - Election of Directors”, “Executive Officers of the Corporation”, “Beneficial Ownership of Common Shares of the Corporation Delinquent Section 16(a) Reports”, “Board of Director Meetings and Committees – Audit Committee”, “Corporate Governance - Code of Ethics” and “Corporate Governance – Nominating Procedure” in the 2020 Proxy Statement is incorporated herein by reference in response to this Item.

Item 11. Executive Compensation.

The information contained under the captions “Executive Compensation”, “2019 Compensation of Directors” and “Compensation Committee Interlocks and Insider Participation” in the 2020 Proxy Statement is incorporated herein by reference in response to this Item.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information contained under the caption “Beneficial Ownership of Common Shares of the Company” in the 2020 Proxy Statement is incorporated herein by reference in response to this Item.

The following table shows the number of common shares remaining available for awards under the 2014 Incentive Plan at December 31, 2019.

Equity Compensation Plan Information
Plan category	(a)<br><br><br>Number of Common<br><br><br>Shares to be issued upon<br><br><br>exercise<br><br><br>of outstanding options,<br><br><br>warrants and rights (a)		(b)<br><br><br>Weighted-average<br><br><br>exercise price of<br><br><br>outstanding options,<br><br><br>warrants and rights (b)		(c)<br><br><br>Number of Common<br><br><br>Shares remaining<br><br><br>available for future<br><br><br>issuance under equity<br><br><br>compensation plans<br><br><br>(excluding common<br><br><br>shares reflected in<br><br><br>column (a) )
Equity compensation plans approved by<br><br><br>shareholders		—		—		240,001
Equity compensation plans not approved by<br><br><br>shareholders		—		—		—
Total		—		—		240,001

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information contained under the caption “Corporate Governance-Director Independence” and “Corporate Governance-Transactions with Directors, Officers and Associates” in the 2020 Proxy Statement is incorporated herein by reference in response to this Item.

Item 14. Principal Accountant Fees and Services.

The information contained under the caption “Audit Committee Matters” of the 2020 Proxy Statement is incorporated herein by reference in response to this Item.

Item 15. Exhibit and Financial Statement Schedules

(a) Documents filed as a Part of the Report

1.	Financial Statements. Civista Bancshares, Inc.’s Report of Independent Auditors and Consolidated Financial Statements and accompanying notes are listed below and are incorporated herein by reference from pages 23 through 86 of the 2019 Annual Report (included as Exhibit 13.1 hereto).

Report of Independent Registered Public Accounting Firm on Financial Statements

Consolidated Balance Sheets

December 31, 2019 and 2018

Consolidated Statements of Operations

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Changes in Shareholders’ Equity

For the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows

For the years ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

2.	Financial Statement Schedules. All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3.	Exhibits
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Exhibit	Description	Location
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2.1	Agreement and Plan of Merger, dated March 11, 2018 by and between Civista Bancshares, Inc., Civista Bank, United Community Bancorp and United Community Bank	Filed as Exhibit 2.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on March 12, 2018 and incorporated herein by reference. (File No. 001-36192)
3.1	Second Amended and Restated Articles of Incorporation of Civista Bancshares, Inc., as filed with the Ohio Secretary of State on November 15, 2018	Filed as Exhibit 3.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on November 16, 2018 and incorporated herein by reference (File No. 001-36192)
3.2	Amended and Restated Code of Regulations of Civista Bancshares, Inc. (adopted April 15, 2008).	Filed as Exhibit 3.2 to Civista Bancshares, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed on November 8, 2017 and incorporated herein by reference. (File No. 001-36192)
4.3	Form of Certificate for 6.50% Noncumulative Redeemable Convertible Perpetual Preferred Shares, Series B, of Civista Bancshares, Inc.	Filed as Exhibit 4.2 to Civista Bancshares, Inc.’s Pre-Effective Amendment No.1 to Form S-1 Registration Statement filed November 1, 2013, and incorporated herein by reference. (File No. 333-191169)
4.4	Form of Depositary Receipt for Depositary Shares, each representing 1/40^th^ of a 6.50% Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B, of Civista Bancshares, Inc.	Filed as Exhibit 4.3 to Civista Bancshares, Inc.’s Pre-Effective Amendment No.1 to Form S-1 Registration Statement filed November 1, 2013, and incorporated herein by reference. (File No. 333-191169)
4.5	Deposit Agreement dated December 1, 2013, among Civista Bancshares, Inc., Illinois Stock Transfer Company, as Depositary, and the holders from time to time of Depositary Receipts thereunder.	Filed as Exhibit 4.4 to Civista Bancshares, Inc.’s Pre-Effective Amendment No.1 to Form S-1 Registration Statement filed November 1, 2013, and incorporated herein by reference. (File No. 333-191169)
4.6	Agreement to furnish instrument and agreements defining rights of holders of long-term debt.	Included herewith.
10.1*	Form of Change of Control Agreement by and among Civista Bancshares, Inc., Civista Bank and certain executive officers.	Filed as Exhibit 10.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on March 8, 2019 and incorporated herein by reference.  (File No. 001-36192).
10.2*	Form of Amended and Restated Change of Control Agreement by and among Civista Bancshares, Inc., Civista Bank and certain executive officers.	Filed as Exhibit 10.1 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on March 8, 2019 and incorporated herein by reference. (File No. 001-36192).
10.2*	Form of Pension Shortfall Agreement by and among Civista Bancshares, Inc., Civista Bank and certain executive officers.	Filed as Exhibit 10.2 to Civista Bancshares, Inc.’s Current Report on Form 8-K dated and filed on October 29, 2015 and incorporated herein by reference.  (File No. 001-36192).
10.3*	Supplemental Nonqualified Executive Retirement Plan	Filed as Exhibit 10.12 to Civista Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012 and incorporated herein by reference (File No. 0-25980).
10.4*	Amendment to Supplemental Nonqualified Executive Retirement Plan	Filed as Exhibit 10.13 to Civista Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2011, filed on March 15, 2012 and incorporated herein by reference (File No. 0-25980).
10.5*	Second Amendment to Supplemental Nonqualified Executive Retirement Plan	Filed as Exhibit 10.1 to Civista Bancshares, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2016, filed on August 9, 2016 and incorporated herein by reference (File No. 1-36192)
Exhibit	Description	Location
---	---	---
10.6*	2018 Amendment to Supplemental Nonqualified Executive Retirement Plan	Filed as Exhibit 10.1 to Civista Bancshares, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2018, filed on August 8, 2018 (File No. 1-36192).
10.7*	Civista Bancshares, Inc. 2014 Incentive Plan	Filed as Exhibit 10.1 to Civista Bancshares, Inc.’s Registration Statement on Form S-8 filed on February 26, 2015 and incorporated herein by reference (File No. 333-202316).
10.8*	Form of Restricted Stock Award Agreement under Civista Bancshares, Inc. 2014 Incentive Plan	Filed as Exhibit 10.8 to Civista Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, filed on March 15, 2019 and incorporated herein by reference. (File No. 1-36192)
11.1	Statement regarding earnings per share	Included in Note 22 to the Consolidated Financial Statements filed as Exhibit 13.1 of this Annual Report on Form 10-K.
13.1	Civista Bancshares, Inc. 2019 Annual Report to Shareholders (not deemed filed except for portions which are specifically incorporated by reference in this Annual Report on Form 10-K)	Included herewith
21.1	Subsidiaries of CBI	Included herewith
23.1	Consent of S.R. Snodgrass, P.C.	Included herewith
31.1	Rule 13a-14(a)/15-d-14(a) Certification of Chief Executive Officer	Included herewith
31.2	Rule 13a-14(a)/15-d-14(a) Certification of Principal Accounting Officer	Included herewith
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included herewith
32.2	Certification of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Included herewith
101	The following materials from Civista Bancshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language) pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2019 and 2018; (ii) Consolidated Statements of Operations for each of the three years ended December 31, 2019, 2018 and 2017;  (iii) Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2019, 2018 and 2017; (iv) Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended December 31, 2019, 2018 and 2017; (v) Consolidated Statement of Cash Flows for each of the three years ended December 31, 2019, 2018 and 2017; and (vi) Notes to Consolidated Financial Statements .

* Management contract or compensatory plan or arrangement

Item 16. Form 10-K Summary

Not Applicable

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant) Civista Bancshares, Inc.
By	/s/ Dennis G. Shaffer
	Dennis G. Shaffer, President & CEO<br><br><br>(Principal Executive Officer)

Date: March 16, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on March 16, 2020 by the following persons (including a majority of the Board of Directors of the Registrant) in the capacities indicated:

/s/ Thomas A. Depler	/s/ Allen R. Nickles, CPA , CFE , FCPA , CFF , CICA
Thomas A. Depler, Director	Allen R. Nickles, CPA , CFE , FCPA , CFF , CICA , Director
/s/ Harry Singer	/s/ Julie A. Mattlin
Harry Singer, Director	Julie A. Mattlin, Director
/s/ Todd A. Michel	/s/ M. Patricia Oliver
Todd A. Michel, Senior Vice President,	M. Patricia Oliver, Director
(Principal Accounting Officer)
/s/ James O. Miller	/s/ Daniel J. White
James O. Miller, Chairman of the Board	Daniel J. White, Director
/s/ Dennis E. Murray, Jr.	/s/ Dennis G. Shaffer
Dennis E. Murray, Jr., Director	Dennis G. Shaffer, President & CEO,<br><br><br>(Principal Executive Officer)
/s/ William F. Ritzmann
William F. Ritzmann, Director

40

civb-ex46_11.htm

Exhibit 4.6

[CIVISTA BANCSHARES, INC. LETTERHEAD]

March 16, 2020

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549

Re:  Civista Bancshares, Inc. Form 10-K for the fiscal year ended December 31, 2019

Ladies and Gentlemen:

Civista Bancshares, Inc., an Ohio corporation (“CBI”), is today filing an Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the Form 10-K), as executed on March 16, 2020.

Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, CBI hereby agrees to furnish the Commission, upon request, copies of instruments and agreements defining the rights of holders of its long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K.  None of such long-term debt exceeds 10% of the total assets of CBI and its subsidiaries on a consolidated basis.

Very truly yours,

/s/ Dennis G. Shaffer

Dennis G. Shaffer

President and Chief Executive Officer

civb-ex131_14.htm

Exhibit 13.1

Dear Shareholders:

2019 was another strong and successful year for Civista.  The total return on our stock, including dividends, for 2019 was 43%.  We reported record revenue and net income as we earned $33.2 million in net income on revenue of $120.5 million.  All business lines contributed significantly to our success. I want to take this opportunity to thank all of our employees for their hard work and commitment that they make to the bank and to the communities we serve.  The bank is now approximately $2.3 billion in asset size and we operate 35 full service branches and two loan production offices in 12 Ohio counties, two southeast Indiana counties and one northern Kentucky county.

Some of our more significant accomplishments in 2019 included increasing our loan portfolio by 9.4%, or $147.0 million, with much of this growth coming from our commercial lending teams across our entire footprint.  On the consumer side, we had record production from our residential mortgage lenders, who generated nearly $125 million in secondary market loans, creating an additional $1.1 million more in income than in the previous year.  It’s these dollars that we lend out each and every day that our borrowers invest back in to our communities to make them a stronger and better place to live and work.  Our loan portfolio balance at the end of the year was $1.7 billion.

On the deposit side, we grew balances by 6.3%, or $98.9 million, with $90.7 million of that growth in core deposit accounts.  We were particularly pleased with the work of our commercial, treasury, retail and private bankers as $73.5 million of that growth was in business and municipal operating accounts.

Other accomplishments in 2019 included the opening of a full service branch in Beachwood, Ohio, which is located on the east side of Cleveland.  We have had a loan production office in the area for the last few years which has been quite successful so we wanted to bring all of our products and services to the area.  The employees of the loan production office have relocated to this full service branch.  The office will allow us to better serve the needs of our current and prospective customers in the area.

Throughout 2019, we continued to look for ways to efficiently manage our capital. We increased our quarterly common dividend to 11 cents per share, a year-over-year increase of 31.3%.  We initiated a stock repurchase plan, with the board approving the repurchase of up to 472,000 shares.  During the year we repurchased 188,200 shares at a weighted average price of $20.77.  The stock repurchase plan was reapproved in December 2019, authorizing the repurchase of up to 672,000 shares.  In October, we also announced that we would begin the process of redeeming our convertible preferred stock.  The convertible preferred stock had nearly tripled in value and virtually all holders converted the preferred shares to common stock.  This helped simplify the structure of our balance sheet and eliminate any confusion regarding how many preferred shares might convert to common.

As we move forward into 2020, we continue to invest in technology to make the organization more efficient, to make it easier to do business with us and to enhance the overall customer experience.  Notable projects underway include a customer communication project that will improve the format, design and content of customer statements, invoices and notices; a commercial loan project that will automate and improve workflow to allow us to respond to the customer quicker and a digital banking project that will allow us to open deposit accounts online and streamline the in-branch new account process as well as provide a more efficient digital treasury management product for our customers.

Our key strategic initiatives are to continue to grow the company and to differentiate ourselves by providing a superior customer experience.  Growth will allow us to become more efficient and will help provide us with the resources we need to bring expanded and innovative products and services to our customers.  Other key initiatives are to continue to invest in our employees as they are our greatest asset, and to diversify our income stream by growing our noninterest income products and services.

Noninterest income for 2019 totaled $22.4 million.  This is an increase of $4.3 million, or 23.8%, from the prior year and is primarily attributable to the acquisition of United Community Bancorp in the third quarter of 2018 and the previously mentioned strong residential mortgage banking production.  In addition, wealth management continues to grow its assets under management and we continue to view this as an opportunity to grow noninterest income as we expand those services into our new markets.

Results of our financial performance in 2019 rank Civista as one of the top performing banks in Ohio and in the Midwest.  Our return on average assets for the year was 1.51% and our net interest margin expanded by 10 basis points to 4.31%.  Our asset quality remains strong and our asset quality metrics continue to be solid.

At Civista, we strongly believe in investing in the communities we serve.  Each year, we donate significant dollars to local schools, civic and non-profit organizations throughout our footprint.  Our employees donate their time serving in leadership roles or as active volunteers at hundreds of organizations where we live and work.  We take great pride in being a community leader and in the commitment we make to our communities.

I am very pleased with our accomplishments.  Our goal is to remain an independent community bank. I continue to believe that we earn our independence and I remain confident that our disciplined approach to managing Civista and our long term focus on driving shareholder value will continue to yield positive results.  We are focused on establishing and building long term relationships with our customers and our vision is to continue to work together to be the community’s trusted financial provider.

As always, please read your proxy and vote your shares in your company.  I hope to see you at our annual meeting.

Warmest regards,

Dennis G. Shaffer

CEO and President

ANNUAL REPORT

CONTENTS

Five –Year Selected Consolidated Financial Data	1
Common Shares and Shareholder Matters	3
General Development of Business	3
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Quantitative and Qualitative Disclosures about Market Risk	17
Financial Statements
Management’s Report on Internal Control over Financial Reporting	21
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Statements	22
Report of Independent Registered Public Accounting Firm on Financial Statements	23
Consolidated Balance Sheets	24
Consolidated Statements of Operations	25
Consolidated Statements of Comprehensive Income	26
Consolidated Statements of Changes in Shareholders’ Equity	27
Consolidated Statements of Cash Flow	28
Notes to Consolidated Financial Statements	30

This page left blank intentionally.

Five-Year Selected Consolidated Financial Data

(Amounts in thousands, except per share data)

	Year ended December 31,
	2019		2018			2017		2016			2015
Statements of income:
Total interest and dividend income	$	98,054	$	73,677		$	58,594	$	53,567		$	50,701
Total interest expense		12,954		7,570			4,092		3,308			3,309
Net interest income		85,100		66,107			54,502		50,259			47,392
Provision (credit) for loan losses		1,035		780			—		(1,300	)		1,200
Net interest income after provision for<br><br><br>loan losses		84,065		65,327			54,502		51,559			46,192
Net gain (loss) on sale of securities		32		(413	)		12		19			(18	)
Other noninterest income		22,411		18,544			16,322		16,113			14,296
Total noninterest income		22,443		18,131			16,334		16,132			14,278
Total noninterest expense		66,947		66,679			48,604		43,855			42,944
Income before federal income taxes		39,561		16,779			22,232		23,836			17,526
Federal income tax expense		5,683		2,640			6,360		6,619			4,781
Net income	$	33,878	$	14,139		$	15,872	$	17,217		$	12,745
Preferred stock dividends and discount<br><br><br>accretion		647		959			1,244		1,501			1,577
Net income available to common<br><br><br>shareholders	$	33,231	$	13,180		$	14,628	$	15,716		$	11,168
Per common share:
Net income available to common<br><br><br>shareholders (basic)		2.12		1.10			1.48		1.96			1.43
Net income available to common<br><br><br>shareholders (diluted)		2.01		1.02			1.28		1.57			1.17
Dividends declared		0.42		0.32			0.25		0.22			0.20
Book value		19.78		18.56			16.39		14.22			13.12
Average common shares outstanding:
Basic		15,652,881		11,971,786			9,906,856		8,010,399			7,822,369
Diluted		16,851,740		13,855,706			12,352,616		10,950,961			10,918,335
Year-end balances:
Loans, net	$	1,694,203	$	1,548,262		$	1,151,527	$	1,042,201		$	987,166
Securities		379,970		368,385			245,309		209,919			209,701
Total assets		2,309,557		2,138,954			1,525,857		1,377,263			1,315,041
Deposits		1,678,764		1,579,893			1,204,923		1,121,103			1,052,033
Borrowings		274,601		245,226			123,082		106,852			125,667
Shareholders’ equity		330,126		298,898			184,461		137,616			125,173
Average balances:
Loans, net	$	1,598,991	$	1,261,568		$	1,095,956	$	1,011,683		$	966,786
Securities		372,886		273,998			234,249		213,496			211,436
Total assets		2,241,111		1,742,823			1,526,387		1,441,717			1,336,645
Deposits		1,689,801		1,341,860			1,236,663		1,210,283			1,107,445
Borrowings		208,932		167,752			101,880		79,391			95,132
Shareholders’ equity		318,306		217,371			172,763		133,445			120,350

Five-Year Selected Ratios

	Year ended December 31,
	2019			2018			2017			2016			2015
Net interest margin (1)		4.31	%		4.21	%		4.01	%		3.93	%		3.96	%
Return on average total assets		1.51			0.81			1.04			1.19			0.95
Return on average shareholders’ equity		10.64			6.50			9.19			12.90			10.59
Dividend payout ratio		19.81			29.09			16.89			11.22			13.99
Average shareholders’ equity as a percent of<br><br><br>average total assets		14.20			12.47			11.32			9.26			9.00
Net loan charge-offs (recoveries) as a percent of<br><br><br>average total loans		(0.00	)		0.02			0.02			(0.02	)		0.11
Allowance for loan losses as a percent of loans at<br><br><br>year-end		0.86			0.88			1.13			1.26			1.43
Shareholders’ equity as a percent of total year-end<br><br><br>assets		14.29			13.97			12.09			9.99			9.52
(1)	Calculated on a tax-equivalent basis using an effective tax rate of 21% for 2019 and 2018 and 35% for 2017, 2016 and 2015.
---	---

Stockholder Return Performance

Set forth below is a line graph comparing the five-year cumulative return of the common shares of Civista Bancshares, Inc. (ticker symbol CIVB), based on an initial investment of $100 on December 31, 2014 and assuming reinvestment of dividends, with the cumulative return of the Standard & Poor’s 500 Index, the NASDAQ Bank Index and the SNL Bank Index. The comparative indices were obtained from SNL Securities and NASDAQ.

Annual Report on Form 10-K

A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, to shareholders, upon written request to Lance A. Morrison, Secretary of Civista Bancshares, Inc., 100 East Water Street, Sandusky, Ohio 44870.

Common Shares and Shareholder Matters

The common shares of Civista Bancshares, Inc. (“CBI”) trade on The NASDAQ Capital Market under the symbol “CIVB”. As of February 21, 2020, there were 16,578,679 common shares outstanding and held by approximately 1,668 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms).

The Company paid quarterly dividends on its common shares in the aggregate amounts of $0.42 per share and $0.32 per share in 2019 and 2018, respectively. The Company presently anticipates continuing to pay quarterly dividends in the future at similar levels, subject to compliance with applicable restrictions on the payment of dividends as discussed in the “Liquidity and Capital Resources” section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 19 to the Consolidated Financial Statements.

On February 24, 2017, CBI completed a public offering of 1,610,000 of its common shares at a price of $21.75 per share. The offering resulted in gross proceeds of approximately $35.0 million and net proceeds of approximately $32.8 million.

On December 19, 2013, CBI completed a public offering of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B (the “Series B Preferred Shares”), of CBI. The depositary shares traded on The NASDAQ Capital Market under the symbol “CIVBP.” The terms of the Series B Preferred Shares provided for the payment of quarterly dividends on the Series B Preferred Shares (and, therefore, the depositary shares) at the rate of 6.50% per annum of the liquidation preference of $1,000 per Series B Preferred Share (or $25.00 per depositary share). The depositary shares were convertible into CBI common shares at the election of the holder. All outstanding depositary shares, not previously converted in CBI common shares, were redeemed on December 20, 2019.

General Development of Business

(Amounts in thousands)

CBI was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Financial Modernization Act of 1999, as amended. CBI and its subsidiaries are sometimes referred to together as the “Company”. The Company’s office is located at 100 East Water Street, Sandusky, Ohio. The Company had total consolidated assets of $2,309,557 at December 31, 2019.

CIVISTA BANK (“Civista”), owned by the Company since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Civista was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Civista surrendered its trust charter and began operation as The Citizens Banking Company. The name Civista Bank was introduced during the first quarter of 2015 to solidify our dual Citizens/Champaign brand and distinguish ourselves from the many other banks using the “Citizens” name in our existing and prospective markets. Civista maintains its main office at 100 East Water Street, Sandusky, Ohio and operates branch banking offices in the following Ohio communities: Sandusky (2), Norwalk (2), Berlin Heights, Huron, Port Clinton, Castalia, New Washington, Shelby (2), Willard, Greenwich, Plymouth, Shiloh, Akron, Dublin, Plain City, Russells Point, Urbana (2), West Liberty, Quincy, Dayton(3), Beachwood, and in the following Indiana communities: Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles. Civista also operates loan production offices in Westlake, Ohio and Fort Mitchell, Kentucky. Civista accounted for 99.6% of the Company’s consolidated assets at December 31, 2019.

FIRST CITIZENS INSURANCE AGENCY INC. (“FCIA”) was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Assets of FCIA were less than one percent of the Company’s consolidated assets as of December 31, 2019.

WATER STREET PROPERTIES, INC. (“WSP”) was formed to hold properties repossessed by CBI subsidiaries. WSP accounted for less than one percent of the Company’s consolidated assets as of December 31, 2019.

FC REFUND SOLUTIONS, INC. (“FCRS”) was formed during 2012 to facilitate payment of individual state and federal income tax refunds. The operations of FCRS were discontinued June 30, 2019 as a result of inactivity. The discontinued operations of FCRS will not affect the Company’s participation in the tax refund processing program.

FIRST CITIZENS INVESTMENTS, INC. (“FCI”) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware.

FIRST CITIZENS CAPITAL LLC (“FCC”) is wholly-owned by Civista and holds inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware.

CIVB RISK MANAGEMENT, INC. (“CRMI”) is a wholly-owned captive insurance company formed in 2017 which insures against certain risks unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. Assets of CRMI were less than one percent of the Company’s consolidated assets as of December 31, 2019.

Acquisition of United Community Bancorp

On September 14, 2018, CBI completed the acquisition by merger of United Community Bancorp (“UCB”) in a stock and cash transaction for aggregate consideration of approximately $117,344.  Immediately following the merger, UCB’s banking subsidiary, United Community Bank, was merged into CBI’s banking subsidiary, Civista Bank.  At the time of the merger, UCB had total assets of $537,875, including $298,319 in loans, and $475,944 in deposits.  As a result of the merger, we acquired eight offices of UCB in the Indiana communities of Lawrenceburg (3), Aurora, West Harrison, Milan, Osgood and Versailles and a loan production office in Fort Mitchell, Kentucky.

Management’s Discussion and Analysis of Financial Condition and Results of Operations—As of December 31, 2019 and December 31, 2018 and for the Years Ended December 31, 2019, 2018 and 2017

(Amounts in thousands, except per share data)

General

The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Company’s financial condition, results of operations, liquidity and capital resources as of December 31, 2019 and 2018, and during the three-year period ended December 31, 2019. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which are included elsewhere in this report.

Forward-Looking Statements

This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as 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, changes in financial markets or national or local economic conditions; adverse changes in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; operational risks; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in FDIC insurance premiums and assessments; changes in tax laws; accounting changes; inability to raise additional capital if and when needed in the future; unexpected losses of key management; failure, interruption or breach of security of our communications and information systems or those of our third party service providers; unforeseen litigation; increased competition in our market area; failures to manage growth and/or effectively integrate acquisitions; future revenues of our tax refund program; climate change, natural disasters, acts of war or terrorism, and other external events; and other risks identified from time-to-time in the Company’s other public documents on file with the Securities and Exchange Commission.

The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions.

Financial Condition

At December 31, 2019, the Company’s total assets were $2,309,557, compared to $2,138,954 at December 31, 2018. The increase in assets is primarily the result of increases in cash and due from financial institutions, securities available for sale, loans and other assets. Other factors contributing to the change in assets are discussed in the following sections.

At $1,694,203, net loans increased from December 31, 2018 by 9.4%. The increase in net loans was spread across most segments. Commercial & Agriculture loans increased $26,009, Commercial Real Estate – Owner Occupied loans increased $35,485, Commercial Real Estate - Non-Owner Occupied loans increased $68,624, Residential Real Estate loans increased $5,182, and Real estate construction loans increased $20,630. The increases in the foregoing loan segments were offset by decreases in Farm Real Estate loans of $4,399 and Consumer and other loans of $4,502.

Securities available for sale increased by $12,205, or 3.5%, from $346,294 at December 31, 2018 to $358,499 at December 31, 2019. U.S. Treasury securities and obligations of U.S. government agencies decreased $11,084 from $30,685 at December 31, 2018 to $19,601 at December 31, 2019. Obligations of states and political subdivisions available for sale increased by $33,963 from 2018 to 2019. Mortgage-backed securities decreased by $10,674 to total $132,864 at December 31, 2019. The Company continues to utilize letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. As of December 31, 2019, the Company was in compliance with all applicable pledging requirements.

Mortgage-backed securities totaled $132,864 at December 31, 2019 and none were considered unusual or “high risk” securities as defined by regulatory authorities. Of this total, $99,939 consisted of pass-through securities issued by the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”), and $32,925 of these securities were collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the mortgage-backed securities portfolio at December 31, 2019 was 3.3%. The average maturity at December 31, 2019 was approximately 5.1 years. The Company has not invested in any derivative securities.

Securities available for sale had a fair value at December 31, 2019 of $358,499. This fair value includes unrealized gains of approximately $16,476 and unrealized losses of approximately $169. Net unrealized gains totaled $16,307 on December 31, 2019 compared to net unrealized gains of $2,971 on December 31, 2018. The change in unrealized gains is primarily due to changes in market interest rates. Note 3 to the Consolidated Financial Statements provides additional information on unrealized gains and losses.

Premises and equipment, net of accumulated depreciation, increased $850 from December 31, 2018 to December 31, 2019. The increase is the result of new purchases of $3,201, offset by disposals of $35 and depreciation of $2,240, and the transfer of $76 of assets to premises and equipment held for sale.

Other assets increased $4,292 from December 31, 2018 to December 31, 2019. The increase is the result of increases in the fair value of swap assets and right-of-use (ROU) assets of $6,080 and $3,273, offset by a decrease in net deferred tax assets of $2,876. The Company adopted a new accounting standard, effective January 1, 2019, which required the recognition of ROU lease assets and related liabilities for lease agreements. At adoption, the ROU assets were recorded at $2,210.

Bank owned life insurance (BOLI) increased $1,962 from December 31, 2018 to December 31, 2019. The Company purchased additional policies totaling $955 during 2019. The remaining difference is the result of increases in the cash surrender value of the underlying insurance policies.

Year-end deposit balances totaled $1,678,764 in 2019 compared to $1,579,893 in 2018, an increase of $98,871, or 6.3%. Overall, the increase in deposits at December 31, 2019 compared to December 31, 2018 included increases in noninterest bearing demand deposits of $44,470, or 9.5%, interest bearing demand accounts of $39,678, or 15.1%, statement and passbook savings accounts of $6,569, or 1.1%, certificate of deposit accounts of $10,958, or 5.1%, offset by a decrease in individual retirement accounts of $2,804, or 5.5%. The increase in noninterest-bearing deposits was due to an increase in business demand deposits of $49,550.  The increase in interest-bearing demand deposits was mainly due to an increase in public fund interest-bearing accounts of $23,890. Average deposit balances for 2019 were $1,689,801 compared to $1,341,860 for 2018, an increase of 25.9%. Noninterest bearing deposits averaged $550,638 for 2019, compared to $466,763 for 2018, increasing $83,875, or 18.0%. Savings, NOW, and MMDA accounts averaged $869,340 for 2019 compared to $685,497 for 2018. Average certificates of deposit increased $80,223 to total an average balance of $269,823 for 2019. The increase in year-to-date average balances was impacted by the United Community Bancorp (“UCB”) acquisition which occurred in the third quarter of 2018.

Borrowings from the FHLB of Cincinnati were $226,500 at December 31, 2019 compared to $193,600 at December 31, 2018, an increase of $32,900. Additional detail regarding these borrowings can be found in Note 10 and Note 11 to the Consolidated Financial Statements. Short-term FHLB advances decreased $87,100 from December 31, 2018 to December 31, 2019. The decrease is due to a decrease in overnight borrowings as this funding was replaced with term advances.  Other borrowings increased $120,000 from December 31, 2018 to December 31, 2019. The Company advanced $50,000 on May 23, 2019 and $75,000 on October 22, 2019.  The advance on May 23, 2019 has terms of 120 months, puttable after 60-months with a fixed rate of 2.05%.  The advance on October 22, 2019 has terms of 120 months, puttable after 12 months with a fixed rate of 1.03%. In addition, on October 7, 2019, an FHLB advance in the amount of $5,000 matured. This advance had terms of sixty-months with a fixed rate of 2.1%.

Civista offers repurchase agreements in the form of sweep accounts to commercial checking account customers. These repurchase agreements totaled $18,674 at December 31, 2019 compared to $22,199 at December 31, 2018. U.S. Treasury securities and obligations of U.S. government agencies maintained under Civista’s control are pledged as collateral for the repurchase agreements. Additional detail related to these repurchase agreements can be found in Note 12 to the Consolidated Financial Statements.

Accrued expenses and other liabilities increased $11,129 from December 31, 2018 to December 31, 2019. The increase is primarily the result of increases in lease liabilities of $3,273 and swap liabilities of $6,080.

Total shareholders’ equity increased $31,228, or 10.4%, during 2019 to $330,126. The change in shareholders’ equity resulted from net income of $33,878, a decrease in the Company’s pension liability, net of tax, of $2,210, an increase in the fair value of securities available for sale, net of tax, of $10,536 and offset by the purchase of treasury shares of $3,909 and dividends on preferred shares and common shares of $647 and $6,547, respectively. Additionally, $531 was recognized as stock-based compensation in 2019 in connection with the grant of restricted common shares. For further explanation of these items, see Note 1, Note 15 and Note 16 to the Consolidated Financial Statements. The Company paid $0.42 per common share in dividends in 2019 compared to $0.32 per common share in dividends in 2018. Total outstanding common shares at December 31, 2019 were 16,687,542. Total outstanding common shares at December 31, 2018 were 15,603,499. The increase in common shares outstanding is the result of the conversion of 9,719 of the Company’s previously issued preferred shares into 1,242,683 common shares, the grant of 21,106 restricted common shares to certain officers under the Company’s 2014 Incentive Plan, the grant of 8,946 common shares to directors of Civista as a retainer for their service and the forfeiture of 492 restricted common shares. The increase in common shares outstanding was offset by the repurchase of 188,200 common shares at an average repurchase price of $20.77.  The Company was authorized to repurchase up to 470,000 shares of the Company’s common shares until December 18, 2019 pursuant to a stock repurchase program announced on December 20, 2018. The ratio of total shareholders’ equity to total assets was 14.3% and 14.0%, at December 31, 2019 and 2018, respectively.

Results of Operations

The operating results of the Company are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Company’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by the demand for real estate loans and other types of loans, which in turn is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities.

The Company’s net income primarily depends on its net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities, and interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. The level of net interest income is dependent on the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net income is also affected by provisions for loan losses, service charges, gains on the sale of assets, other non-interest income, noninterest expense and income taxes.

Comparison of Results of Operations for the Years Ended December 31, 2019 and December 31, 2018

Net Income

The Company’s net income for the year ended December 31, 2019 was $33,878, compared to $14,139 for the year ended December 31, 2018. The change in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2019 was $85,100, an increase of $18,993, or 28.7%, from 2018. From 2018 to 2019, average earning assets increased 26.9%, interest income increased $24,377, and interest expense on interest-bearing liabilities increased $5,384. The Company continually examines its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes.

Total interest income increased $24,377 to $98,054 for the year ended December 31, 2019, which is attributable to an increase of $20,776 in interest and fees on loans.  This change was the result of an increase in the average balance of loans, accompanied by a higher yield on the portfolio.  The average balance of loans increased by $338,196 or 26.5% to $1,612,975 for the year ended December 31, 2019, as compared to $1,274,779 for the year ended December 31, 2018.  The loan yield increased to 5.27% for 2019, from 5.04% in 2018.

Interest on taxable securities increased $1,814 to $6,584 for the year ended December 31, 2019, compared to $4,770 for the same period in 2018.  The average balance of taxable securities increased $40,623 to $200,074 for the year ended December 31, 2019, as compared to $159,451 for the year ended December 31, 2018.  The yield on taxable securities increased 38 basis points to 3.35% for 2019, compared to 2.97% for 2018.  Interest on tax-exempt securities increased $1,671 to $5,647 for the year ended December 31, 2019, compared to $3,976 for the same period in 2018.  The average balance of tax-exempt securities increased $58,265 to $172,812 for the year ended December 31, 2019 as compared to $114,547 for the year ended December 31, 2018.  The yield on tax-exempt securities decreased 7 basis points to 4.36% for 2019, compared to 4.43% for 2018.

Total interest expense increased $5,384 or 71.1% to $12,954 for the year ended December 31, 2019, compared with $7,570 for the same period in 2018.  The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities and an increase in the average rate paid.  For the year ended December 31, 2019, the average balance of interest-bearing liabilities increased $305,246 to $1,348,095, as compared to $1,042,849 for the year ended December 31, 2018.  Interest incurred on deposits increased by $4,299 to $8,057 for the year ended December 31, 2019, compared to $3,758 for the same period in 2018.  The change in deposit expense was due to an increase in the average balance of interest-bearing deposits of $264,066 for the year ended December 31, 2019 as compared to the same period in 2018.  In addition, the average rate paid on demand and savings accounts increased from 0.21% in 2018 to 0.33% in 2019 and the average rate paid on time deposits increased from 1.22% to 1.92% in 2019.  Interest expense incurred on FHLB advances and subordinated debentures increased 28.6% from 2018.  The increase was due to a $41,294 increase in average balance from 2018 and a 2 basis point increase in rate from 2018.

Refer to “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate” on pages 12 through 14 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Company’s net interest income.

Provision and Allowance for Loan Losses

The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses as of and for each of the three years in the period ended December 31.

	As of and for year<br><br><br>ended December 31,
	2019			2018			2017
Net loan charge-offs (recoveries)	$	(53	)	$	235		$	171
Provision (credit) for loan losses charged to expense		1,035			780			—
Net loan charge-offs (recoveries) as a percent of<br><br><br>average outstanding loans		0.00	%		0.02	%		0.02	%
Allowance for loan losses	$	14,767		$	13,679		$	13,134
Allowance for loan losses as a percent of year-end<br><br><br>outstanding loans		0.86	%		0.88	%		1.13	%
Impaired loans, excluding purchase credit impaired<br><br><br>loans (PCI)	$	3,597		$	2,857		$	3,460
Impaired loans as a percent of gross year-end loans (1)		0.21	%		0.18	%		0.30	%
Nonaccrual and 90 days or more past due loans,<br><br><br>excluding PCI	$	5,599		$	5,869		$	6,148
Nonaccrual and 90 days or more past due loans,<br><br><br>excluding PCI as a percent of gross year-end loans (1)		0.33	%		0.38	%		0.53	%
(1)	Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered nonaccrual if it is maintained on a cash basis because of deterioration in the borrower’s financial condition, where payment in full of principal or interest is not expected and where the principal and interest have been in default for 90 days, unless the asset is both well-secured and in process of collection. A loan is considered impaired when it is probable that all of the interest and principal due will not be collected according to the terms of the original contractual agreement.
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The Company’s policy is to maintain the allowance for loan losses at a level sufficient to provide for probable losses incurred in the current portfolio. Management believes the analysis of the allowance for loan losses supported a reserve of $14,767 at December 31, 2019. The Company provides for loan losses through regular provisions to the allowance for loan losses as necessary. The amount of the provision is affected by loan charge-offs, recoveries and changes in specific and general allocations required for the allowance for loan losses. A number of factors impact the provisions for loan losses, such as the level of higher risk loans in the portfolio, changes in practices related to loans, changes in collateral values and other factors. We continue to actively manage this process and have provided to maintain the reserve at a level that assures adequate coverage ratios.

Provisions (credits) for loan losses totaled $1,035, $780 and $0 in 2019, 2018 and 2017, respectively. The Company’s provision for loan losses increased $255 during 2019 to support loan growth.

Efforts are continually made to analyze each segment of the loan portfolio and quantify risk to assure that reserves are appropriate for each segment and the overall portfolio. Management specifically evaluates loans that are impaired, which includes restructured loans, to estimate potential loss. This analysis includes a review of the loss migration calculation for all loan categories as well as fluctuations and trends in various risk factors that have occurred within the portfolios’ economic life cycle. The analysis also includes assessment of qualitative factors such as credit trends, unemployment trends, vacancy trends and loan growth. The composition and overall level of the loan portfolio and charge-off activity are also factors used to determine the amount of the allowance for loan losses.

Management analyzes each impaired commercial and commercial real estate loan relationship with a balance of $350 or larger, on an individual basis and when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale and leases are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans or portions thereof are charged-off when deemed uncollectible.

Noninterest Income

Noninterest income increased $4,312, or 23.8%, to $22,443 for the year ended December 31, 2019, from $18,131 for the comparable 2018 period. The increase was primarily due to increases in service charges of $1,187, net gain on sale of securities of $445, net gain on equity securities of $95, net gain on sale of loans of $1,086, ATM/Interchange fees of $1,262 and bank owned life insurance of $289.

Service charges, ATM/Interchange fees and bank owned life insurance income increased primarily due to the Company’s acquisition of UCB during the third quarter of 2018. Net gain (loss) on sale of securities increased as a result of management’s decision to reposition the investment portfolio in 2018, which resulted in losses on the sales. Net gain on equity securities increased as a result of market value adjustments. Net gain on sale of loans increased primarily as a result of an increase in the volume of loans sold and the average loan balance of loans sold.

Noninterest Expense

Noninterest expense increased $268, or 0.4%, to $66,947 for the year ended December 31, 2019, from $66,679 for the comparable 2018 period. The increase was primarily due to increases in compensation expense of $1,857, net occupancy expense of $472, equipment expense of $592, state franchise tax of $473, amortization of intangible assets of $579, ATM expense of $818, marketing expense of $229, software maintenance expense of $387 and other operating expense of $2,340, which were partially offset by decreases in contracted data processing expense of $5,308, FDIC assessments of $398 and professional services expense of $1,385.

Compensation expense increased mainly due to being a larger company as a result of the acquisition of UCB.  The Company had an average of 444.8 full time equivalent (FTE) employees during 2019, an increase of 74.7 FTEs over 2018. In addition, payroll and payroll related expenses increased due to annual pay increases and increases in commission based costs and employee insurance costs. The increases in net occupancy expense, equipment expense, amortization of intangible assets, ATM expense and marketing expense are primarily due to being a larger company as a result of the acquisition of UCB. The increase in state franchise taxes was attributable to an increase in equity capital, which is the basis of the Ohio Financial Institutions tax. Other operating expense increased due to general increases in components of other operating expenses mainly due to being a larger company as a result of the acquisition of UCB. Contracted data processing decreased due to $5,516 of UCB merger expenses paid in 2018 related to the conversion of UCB’s core system data to the Company’s core system. Professional services expense decreased due to $1,149 of legal and consulting expense paid in 2018 related to the merger with UCB. The decrease in FDIC assessment is due to a small bank assessment credit applied to the Company’s 2019 assessment.

Income Tax Expense

Federal income tax expense was $5,683 in 2019 compared to $2,640 in 2018. Federal income tax expense as a percentage of pre-tax income was 14.4% in 2019 compared to 15.7% in 2018. A lower federal effective tax rate than the statutory rate of 21% in 2019 and 2018 is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits.

Comparison of Results of Operations for the Years Ended December 31, 2018 and December 31, 2017

Net Income

The Company’s net income for the year ended December 31, 2018 was $14,139, compared to $15,872 for the year ended December 31, 2017. The change in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2018 was $66,107, an increase of $11,605, or 21.3%, from 2017. From 2017 to 2018, average earning assets increased 13.5%, interest income increased $15,083, and interest expense on interest-bearing liabilities increased $3,478. The Company continually examines its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes.

Total interest income increased $15,083, or 25.7%, from 2017 which is the result of an increase of $12,998 in interest and fees on loans (including the interest and fees on loans acquired through the UCB acquisition). The increase was mainly a result of an increase in loan volume and rates. Average loans increased $165,710 from 2017 to 2018. The yield on the Company’s loan portfolio increased 42 basis points from 2017.

Interest on taxable securities increased $1,025 for 2018 as compared to 2017. The average balance for 2018 compared to 2017 increased $14,766 while the yield increased 35 basis points in 2018 compared to 2017. Interest on non-taxable securities increased $823 for 2018 as compared to 2017. The average balance for 2018 compared to 2017 increased $24,983 while the yield decreased 107 basis points in 2018 compared to 2017. Interest earned on interest-bearing deposits in other banks increased $237 from 2017 to 2018. Average balances in interest-bearing deposits in other banks decreased in 2018 by $16,093 while the yield increased 81 basis points compared to 2017. The decrease in average balance is mainly due to a decrease in our tax refund processing balances in 2018.  The timing of cash inflows and outflows leads to large, but temporary, fluctuations in cash on deposit.

Total interest expense increased $3,478 for 2018 compared to 2017. The total average balance of interest-bearing liabilities increased $154,954 while the average rate increased 27 basis points in 2018. Average interest-bearing deposits increased $89,082 from 2017 to 2018. While average balances in interest-bearing deposits increased, the average balance in time deposits declined $11,197 and the rate on time deposits increased approximately 35 basis points, which caused interest expense on certificates of deposit to increase by $569. Interest expense on FHLB borrowings increased $1,776 due to an increase in average balance of $65,653. The average balance in subordinated debentures did not change from 2017 to 2018, but the rate on these securities increased 97 basis points, resulting in an increase in interest expense of $285. Repurchase agreements increased $222 in average balance from 2017 to 2018. The UCB acquisition resulted in an increase in interest expense of $887 for the year ended December 31, 2018 as compared to the same period in 2017.

Refer to “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate” on pages 12 through 14 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Company’s net interest income.

Provision and Allowance for Loan Losses

Management believes the analysis of the allowance for loan losses supported a reserve of $13,679 at December 31, 2018.

Provisions (credits) for loan losses totaled $780, $0 and ($1,300) in 2018, 2017 and 2016, respectively. During 2016, the Company received a payoff on a nonperforming loan which resulted in the Company recovering the charged-down amount of approximately $1,303. The result of the transaction was a reversal of $1,300 from the allowance for loan losses during 2016.

Noninterest Income

Noninterest income increased $1,797, or 11.0%, to $18,131 for the year ended December 31, 2018, from $16,334 for the comparable 2017 period. The increase was primarily due to increases in ATM/Interchange fees of $490, wealth management fees of $601, bank owned life insurance of $145, net gain on sale of other real estate owned of $46 and other income of $593, which were partially offset by a decrease in net gain (loss) on sale of securities of $425.

ATM/Interchange fees increased primarily due to an increase in interchange income as a result of the acquisition of UCB. The wealth management fee income increase is a result of average assets under management increasing $21.8 million in 2018, while assets under management decreased $7.9 million to $472.4 million at December 31, 2018. Bank owned life insurance income increased primarily due to the addition of BOLI policies from the acquisition of UCB. Sales of other real estate owned resulted in recognized gains of $18 on the sale of two properties in 2018 compared to losses of $28 on the sale of six properties in 2017. Other income increased primarily due to an increase in swap related income and deluxe check fee income. Net gain (loss) on sale of securities decreased by $425 in 2018 as compared to the same period of 2017.  Management, from time to time, will reposition the investment portfolio to match liquidity needs of the Company.

Noninterest Expense

Noninterest expense increased $18,075, or 37.2%, to $66,679 for the year ended December 31, 2018, from $48,604 for the comparable 2017 period. The increase was primarily due to increases in compensation expense of $8,046, net occupancy expense of $674, contracted data processing expense of $5,302, state franchise tax of $346, professional services expense of $1,929, ATM expense of $222, marketing expense of $365, software maintenance expense 0f $362 and other operating expense of $925 which were partially offset by decreases in amortization of intangible assets of $220 and repossession expense of $192.

Compensation expense increased mainly due to merger related expenses of $5,230 paid in the acquisition of UCB in 2018. The remaining increase was due to payroll and payroll related expenses resulting from an increase in full time equivalent (FTE) employees and annual pay increases. Average FTE employees increased 84, to 431 FTE in 2018, as compared to the same period of 2017 as a result of the UCB acquisition. In addition, commission based costs and employee insurance costs increased. Net occupancy expense increased as a result of increases in miscellaneous building repairs, janitorial services and grounds maintenance.  In addition, real estate taxes increased as a result of the acquisition of UCB.  Contracted data processing increased due to $5,516 of UCB merger expenses related to the conversion of UCB’s core system data to the Company’s core system in 2018. State franchise taxes increased due to an increase in the Company’s equity capital. Professional services expense increased due to $1,149 of legal and consulting expense related to the merger with UCB.  In addition, the Company had increases in examination fees, facilities management and consulting services to analyze workflow systems. ATM expense increased primarily due to the addition of UCB. Marketing expense increased due to $121 of marketing expenses related to the merger with UCB.  In addition, the Company incurred higher promotional and benefits cost related to a change in vendors. Other operating expense increased due to general increases in components of other operating expenses. Amortization of intangible assets decreased as a result of scheduled amortization of intangible assets associated with mergers. Repossession expense decreased as a result of a general decrease in expenses related to repossessions.

Income Tax Expense

Federal income tax expense was $2,640 in 2018 compared to $6,360 in 2017. Federal income tax expense as a percentage of pre-tax income was 15.7% in 2018 compared to 28.6% in 2017. The Tax Cuts and Jobs Act, enacted on December 22, 2017, lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018.  A lower federal effective tax rate than the statutory rate of 21% in 2018 and 35% in 2017 is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits.

Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential

The following table sets forth, for the years ended December 31, 2019, 2018 and 2017, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Amounts in thousands):

	2019								2018								2017
Assets	Average<br><br><br>balance			Interest		Yield/<br><br><br>rate			Average<br><br><br>balance			Interest		Yield/<br><br><br>rate			Average<br><br><br>balance			Interest		Yield/<br><br><br>rate
Interest-earning assets:
Loans (1)(2)(3)(5)	$	1,612,975		$	84,972		5.27	%	$	1,274,779		$	64,196		5.04	%	$	1,109,069		$	51,198		4.62	%
Taxable securities (4)		200,074			6,584		3.35	%		159,451			4,770		2.97	%		144,685			3,745		2.62	%
Non-taxable<br><br><br>securities (4)(5)		172,812			5,647		4.36	%		114,547			3,976		4.43	%		89,564			3,153		5.50	%
Interest-bearing<br><br><br>deposits in other<br><br><br>banks		38,359			851		2.22	%		45,766			735		1.61	%		61,859			498		0.81	%
Total interest<br><br><br>income assets		2,024,220			98,054		4.95	%		1,594,543			73,677		4.69	%		1,405,177			58,594		4.30	%
Noninterest-earning assets:
Cash and due from<br><br><br>financial institutions		47,472								43,247								45,801
Premises and<br><br><br>equipment, net		21,946								19,045								18,027
Accrued interest<br><br><br>receivable		7,088								5,514								4,697
Intangible assets		85,744								45,524								28,605
Other assets		24,273								17,678								12,374
Bank owned life<br><br><br>insurance		44,352								30,483								24,819
Less allowance for loan<br><br><br>losses		(13,984	)							(13,211	)							(13,113	)
Total	$	2,241,111							$	1,742,823							$	1,526,387
(1)	For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale.
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(2)	Included in loan interest income are loan fees of $1,227 in 2019, $776 in 2018 and $421 in 2017.
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(3)	Non-accrual loans are included in loan totals and do not have a material impact on the analysis presented.
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(4)	Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.
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(5)	Yield/Rate is calculated using the tax-equivalent adjustment of 21% for 2019 and 2018 and 35% for 2017.
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Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential (Continued)

The following table sets forth, for the years ended December 31, 2019, 2018 and 2017, the distribution of liabilities and shareholders’ equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Amounts in thousands):

	2019							2018							2017
Liabilities and<br><br><br>Shareholders’ Equity	Average<br><br><br>balance		Interest		Yield/<br><br><br>rate			Average<br><br><br>balance		Interest		Yield/<br><br><br>rate			Average<br><br><br>balance		Interest		Yield/<br><br><br>rate
Interest-bearing liabilities:
Savings and<br><br><br>interest-bearing<br><br><br>demand accounts	$	869,340	$	2,871		0.33	%	$	685,497	$	1,442		0.21	%	$	585,218	$	595		0.10	%
Certificates of deposit		269,823		5,186		1.92	%		189,600		2,316		1.22	%		200,797		1,747		0.87	%
Federal Home Loan Bank<br><br><br>advances		161,047		3,452		2.14	%		119,753		2,471		2.06	%		54,100		695		1.28	%
Securities sold under<br><br><br>repurchase agreements		18,321		19		0.10	%		18,456		18		0.10	%		18,234		18		0.10	%
Federal funds purchased		137		3		2.19	%		116		3		2.59	%		119		2		1.68	%
Subordinated debentures		29,427		1,423		4.84	%		29,427		1,320		4.49	%		29,427		1,035		3.52	%
Total interest-bearing<br><br><br>liabilities		1,348,095		12,954		0.96	%		1,042,849		7,570		0.73	%		887,895		4,092		0.46	%
Noninterest-bearing<br><br><br>liabilities:
Demand deposits		550,638							466,763							450,648
Other liabilities		24,072							15,840							15,081
		574,710							482,603							465,729
Shareholders’ equity		318,306							217,371							172,763
Total	$	2,241,111						$	1,742,823						$	1,526,387
Net interest income and<br><br><br>interest rate spread (1)			$	85,100		3.99	%			$	66,107		3.96	%			$	54,502		3.84	%
Net interest margin (2)						4.31	%						4.21	%						4.01	%
(1)	Interest rate spread is calculated by subtracting the rate on average interest-bearing liabilities from the yield on average interest-earning assets.
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(2)	Net interest margin is calculated by dividing tax-equivalent adjusted net interest income by average interest-earning assets.
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Changes in Interest Income and Interest Expense

Resulting from Changes in Volume and Changes in Rate

The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate (Amounts in thousands):

	Increase (decrease) due to:
	Volume (1)			Rate (1)			Net
2019 compared to 2018
Interest income:
Loans	$	17,700		$	3,076		$	20,776
Taxable securities		1,159			655			1,814
Nontaxable securities		1,728			(57	)		1,671
Interest-bearing deposits in other banks		(132	)		248			116
Total interest income	$	20,455		$	3,922		$	24,377
Interest expense:
Savings and interest-bearing demand accounts	$	457		$	972		$	1,429
Certificates of deposit		1,219			1,651			2,870
Federal Home Loan Bank advances		882			99			981
Securities sold under repurchase agreements		—			1			1
Federal funds purchased		—			—			—
Subordinated debentures		—			103			103
Total interest expense	$	2,558		$	2,826		$	5,384
Net interest income	$	17,897		$	1,096		$	18,993
2018 compared to 2017
Interest income:
Loans	$	8,082		$	4,916		$	12,998
Taxable securities		486			539			1,025
Nontaxable securities		943			(120	)		823
Interest-bearing deposits in other banks		(156	)		393			237
Total interest income	$	9,355		$	5,728		$	15,083
Interest expense:
Savings and interest-bearing demand accounts	$	117		$	730		$	847
Certificates of deposit		(102	)		671			569
Federal Home Loan Bank advances		1,184			592			1,776
Securities sold under repurchase agreements		—			—			—
Federal funds purchased		—			1			1
Subordinated debentures		—			285			285
Total interest expense	$	1,199		$	2,279		$	3,478
Net interest income	$	8,156		$	3,449		$	11,605
(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.
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Liquidity and Capital Resources

Civista maintains a conservative liquidity position. All securities are classified as available for sale. At December 31, 2019, securities with maturities of one year or less totaled $11,166, or 3.1% of the total securities portfolio. The available for sale portfolio helps to provide Civista with the ability to meet its funding needs. The Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings.

Net cash provided by operating activities for 2019, 2018 and 2017 was $39,526, $19,957 and $20,819, respectively. The primary additions to cash from operating activities are from changes in amortization of intangible assets, amortization of securities net of accretion, the provision for loan losses, depreciation and proceeds from sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used for investing activities was $150,509, $34,118 and $146,180 in 2019, 2018 and 2017, respectively, principally reflecting our loan and investment security activities. Deposits, borrowings and net proceeds from issuances of common shares in 2017 comprised most of our financing activities, which resulted in net cash provided of $116,739, $16,421 and $129,185 for 2019, 2018 and 2017 respectively.

Future loan demand of Civista can be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. As of December 31, 2019, Civista had total credit availability with the FHLB of $564,516, of which $246,500 was outstanding.

On a separate entity basis, CBI’s primary source of funds is dividends paid by its subsidiaries, primarily by Civista. Generally, subject to applicable minimum capital requirements, Civista may declare and pay a dividend without the approval of the Federal Reserve Bank of Cleveland and the State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. At December 31, 2019, Civista was able to pay approximately $53,609 of dividends to CBI without obtaining regulatory approval. During 2019, Civista paid dividends totaling $13,300 to CBI. This represented approximately 38 percent of Civista’s earnings for the year.

The Company manages its liquidity and capital through quarterly Asset/Liability Management Committee (ALCO) meetings. The ALCO discusses issues like those in the above paragraphs as well as others that may affect the future liquidity and capital position of the Company. The ALCO also examines interest rate risk and the effect that changes in rates will have on the Company. For more information about interest rate risk, please refer to the “Quantitative and Qualitative Disclosures about Market Risk” section.

Capital Adequacy

Shareholders’ equity totaled $330,126 at December 31, 2019 compared to $298,898 at December 31, 2018. The increase in shareholders’ equity resulted primarily from net income of $33,878, a $2,210 net decrease in the Company’s pension liability and an increase in the fair value of securities available for sale, net of tax, of $10,563, which was offset by dividends on preferred shares and common shares of $647 and $6,547, respectively. In addition, the Company repurchased common shares pursuant to its publicly-announced share purchase program totaling $3,909 during 2019.

During the first quarter of 2015, the Company adopted the new BASEL III regulatory capital framework as approved by the federal banking agencies. In addition to the existing regulatory capital rules, the final BASEL III rules also require the Company to now maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) Capital to risk-weighted assets (as these terms are defined in the BASEL III rules). Under the BASEL III rules, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of December 31, 2019 and 2018 as identified in the following table:

	Total Risk<br><br><br>Based<br><br><br>Capital			Tier I Risk<br><br><br>Based<br><br><br>Capital			CET1 Risk<br><br><br>Based<br><br><br>Capital			Leverage<br><br><br>Ratio
Company Ratios—December 31, 2019		16.1	%		15.3	%		13.6	%		12.3	%
Company Ratios—December 31, 2018		16.1	%		15.3	%		12.9	%		12.2	%
For Capital Adequacy Purposes		8.0	%		6.0	%		4.5	%		4.0	%
To Be Well Capitalized Under Prompt Corrective<br><br><br>Action Provisions		10.0	%		8.0	%		6.5	%		5.0	%

Common equity for the CET1 risk-based capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the CET1 risk-based capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions.

The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions were phased in from 2015 through 2019.

Under applicable regulatory guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The new regulatory capital rules and regulations also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5 percent composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital conservation buffer began to phase in starting on January 1, 2016, at 0.625%, and was fully phased in effective January 1, 2019, at 2.5%. The implementation of Basel III did not have a material impact on CBI’s or Civista’ capital ratios.

Effects of Inflation

The Company’s balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds.

During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. No clear evidence exists of a relationship between the purchasing power of an entity’s net positive monetary position and its future earnings. Moreover, the Company’s ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. As part of the asset/liability management process, management reviews and monitors information and projections on inflation as published by the Federal Reserve Board and other sources. This information speaks to inflation as determined by its impact on consumer prices and also the correlation of inflation and interest rates. This information is but one component in an asset/liability management process designed to limit the impact of inflation on the Company. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated.

Fair Value of Financial Instruments

The Company has disclosed the fair value of its financial instruments at December 31, 2019 and 2018 in Note 17 to the Consolidated Financial Statements. The fair value of loans at December 31, 2019 was 101.2% of the carrying value compared to 98.0% at December 31, 2018. The fair value of deposits at December 31, 2019 was 100.1% of the carrying value compared to 100.0% at December 31, 2018.  Changes in fair value were primarily due to changes in the discount values used to measure fair value.

Contractual Obligations

The following table represents significant fixed and determinable contractual obligations of the Company as of December 31, 2019.

Contractual Obligations	One year<br><br><br>or less		One to<br><br><br>three years		Three to<br><br><br>five years		Over five<br><br><br>years		Total
Deposits without a stated maturity	$	1,402,924	$	—	$	—	$	—	$	1,402,924
Certificates of deposit and IRAs		171,220		97,335		6,247		1,038		275,840
FHLB advances, securities sold under agreements<br><br><br>to repurchase and U.S. Treasury interest-bearing<br><br><br>demand note		120,174		—		—		125,000		245,174
Subordinated debentures (1)		—		—		—		29,427		29,427
Operating leases		660		660		421		595		2,336
(1)	The subordinated debentures consist of $2,000, $2,500, $5,000, $7,500, and $12,500 debentures.
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The Company has retail repurchase agreements with clients within its local market areas. These borrowings are collateralized with securities owned by the Company. See Note 12 to the Consolidated Financial Statements for further detail. The Company also has a cash management advance line of credit and outstanding letters of credit with the FHLB. For further discussion, refer to Note 10 and Note 11 to the Consolidated Financial Statements.

Quantitative and Qualitative Disclosures about Market Risk

The Company’s primary market risk exposure is interest-rate risk and, to a lesser extent, liquidity risk. All of the Company’s transactions are denominated in U.S. dollars with no specific foreign exchange exposure.

Interest-rate risk is the exposure of a banking organization’s financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and shareholder value. However, excessive levels of interest-rate risk can pose a significant threat to the Company’s earnings and capital base. Accordingly, effective risk management that maintains interest-rate risk at prudent levels is essential to the Company’s safety and soundness.

Evaluating a financial institution’s exposure to changes in interest rates includes assessing both the adequacy of the management process used to control interest-rate risk and the organization’s quantitative level of exposure. When assessing the interest-rate risk management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain interest-rate risk at prudent levels with consistency and continuity. Evaluating the quantitative level of interest rate risk exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity and, where appropriate, asset quality.

The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on interest-rate risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which will form the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Financial institutions derive their income primarily from the excess of interest collected over interest paid. The rates of interest an institution earns on its assets and owes on its liabilities generally are established contractually for a period of time. Since market interest rates change over time, an institution is exposed to lower profit margins (or losses) if it cannot adapt to interest-rate changes. For example, assume that an institution’s assets carry intermediate- or long-term fixed rates and that those assets were funded with short-term liabilities. If market interest rates rise by the time the short-term liabilities must be refinanced, the increase in the institution’s interest expense on its liabilities may not be sufficiently offset if assets continue to earn at the long-term fixed rates. Accordingly, an institution’s profits could decrease on existing assets because the institution will have either lower net interest income or, possibly, net interest expense. Similar risks exist when assets are subject to contractual interest-rate ceilings, or rate sensitive assets are funded by longer-term, fixed-rate liabilities in a decreasing-rate environment.

Several techniques may be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company’s primary asset/liability management technique is the measurement of the Company’s asset/liability gap, that is, the difference between the cash flow amounts of interest sensitive assets and liabilities that will be refinanced (or repriced) during a given period. For example, if the asset amount to be repriced exceeds the corresponding liability amount for a certain day, month, year, or longer period, the institution is in an asset sensitive gap position. In this situation, net interest income would increase if market interest rates rose or decrease if market interest rates fell.

If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities.

Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities and matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refund its obligations at new, lower rates. The Company does not have significant derivative financial instruments and does not intend to purchase a significant amount of such instruments in the near future. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short term or due on demand, while most of its assets may be invested in long term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Also, FHLB advances and wholesale borrowings may be used as important sources of liquidity for the Company.

The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2019 and 2018, based on certain prepayment and account decay assumptions that management believes are reasonable. The Company had derivative financial instruments as of December 31, 2019 and 2018. The changes in fair value of the assets and liabilities of the underlying contracts offset each other. For more information about derivative financial instruments see Note 24 to the Consolidated Financial Statements. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Company’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates.

Net Portfolio Value

	December 31, 2019								December 31, 2018
Change in<br><br><br>Rates	Dollar<br><br><br>Amount		Dollar<br><br><br>Change			Percent<br><br><br>Change			Dollar<br><br><br>Amount		Dollar<br><br><br>Change			Percent<br><br><br>Change
+200bp	$	449,843	$	31,596			8	%	$	417,572	$	29,451			8	%
+100bp		437,195		18,948			5	%		409,514		21,393			6	%
Base		418,247		—			—			388,121		—			—
-100bp		394,943		(23,304	)		(6	)%		366,486		(21,635	)		(6	)%
-200bp		416,878		(1,369	)		0	%		372,090		(16,031	)		-4	%

The change in net portfolio value from December 31, 2018 to December 31, 2019, can be attributed to two factors.  While the yield curve has fallen from the end of the year, both the volume and mix of assets and funding sources has changed.  The volume of loans has increased, and the mix has shifted toward loans.  The volume of deposits has increased, with the mix shifting away from certificates of deposit toward deposits and borrowed money.  The volume changes and mix shifts from the end of the last year led to an increase in the base net portfolio value.  Both assets and liabilities have shifted toward more volatile components.  Combined, this led to only small changes in volatility.  Beyond the change in the base level of net portfolio value, projected movements in rates, up or down, would also lead to changes in market values.  The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a larger decrease in the market value of liabilities.  Accordingly, we see an increase in the net portfolio value.  However, a 100 and 200 basis point downward change in rates would lead to a decrease in the net portfolio value as the market value of liabilities would increase more quickly than the market value of assets.

Critical Accounting Policies

Allowance for Loan Losses: The allowance for loan losses is regularly reviewed by management to determine that the amount is considered adequate to absorb probable losses in the loan portfolio. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed impaired loans, the pooling of commercial credits risk graded as special mention and substandard that are not individually analyzed, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other items.

Those judgments and assumptions that are most critical to the application of this accounting policy are assessing the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk ratings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors, including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees.

Note 1 and Note 5 to the Consolidated Financial Statements provide additional information regarding the Allowance for Loan Losses.

Goodwill: The Company accounts for business combinations using the acquisition method of accounting. Accordingly, the identifiable assets acquired and the liabilities assumed are recorded at their estimated fair values as of the date of acquisition with any excess of the cost of the acquisition over the fair value recorded as goodwill. The Company performs an evaluation of goodwill for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The evaluation for impairment involves comparing the current estimated fair value of the Company to its carrying value. If the current estimated fair value exceeds the carrying value, no additional testing is required and an impairment loss is not recorded. If the estimated fair value is less than the carrying value, further valuation procedures are performed that could result in impairment of goodwill being recorded. In this case, management would obtain several commonly used financial ratios from pending and completed purchase transactions for banks based in the Midwest. During the fourth quarter of 2019, Management compared the estimated fair value of the Company to its carrying value and determined the estimated fair value exceeded the carrying value including goodwill. Therefore management concluded that goodwill was not impaired and made no adjustment in 2019.

Income Taxes: Management’s determination of the realization of net deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

Other-Than-Temporary Impairment of Investment Securities: The Company performs a quarterly valuation to determine if a decline in the value of an investment security is other than temporary. Although the term “other than temporary” is not intended to indicate that the decline is permanent, it does indicate that the prospects for a near-term recovery of value are not necessarily favorable, or that there is lack of evidence to support fair values equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary.

Pension Benefits: Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Our pension benefits are described further in Note 15 of the “Notes to Consolidated Financial Statements.”

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, 2019, 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, 2019, its system of internal control over financial reporting is effective and meets the criteria of the “2013 Internal Control – Integrated Framework”. S.R. Snodgrass, P.C., 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, 2019.

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, 2019.

Dennis G. Shaffer	Todd A. Michel
President and Chief Executive Officer	Senior Vice President, Controller
Sandusky, Ohio
March 16, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Civista Bancshares, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Civista Bancshares, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, of the Company, and our report dated March 16, 2020, expressed an unqualified opinion.

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 in the accompanying Report on Management’s Assessment of 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 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.

Definition 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 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.

Cranberry Township, Pennsylvania

March 16, 2020

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Civista Bancshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Civista Bancshares, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018; the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019; and the related notes to the consolidated financial statements (collectively, the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also 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, 2019, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 16, 2020, which expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

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 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 audit 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 included 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.

We have served as the Company’s auditor since 2009.

Cranberry Township, Pennsylvania

March 16, 2020

CIVISTA BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2019 and 2018

(Amounts in thousands, except share data)

			2018
ASSETS
Cash and due from financial institutions	48,535		$	42,779
Securities available for sale	358,499			346,294
Equity securities	1,191			1,070
Loans held for sale	2,285			1,391
Loans, net of allowance of 14,767 and 13,679	1,694,203			1,548,262
Other securities	20,280			21,021
Premises and equipment, net	22,871			22,021
Accrued interest receivable	7,093			6,723
Goodwill	76,851			76,851
Other intangible assets	8,305			9,352
Bank owned life insurance	44,999			43,037
Other assets	24,445			20,153
Total assets	2,309,557		$	2,138,954
LIABILITIES
Deposits
Noninterest-bearing	512,553		$	468,083
Interest-bearing	1,166,211			1,111,810
Total deposits	1,678,764			1,579,893
Federal Home Loan Bank advances	226,500			193,600
Securities sold under agreements to repurchase	18,674			22,199
Subordinated debentures	29,427			29,427
Accrued expenses and other liabilities	26,066			14,937
Total liabilities	1,979,431			1,840,056
SHAREHOLDERS’ EQUITY
Preferred stock, no par value, 200,000 shares of Series B Preferred stock,<br>   1,000 liquidation preference, authorized, 10,120 shares issued at<br>   December 31, 2018, net of issuance costs	—			9,364
Common stock, no par value, 20,000,000 shares authorized, 17,623,706<br>   shares issued at December 31, 2019 and 16,351,463 shares issued at<br>   December 31, 2018	276,422			266,901
Accumulated earnings	67,974			41,320
Treasury stock, 936,164 common shares at December 31, 2019 and 747,964<br>   common shares at December 31, 2018, at cost	(21,144	)		(17,235	)
Accumulated other comprehensive income (loss)	6,874			(1,452	)
Total shareholders’ equity	330,126			298,898
Total liabilities and shareholders’ equity	2,309,557		$	2,138,954

All values are in US Dollars.

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2019, 2018 and 2017

(Amounts in thousands, except per share data)

	2019		2018			2017
Interest and dividend income
Loans, including fees	$	84,972	$	64,196		$	51,198
Taxable securities		6,584		4,770			3,745
Tax-exempt securities		5,647		3,976			3,153
Federal funds sold and other		851		735			498
Total interest and dividend income		98,054		73,677			58,594
Interest expense
Deposits		8,057		3,758			2,342
Federal Home Loan Bank advances		3,452		2,471			695
Subordinated debentures		1,423		1,320			1,035
Securities sold under agreements to repurchase		22		21			20
Total interest expense		12,954		7,570			4,092
Net interest income		85,100		66,107			54,502
Provision for loan losses		1,035		780			—
Net interest income after provision for loan losses		84,065		65,327			54,502
Noninterest income
Service charges		6,395		5,208			4,777
Net gain (loss) on sale of securities		32		(413	)		12
Net gain on equity securities		121		26			—
Net gain on sale of loans		2,707		1,621			1,745
ATM/Interchange fees		4,056		2,794			2,304
Wealth management fees		3,670		3,669			3,068
Bank owned life insurance		1,007		718			573
Tax refund processing fees		2,750		2,750			2,750
Computer center item processing fees		273		260			246
Net gain (loss) on sale of other real estate owned		—		18			(28	)
Other		1,432		1,480			887
Total noninterest income		22,443		18,131			16,334
Noninterest expense
Compensation expense		39,156		37,299			29,253
Net occupancy expense		3,835		3,363			2,689
Equipment expense		2,246		1,654			1,564
Contracted data processing		1,831		7,140			1,838
FDIC Assessment		138		536			502
State franchise tax		1,843		1,370			1,024
Professional services		2,844		4,229			2,300
Amortization of intangible assets		945		366			586
ATM expense		1,887		1,069			847
Marketing expense		1,411		1,182			817
Software maintenance expenses		1,523		1,136			774
Other operating expenses		9,288		7,335			6,410
Total noninterest expense		66,947		66,679			48,604
Income before income taxes		39,561		16,779			22,232
Income taxes		5,683		2,640			6,360
Net income		33,878		14,139			15,872
Preferred stock dividends		647		959			1,244
Net income available to common shareholders	$	33,231	$	13,180		$	14,628
Earnings per common share, basic	$	2.12	$	1.10		$	1.48
Earnings per common share, diluted	$	2.01	$	1.02		$	1.28

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2019, 2018 and 2017

(Amounts in thousands)

	2019			2018			2017
Net income	$	33,878		$	14,139		$	15,872
Other comprehensive income (loss):
Unrealized holding gains (loss) on available for sale securities		13,336			(709	)		987
Tax effect		(2,800	)		149			(375	)
Pension liability adjustment		(2,797	)		646			1,129
Tax effect		587			(136	)		(329	)
Total other comprehensive income (loss)		8,326			(50	)		1,412
Comprehensive income	$	42,204		$	14,089		$	17,284

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Years ended December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

						Common Shares						Accumulated			Treasury			Accumulated<br><br><br>Other<br><br><br>Comprehensive			Total<br><br><br>Shareholders’
			Amount			Shares			Amount			Earnings			Stock			Income (Loss)			Equity
Balance, December 31,<br>   2016	20,481		$	18,950			8,343,509		$	118,975		$	19,263		$	(17,235	)	$	(2,337	)	$	137,616
Net income													15,872									15,872
Other comprehensive income																			1,412			1,412
Reclassification of certain<br>   income tax effects from<br>   accumulated other<br>   comprehensive loss												199							(199	)		—
Conversion of Series B<br>   preferred shares to<br>   common shares	(1,721	)		(1,592	)		220,108			1,592												—
Common share issuance, net<br>   of costs							1,610,000			32,821												32,821
Stock-based compensation							25,069			426												426
Common share dividends<br>   (0.25 per share)													(2,438	)								(2,438	)
Preferred share dividends <br>  (65.00 per share)													(1,244	)								(1,244	)
Retirement of common stock							(211	)		(4	)											(4	)
Balance, December 31,<br>   2017	18,760		$	17,358			10,198,475		$	153,810		$	31,652		$	(17,235	)	$	(1,124	)	$	184,461
Net income													14,139									14,139
Other comprehensive loss																			(50	)		(50	)
Change in accounting<br>   principle for adoption<br>   of ASU 2016-01												278							(278	)		—
Conversion of Series B<br>   preferred shares to<br>   common shares	(8,640	)		(7,994	)		1,104,735			7,994												—
UCB acquisition							4,277,430			104,669												104,669
Stock-based compensation							22,859			428												428
Common share dividends<br>   (0.32 per share)													(3,790	)								(3,790	)
Preferred share dividends<br>   (65.00 per share)													(959	)								(959	)
Balance, December 31,<br>   2018	10,120		$	9,364			15,603,499		$	266,901		$	41,320		$	(17,235	)	$	(1,452	)	$	298,898
Net income													33,878									33,878
Other comprehensive income																			8,326			8,326
Conversion of Series B<br>   preferred shares to<br>   common shares	(10,120	)		(9,364	)		1,242,683			8,990			(30	)								(404	)
Stock-based compensation							29,560			531												531
Common share dividends<br>   (0.42 per share)													(6,547	)								(6,547	)
Preferred share dividends<br>   (65.00 per share)													(647	)								(647	)
Purchase of treasury stock at<br>   cost							(188,200	)		—						(3,909	)					(3,909	)
Balance, December 31,<br>   2019	—		$	—			16,687,542		$	276,422		$	67,974		$	(21,144	)	$	6,874		$	330,126

All values are in US Dollars.

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2019, 2018 and 2017

(Amounts in thousands)

	2019			2018			2017
Cash flows from operating activities:
Net income	$	33,878		$	14,139		$	15,872
Adjustments to reconcile net income to net cash from<br><br><br>operating activities
Security amortization, net		1,185			1,171			1,263
Depreciation		2,240			1,515			1,249
Amortization of core deposit intangible		945			366			586
Amortization of net deferred loan fees		99			166			317
Net (gain) loss on sale of securities		(32	)		413			(12	)
Net gain on equity securities		(121	)		(26	)		—
Provision for loan losses		1,035			780			—
Loans originated for sale		(126,690	)		(78,252	)		(76,493	)
Proceeds from sale of loans		128,503			81,085			78,309
Net gain on sale of loans		(2,707	)		(1,621	)		(1,745	)
Net (gain) loss on sale of other real estate owned		—			(18	)		28
(Gain) loss on sale of fixed assets		33			(147	)		(67	)
Increase in cash surrender value of bank owned life<br><br><br>insurance		(1,007	)		(718	)		(573	)
Share-based compensation		531			428			426
Change in:
Accrued interest payable		47			(197	)		229
Accrued interest receivable		(370	)		(1,285	)		(634	)
Deferred taxes		663			151			946
Other, net		1,294			2,007			1,118
Net cash from operating activities		39,526			19,957			20,819
Cash flows used for investing activities:
Securities available for sale
Maturities, prepayments and calls		54,055			42,114			34,379
Sales		17,570			14,667			953
Purchases		(71,646	)		(131,924	)		(70,794	)
Purchases of other securities		—			(3,247	)		(192	)
Redemption of other securities		741			—			—
Acquisition, net of cash acquired		—			143,797			—
Purchases of bank owned life insurance		(955	)		—			—
Net loan originations		(147,075	)		(99,277	)		(109,737	)
Proceeds from sale of OREO properties		—			34			87
Premises and equipment purchases		(3,201	)		(1,472	)		(1,015	)
Proceeds from sale of premises and equipment		2			1,190			139
Net cash used for investing activities		(150,509	)		(34,118	)		(146,180	)

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years ended December 31, 2019, 2018 and 2017

(Amounts in thousands)

	2019			2018			2017
Cash flows from financing activities:
Increase (decrease) in deposits		98,871			(100,974	)		83,820
Net change in short-term FHLB advances		(87,100	)		131,700			25,900
Repayment of long-term FHLB advances		(5,000	)		(10,000	)		(2,500	)
Proceeds from long-term FHLB advances		125,000			—			—
Net proceeds from issuance of common stock		—			—			32,821
Increase (decrease) in securities sold under repurchase<br><br><br>agreements		(3,525	)		444			(7,170	)
Cash payment for repurchase of common stock		—			—			(4	)
Cash payment for redemption of series B preferred stock		(402	)		—			—
Purchase of treasury stock		(3,909	)		—			—
Cash paid on fractional shares on preferred stock conversion		(2	)		—			—
Cash dividends paid		(7,194	)		(4,749	)		(3,682	)
Net cash from financing activities		116,739			16,421			129,185
Increase in cash and due from financial institutions		5,756			2,260			3,824
Cash and due from financial institutions at beginning of year		42,779			40,519			36,695
Cash and due from financial institutions at end of year	$	48,535		$	42,779		$	40,519
Supplemental disclosures of cash flow information:
Interest paid	$	12,907		$	7,751		$	3,863
Income taxes paid		5,700			1,600			5,950
Transfer of loans from portfolio to other real estate owned		—			—			94
Transfer of premises to held-for-sale		76			—			3
Transfer of loans held-for-sale to portfolio		—			85			—
Securities purchased not settled		1,200			500			1,291
Conversion of preferred stock to common stock		8,960			7,994			1,592
Acquisition of UCB
Consideration paid				$	117,344
Noncash assets acquired:
Securities available for sale					43,214
Equity securities					212
Loans held for sale					492
Loans receivable					298,319
FHLB Stock					3,527
Accrued interest receivable					950
Premises and equipment, net					5,291
Goodwill					49,756
Core deposit intangible					7,518
Bank owned life insurance					17,193
Other assets					10,361
Total non cash assets acquired					436,833
Liabilities assumed:
Deposits					475,944
Other liabilities					17
Total liabilities assumed					475,961
Net noncash liabilities acquired					(39,128	)
Cash acquired					156,472

See accompanying notes to consolidated financial statements

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT 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 subsidiaries: Civista Bank (“Civista”), First Citizens Insurance Agency, Inc. (“FCIA”), Water Street Properties, Inc. (“WSP”), FC Refund Solutions, Inc. (“FCRS”) and CIVB Risk Management, Inc. (“CRMI”). First Citizens Capital LLC (“FCC”) is wholly-owned by Civista and holds inter-company debt. First Citizens Investments, Inc. (“FCI”) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI and FCC are located in Wilmington, Delaware. 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 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.

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, 2019, 2018 and 2017. 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, 2019, 2018 and 2017. FCRS was formed in 2012 to facilitate payment of individual state and federal tax refunds. The operations of FCRS were discontinued June 30, 2019.  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, 2019, 2018 and 2017.

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 the financial statements and the disclosures provided, and future results could differ. The allowance for loan 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.

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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Securities are evaluated on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value is other than temporary.  For debt securities, management considers whether the present value of cash flows expected to be collected are less than the security’s amortized cost basis, the magnitude and duration of the decline, the reasons underlying the decline and the Company’s intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value, to determine whether the loss in value is other than temporary. Once a decline in value is determined to be other than temporary, if the Company does not intend to sell the security, and it is more likely than not that it will not be required to sell the security, before recovery of the security’s amortized cost basis, the charge to earnings is limited to the amount of credit loss.  Any remaining difference between fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes.  Otherwise, the entire difference between far value and amortized cost is charged to earnings.

Other securities which include FHLB stock, Federal Reserve Bank (“FRB”) stock, Federal Agricultural Mortgage Corporation stock, Bankers’ Bancshares Inc. (“BB”) stock, and Norwalk Community Development Corp (“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: Loans 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 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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Purchased Loans: The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.

Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s, or pool’s, contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected future cash flows is greater than the carrying amount, the excess is recognized as part of future interest income.

Allowance for Loan Losses: The allowance for loan losses (allowance) is calculated with the objective of maintaining a reserve sufficient to absorb inherent loan losses in the loan portfolio. Management establishes the allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio. In determining the allowance and the related provision for loan losses, the Company considers three principal elements: (i) specific impairment reserve allocations (valuation allowances) based upon probable losses identified during the review of impaired loans in the Commercial loan portfolio, (ii) allocations established for adversely-rated loans in the Commercial loan portfolio and nonaccrual Real Estate Residential, Consumer installment and Home Equity loans, (iii) allocations on all other loans based principally on the use of a three-year period for loss migration analysis. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans. The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses.

All commercial, commercial real estate and farm real estate loans are monitored on a regular basis with a detailed loan review completed for all loan relationships greater than $750. All commercial, commercial real estate and farm real estate loans that are 90 days past due or in nonaccrual status, are analyzed to determine if they are “impaired”, which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. All loans that are delinquent 90 days are classified as substandard and placed on nonaccrual status unless they are well-secured and in the process of collection. The remaining loans are evaluated and segmented with loans with similar risk characteristics. The Company allocates reserves based on risk categories and portfolio segments described below, which conform to the Company’s asset classification policy. In reviewing risk within Civista’s loan portfolio, management has identified specific segments to categorize loan portfolio risk: (i) Commercial & Agriculture loans; (ii) Commercial Real Estate – Owner Occupied loans; (iii) Commercial Real Estate – Non-Owner Occupied loans; (iv) Residential Real Estate loans; (v) Real Estate Construction loans; (vi) Farm Real Estate loans; and (vii) Consumer and Other loans. Additional information related to economic factors can be found in Note 5.

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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Troubled Debt Restructurings: In certain situations based on economic or legal reasons related to a borrower’s financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered. The related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. In addition to the allowance for the pooled portfolios, management has developed a separate reserve for loans that are identified as impaired through a TDR. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed for estimated impairment.

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.

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 stock was not impaired at December 31, 2019 or 2018.

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.

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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. 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. 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-term 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.

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. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common shares at the date of the grant is used for restricted shares.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 is the amount of matching contributions. Deferred compensation allocates the benefits over the years of service.

Earnings per Common Share: Basic earnings per share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable related to convertible preferred shares. Treasury shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income 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, 2019 was $7,127.

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.

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.

Business Combinations: At the date of acquisition the Company records the assets and liabilities of the 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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

Adoption of New Accounting Standards:

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. We adopted ASU 2017-08, effective January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, which was issued by the FASB February 2016 and requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition, which we elected. As a result of the adoption of ASC 842 on January 1, 2019, we recorded both operating lease right-of-use (“ROU”) assets of $2,210 and lease liabilities of $2,210. The adoption of ASC 842 had an immaterial impact on our Condensed Consolidated Statement of Earnings and Condensed Consolidated Statement of Cash Flows for the year ended December 31, 2019. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard which allowed us to carry forward the historical lease classification. There was no cumulative effect adjustment to the opening balance of retained earnings required.

Additional information and disclosures required by this new standard are contained in Note 27, 'Leases'.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued but Not Yet Effective Accounting Standards:

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of ASU 2016-13 is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, which was codified in the final ASU issued by the FASB on November 15, 2019. As a result, because the Company qualified as a smaller reporting company, based on its most recent determination under applicable SEC rules, as of November 15, 2019, the Company will not be subject to ASU 2016-13 until its annual and interim periods beginning after December 15, 2022. Management is in the process of evaluating the impact adoption of ASU 2016-13 will have on the Company’s Consolidated Financial Statements. This process has engaged multiple areas of the Company in evaluating loss estimation methods and application of these methods to specific segments of the loan portfolio. Management has been actively monitoring FASB developments and evaluating the use of different methods allowed.  Due to continuing development of our methodology, additional time is required to quantify the affect this ASU will have on the Company’s Consolidated Financial Statements. Management continues to refine its modeling and running parallel calculations and will finalize a method or methods of adoption in time for the effective date.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. A public business entity that is a U.S. Securities and Exchange Commission (“SEC”) filer, such as the Company, should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. On October 16, 2019, the FASB voted to defer the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The final ASU was issued by the FASB on November 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes the Disclosure Requirements for Fair Value Measurements.  The Update removes the requirement to disclose the amount of and reasons for transfers between Level I and Level II of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level III fair value measurements. The Update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level III fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements. This Update is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  This Update is not expected to have a significant impact on the Company’s financial statements.

In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, and Topic 825, Financial Instruments, which affects a variety of topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. Topic 326, Financial Instruments – Credit Losses amendments are effective for SEC registrants for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the potential impact of the Topic 326 amendments on the Company’s Consolidated Financial Statements. The amendments to Topic 825 are effective for interim and annual reporting periods beginning after December 15, 2019. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU was issued by the FASB on November 15, 2019. This Update is not expected to have a material impact on the Company’s financial statements.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses, Topic 326, which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard. To be eligible for the transition election, the existing financial asset must otherwise be both within the scope of the new credit losses standard and eligible for the applying the fair value option in ASC 825-10.3. The election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities. For entities that elect the fair value option, the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted ASU 2016-13. Changes in fair value of that financial asset would subsequently be reported in current earnings. For entities that have not yet adopted ASU 2016-13, the effective dates and transition requirements are the same as those in ASU 2016-13. For entities that have adopted ASU 2016-13, ASU 2019-05 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted once ASU 2016-13 has been adopted. On October 16, 2019, the FASB voted to defer the effective date for ASC 326, Financial Instruments – Credit Losses, for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years.  The final ASU was issued by the FASB on November 15, 2019. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.

In November 2019, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). The Update defers the effective dates of ASU 2016-13 for SEC filers that are eligible to be smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. This Update also amends the mandatory effective date for the elimination of Step 2 from the goodwill impairment test under ASU No. 2017-04, Intangibles ‒ Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (Goodwill), to align with those used for credit losses. Furthermore, the ASU provides a one-year deferral of the effective dates of the ASUs on derivatives and hedging and leases for companies that are not public business entities. The Company qualifies as a smaller reporting company and does not expect to early adopt these ASUs.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, to clarify its new credit impairment guidance in ASC 326, based on implementation issues raised by stakeholders. This Update clarified, among other things, that expected recoveries are to be included in the allowance for credit losses for these financial assets; an accounting policy election can be made to adjust the effective interest rate for existing troubled debt restructurings based on the prepayment assumptions instead of the prepayment assumptions applicable immediately prior to the restructuring event; and extends the practical expedient to exclude accrued interest receivable from all additional relevant disclosures involving amortized cost basis. The effective dates in this Update are the same as those applicable for ASU 2019-10. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 2 – MERGER

On September 14, 2018, CBI completed the acquisition by merger of United Community Bancorp (“UCB”) in a stock and cash transaction for aggregate consideration of approximately $117,344.  Acquisition-related costs of $5,231, $5,515, $1,638, $131 and $220 are included in compensation expense, contracted data processing, professional services, marketing expense and other operating expense, respectively, in the Company’s Consolidated Statements of Operation for the year ended December 31, 2018.  As a result of the acquisition, the Company issued 4,277,430 common shares and paid approximately $12,675 in cash to the former shareholders of UCB. Immediately following the merger, UCB’s banking subsidiary, United Community Bank, was merged into CBI’s banking subsidiary, Civista Bank.

At the time of the merger, UCB had total assets of $537,875, including $298,319 in loans, and $475,944 in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of UCB have been included in the Company’s Consolidated Financial Statements since the close of business on September 14, 2018.

As of December 31, 2019, the estimated future amortization expense for the core deposit intangible related to UCB is as follows:

	Core deposit intangibles
2020	$	842
2021		823
2022		800
2023		773
2024		742
Thereafter		2,427
	$	6,407

The following table presents financial information for the former UCB included in the Consolidated Statements of Operations from the date of acquisition through December 31, 2018.

	Actual From<br><br><br>Acquisition Date<br><br><br>Through December 31,<br><br><br>2018<br><br><br>(in thousands)
Net interest income after provision for loan losses	$	3,227
Noninterest income		373
Net income		1,707

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 2 – MERGER (Continued)

The following table presents unaudited pro forma information for the periods ended December 31, 2019, 2018 and 2017 as if the acquisition of UCB had occurred on January 1, 2017. 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.

	Pro Formas (unaudited) Twelve months<br><br><br>ended December 31,
	2019		2018		2017
Net interest income after provision for loan losses	$	83,825	$	74,642	$	70,100
Noninterest income		22,443		18,331		20,782
Net income		33,653		18,984		19,284
Pro forma earnings per share:
Basic	$	2.11	$	1.51	$	1.82
Diluted	$	2.00	$	1.37	$	1.56

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for UCB.  Core deposit intangibles will be amortized over a period of ten years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment. 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.

Consideration paid				$	117,344
Net assets acquired:
Cash and due from financial institutions	$	156,472
Securities available for sale		43,214
Equity securities		212
Loans held for sale		492
Loans, net		298,319
Other securities		3,527
Premises and equipment		5,291
Accrued interest receivable		950
Core deposit intangible		7,518
Bank owned life insurance		17,193
Other assets		10,361
Noninterest-bearing deposits		(112,787	)
Interest-bearing deposits		(363,157	)
Other liabilities		(17	)
					67,588
Goodwill resulting from UCB merger				$	49,756

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 2 – MERGER (Continued)

The acquired assets and liabilities were measured at estimated fair values.  Management made certain estimates and exercised judgment in accounting for the acquisition.  The following is a description of the methods used to determine fair value of significant assets and liabilities at the acquisition date:

Cash:  The Company acquired $156.5 million in cash, which management deemed to reflect fair value based on the short term nature of the asset.

Loans:  The Company acquired $298.3 million in loans receivable with and without evidence of credit quality deterioration.  The loans consisted of commercial loans, commercial real estate loans, residential mortgage loans (including home equity secured lines of credit), real estate construction loans, and consumer and other loans.  The fair value of the performing loan portfolio includes separate adjustments to reflect a credit risk and marketability component and a yield component reflecting the differential between portfolio and market yields.  Additionally, certain loans were valued based on their observable sales price.  Loans acquired with credit deterioration of $1,210 were individually evaluated to estimate credit losses and a net recovery amount for each loan.  The net cash flows for each loan was then discounted to present value using a risk-adjusted market rate.

Deposits:  The Company acquired $475.9 million in deposits.  Savings and transaction accounts are variable, have no stated maturity and can be withdrawn on short notice with no penalty.  Therefore, the fair value of such deposits is considered equal to the carrying value.  The fair value of CD’s consists of comparing the contractual cost of the CD’s to the market rates with corresponding maturities.  The valuation adjustment reflects the present value of the difference between the cash flows attributable to the CD’s based on contractual and market rates.  The core deposit intangible is determined by the present value difference of the net cost of the core deposit versus the same amount for an alternative funding source.

This acquisition provided the Company with the 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.  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 also creates synergies on the operational side of the Company by allowing noninterest expenses to be spread over a larger operating base.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

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<br><br><br>Cost		Gross<br><br><br>Unrealized<br><br><br>Gains		Gross<br><br><br>Unrealized<br><br><br>Losses			Fair Value
2019
U.S. Treasury securities and obligations of<br><br><br>U.S. government agencies	$	19,401	$	204	$	(4	)	$	19,601
Obligations of states and political subdivisions		193,646		12,409		(21	)		206,034
Mortgage-back securities in government sponsored<br><br><br>entities		129,145		3,863		(144	)		132,864
Total debt securities	$	342,192	$	16,476	$	(169	)	$	358,499
	Amortized<br><br><br>Cost		Gross<br><br><br>Unrealized<br><br><br>Gains		Gross<br><br><br>Unrealized<br><br><br>Losses			Fair Value
---	---	---	---	---	---	---	---	---	---
2018
U.S. Treasury securities and obligations of<br><br><br>U.S. government agencies	$	30,623	$	202	$	(140	)	$	30,685
Obligations of states and political subdivisions		168,993		3,680		(602	)		172,071
Mortgage-back securities in government sponsored<br><br><br>entities		143,707		1,024		(1,193	)		143,538
Total debt securities	$	343,323	$	4,906	$	(1,935	)	$	346,294

The amortized cost and fair value of securities at year end 2019 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	$	11,124	$	11,166
Due from one to five years		14,756		15,062
Due from five to ten years		26,117		27,173
Due after ten years		161,050		172,234
Mortgage-backed securities in government sponsored<br><br><br>entities		129,145		132,864
Total securities available for sale	$	342,192	$	358,499

Securities with a carrying value of $139,004 and $114,145 were pledged as of December 31, 2019 and 2018, respectively, to secure public deposits, other deposits and liabilities as required or permitted by law.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 3 – SECURITIES (Continued)

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

	2019		2018			2017
Sale proceeds	$	17,570	$	14,667		$	953
Gross realized gains		47		6			—
Gross realized losses		43		393			—
Gains (losses) from securities called or settled by the<br><br><br>issuer		28		(26	)		12

Debt securities with unrealized losses at year end 2019 and 2018 not recognized in income were as follows:

2019	12 Months or less					More than 12 months					Total
Description of Securities	Fair<br><br><br>Value		Unrealized<br><br><br>Loss			Fair<br><br><br>Value		Unrealized<br><br><br>Loss			Fair<br><br><br>Value		Unrealized<br><br><br>Loss
U.S. Treasury securities and obligations of<br><br><br>U.S. government agencies	$	—	$	—		$	3,408	$	(4	)	$	3,408	$	(4	)
Obligations of states and political subdivisions		1,947		(21	)		—		—			1,947		(21	)
Mortgage-backed securities in gov’t sponsored<br><br><br>entities		10,653		(91	)		7,732		(53	)		18,385		(144	)
Total temporarily impaired	$	12,600	$	(112	)	$	11,140	$	(57	)	$	23,740	$	(169	)
2018	12 Months or less					More than 12 months					Total
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Description of Securities	Fair<br><br><br>Value		Unrealized<br><br><br>Loss			Fair<br><br><br>Value		Unrealized<br><br><br>Loss			Fair<br><br><br>Value		Unrealized<br><br><br>Loss
U.S. Treasury securities and obligations of<br><br><br>U.S. government agencies	$	—	$	—		$	16,469	$	(140	)	$	16,469	$	(140	)
Obligations of states and political subdivisions		8,008		(71	)		25,890		(531	)		33,898		(602	)
Mortgage-backed securities in gov’t sponsored<br><br><br>entities		6,630		(90	)		40,333		(1,103	)		46,963		(1,193	)
Total temporarily impaired	$	14,638	$	(161	)	$	82,692	$	(1,774	)	$	97,330	$	(1,935	)

The Company periodically evaluates securities for other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive loss on the Consolidated Balance Sheet.

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).
---	---

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 3 – SECURITIES (Continued)

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, 2019, the Company owned 35 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 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 2019 and 2018, and the portion of unrealized gains and losses for the period that relates to equity investments held at year-end 2019 and 2018:

	2019		2018
Net gains recognized on equity securities during the year	$	121	$	26
Less: Net gains (losses) realized on the sale of equity securities<br><br><br>during the period		—		—
Unrealized gains recognized in equity securities held at<br><br><br>December 31	$	121	$	26

NOTE 4 - LOANS

Loans at year-end were as follows:

	2019			2018
Commercial and Agriculture	$	203,110		$	177,101
Commercial Real Estate - owner occupied		245,606			210,121
Commercial Real Estate - non-owner occupied		592,222			523,598
Residential Real Estate		463,032			457,850
Real Estate Construction		155,825			135,195
Farm Real Estate		34,114			38,513
Consumer and Other		15,061			19,563
Total Loans		1,708,970			1,561,941
Allowance for loan losses		(14,767	)		(13,679	)
Net loans	$	1,694,203		$	1,548,262

Included in total loans above are deferred loan fees of $488 and $389 at December 31, 2019 and 2018, respectively.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 4 – LOANS (Continued)

Loans to principal officers, directors, and their affiliates at year-end 2019 and 2018 were as follows:

	2019			2018
Balance - Beginning of year	$	8,722		$	14,002
New loans and advances		3,057			3,308
Repayments		(2,574	)		(2,324	)
Effect of changes to related parties		704			(6,264	)
Balance - End of year	$	9,909		$	8,722

NOTE 5 - ALLOWANCE FOR LOAN LOSSES

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

•	Changes in lending policies and procedures
•	Changes in experience and depth of lending and management staff
---	---
•	Changes in quality of credit review system
---	---
•	Changes in the nature and volume of the loan portfolio
---	---
•	Changes in past due, classified and nonaccrual loans and TDRs
---	---
•	Changes in economic and business conditions
---	---
•	Changes in competition or legal and regulatory requirements
---	---
•	Changes in concentrations within the loan portfolio
---	---
•	Changes in the underlying collateral for collateral dependent loans
---	---

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date. The Company considers the allowance for loan losses of $14,767 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2019. The following tables present, by portfolio segment, the changes in the allowance for loan losses, the ending allocation of the allowance for loan losses and the loan balances outstanding for the years ended December 31, 2019, 2018 and 2017. The changes can be impacted by overall loan volume, adversely graded loans, historical charge-offs and economic factors.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for loan losses:

December 31, 2019	Beginning<br><br><br>balance		Charge-offs			Recoveries		Provision<br><br><br>(Credit)			Ending<br><br><br>Balance
Commercial & Agriculture	$	1,747	$	(114	)	$	86	$	500		$	2,219
Commercial Real Estate:
Owner Occupied		1,962		(161	)		289		451			2,541
Non-Owner Occupied		5,803		—			102		679			6,584
Residential Real Estate		1,531		(294	)		259		86			1,582
Real Estate Construction		1,046		(24	)		3		225			1,250
Farm Real Estate		397		—			5		(58	)		344
Consumer and Other		284		(183	)		85		61			247
Unallocated		909		—			—		(909	)		—
Total	$	13,679	$	(776	)	$	829	$	1,035		$	14,767

For the year ended December 31, 2019, the allowance for Commercial & Agriculture loans increased as a result of an increase in general reserves due to higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased as a result of an increase in general reserves due to higher 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 for this type as a result of higher loan balances. The allowance for Residential Real Estate loans increased as a result of an increase in general reserves required for this type as a result of an increase in outstanding loan balances, represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances. The result 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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for loan losses:

December 31, 2018	Beginning<br><br><br>balance		Charge-offs			Recoveries		Provision<br><br><br>(Credit)			Ending<br><br><br>Balance
Commercial & Agriculture	$	1,562	$	(249	)	$	169	$	265		$	1,747
Commercial Real Estate:
Owner Occupied		2,043		(193	)		158		(46	)		1,962
Non-Owner Occupied		5,307		(153	)		28		621			5,803
Residential Real Estate		1,910		(105	)		208		(482	)		1,531
Real Estate Construction		834		—			—		212			1,046
Farm Real Estate		430		—			5		(38	)		397
Consumer and Other		290		(203	)		100		97			284
Unallocated		758		—			—		151			909
Total	$	13,134	$	(903	)	$	668	$	780		$	13,679

For the year ended December 31, 2018, the allowance for Commercial & Agriculture loans increased as a result of an increase in general reserves due to higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves as a result of lower loss rates. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances.  The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances. The result was represented as a decrease in the provision.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

Allowance for loan losses:

December 31, 2017	Beginning<br><br><br>balance		Charge-offs			Recoveries		Provision<br><br><br>(Credit)			Ending<br><br><br>Balance
Commercial & Agriculture	$	2,018	$	(11	)	$	372	$	(817	)	$	1,562
Commercial Real Estate:
Owner Occupied		2,171		(328	)		69		131			2,043
Non-Owner Occupied		4,606		(38	)		46		693			5,307
Residential Real Estate		3,089		(400	)		194		(973	)		1,910
Real Estate Construction		420		—			44		370			834
Farm Real Estate		442		—			3		(15	)		430
Consumer and Other		314		(165	)		43		98			290
Unallocated		245		—			—		513			758
Total	$	13,305	$	(942	)	$	771	$	—		$	13,134

For the year ended December 31, 2017, the allowance for Commercial & Agriculture loans was reduced by a decrease in general reserves as a result of lower loss rates. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans was reduced by a decrease in general reserves and charge-offs. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances.  The allowance for Residential Real Estate loans was reduced by a decrease in general reserves required for this type as a result of a decrease in loss rates, represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to higher outstanding loan balances for this type of loan. The allowance for Farm Real Estate loans was reduced by a decrease in general reserves required for this type as a result of lower outstanding loan balances. The result was represented as a decrease in the provision.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of December 31, 2019 and December 31, 2018.

December 31, 2019	Loans acquired<br><br><br>with credit<br><br><br>deterioration		Loans<br><br><br>individually<br><br><br>evaluated for<br><br><br>impairment		Loans<br><br><br>collectively<br><br><br>evaluated for<br><br><br>impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	—	$	2,219	$	2,219
Commercial Real Estate:
Owner Occupied		—		9		2,532		2,541
Non-Owner Occupied		—		—		6,584		6,584
Residential Real Estate		—		82		1,500		1,582
Real Estate Construction		—		—		1,250		1,250
Farm Real Estate		—		—		344		344
Consumer and Other		—		—		247		247
Unallocated		—		—		—		—
Total	$	—	$	91	$	14,676	$	14,767
Outstanding loan balances:
Commercial & Agriculture	$	—	$	367	$	202,743	$	203,110
Commercial Real Estate:
Owner Occupied		—		426		245,180		245,606
Non-Owner Occupied		—		374		591,848		592,222
Residential Real Estate		467		1,764		460,801		463,032
Real Estate Construction		—		—		155,825		155,825
Farm Real Estate		—		666		33,448		34,114
Consumer and Other		—		—		15,061		15,061
Total	$	467	$	3,597	$	1,704,906	$	1,708,970

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

December 31, 2018	Loans acquired<br><br><br>with credit<br><br><br>deterioration		Loans<br><br><br>individually<br><br><br>evaluated for<br><br><br>impairment		Loans<br><br><br>collectively<br><br><br>evaluated for<br><br><br>impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	—	$	1,747	$	1,747
Commercial Real Estate:
Owner Occupied		—		12		1,950		1,962
Non-Owner Occupied		—		—		5,803		5,803
Residential Real Estate		8		122		1,401		1,531
Real Estate Construction		—		—		1,046		1,046
Farm Real Estate		—		7		390		397
Consumer and Other		—		—		284		284
Unallocated		—		—		909		909
Total	$	8	$	141	$	13,530	$	13,679
Outstanding loan balances:
Commercial & Agriculture	$	41	$	367	$	176,693	$	177,101
Commercial Real Estate:
Owner Occupied		—		484		209,637		210,121
Non-Owner Occupied		—		31		523,567		523,598
Residential Real Estate		883		1,279		455,688		457,850
Real Estate Construction		—		—		135,195		135,195
Farm Real Estate		—		696		37,817		38,513
Consumer and Other		—		—		19,563		19,563
Total	$	924	$	2,857	$	1,558,160	$	1,561,941

The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2019 and 2018. The remaining loans in the Residential Real Estate, Real Estate Construction and Consumer and Other loan categories that are not assigned a risk grade are presented in a separate table below. 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 rating 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.
---	---
•	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.
---	---

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

December 31, 2019	Pass		Special<br><br><br>Mention		Substandard		Doubtful		Ending<br><br><br>Balance
Commercial & Agriculture	$	199,649	$	2,236	$	1,225	$	—	$	203,110
Commercial Real Estate:
Owner Occupied		237,171		5,617		2,818		—		245,606
Non-Owner Occupied		588,633		2,155		1,434		—		592,222
Residential Real Estate		73,289		528		6,495		—		80,312
Real Estate Construction		145,251		—		9		—		145,260
Farm Real Estate		30,808		567		2,739		—		34,114
Consumer and Other		1,289		—		6		—		1,295
Total	$	1,276,090	$	11,103	$	14,726	$	—	$	1,301,919
December 31, 2018	Pass		Special<br><br><br>Mention		Substandard		Doubtful		Ending<br><br><br>Balance
---	---	---	---	---	---	---	---	---	---	---
Commercial & Agriculture	$	173,783	$	1,509	$	1,809	$	—	$	177,101
Commercial Real Estate:
Owner Occupied		201,228		3,512		5,381		—		210,121
Non-Owner Occupied		520,487		2,023		1,088		—		523,598
Residential Real Estate		70,908		580		7,363		—		78,851
Real Estate Construction		124,769		13		41		—		124,823
Farm Real Estate		32,908		3,096		2,509		—		38,513
Consumer and Other		1,713		—		20		—		1,733
Total	$	1,125,796	$	10,733	$	18,211	$	—	$	1,154,740

The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 2019 and December 31, 2018 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

December 31, 2019	Residential<br><br><br>Real Estate		Real Estate<br><br><br>Construction		Consumer<br><br><br>and Other		Total
Performing	$	382,720	$	10,565	$	13,766	$	407,051
Nonperforming		—		—		—		—
Total	$	382,720	$	10,565	$	13,766	$	407,051
December 31, 2018	Residential<br><br><br>Real Estate		Real Estate<br><br><br>Construction		Consumer<br><br><br>and Other		Total
---	---	---	---	---	---	---	---	---
Performing	$	378,999	$	10,372	$	17,830	$	407,201
Nonperforming		—		—		—		—
Total	$	378,999	$	10,372	$	17,830	$	407,201

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2019 and 2018.

December 31, 2019	30-59<br><br><br>Days<br><br><br>Past Due		60-89<br><br><br>Days<br><br><br>Past Due		90 Days<br><br><br>or Greater		Total Past<br><br><br>Due		Current		Purchased<br><br><br>Credit-<br><br><br>Impaired<br><br><br>Loans		Total Loans		Past Due<br><br><br>90 Days<br><br><br>and<br><br><br>Accruing
Commercial & Agriculture	$	27	$	35	$	106	$	168	$	202,942	$	—	$	203,110	$	—
Commercial Real Estate:
Owner Occupied		453		63		663		1,179		244,427		—		245,606		—
Non-Owner Occupied		—		—		8		8		592,214		—		592,222		—
Residential Real Estate		2,399		198		1,775		4,372		458,193		467		463,032		—
Real Estate Construction		—		—		—		—		155,825		—		155,825		—
Farm Real Estate		—		—		7		7		34,107		—		34,114		—
Consumer and Other		129		46		—		175		14,886		—		15,061		—
Total	$	3,008	$	342	$	2,559	$	5,909	$	1,702,594	$	467	$	1,708,970	$	—
December 31, 2018	30-59<br><br><br>Days<br><br><br>Past Due		60-89<br><br><br>Days<br><br><br>Past Due		90 Days<br><br><br>or Greater		Total Past<br><br><br>Due		Current		Purchased<br><br><br>Credit-<br><br><br>Impaired<br><br><br>Loans		Total Loans		Past Due<br><br><br>90 Days<br><br><br>and<br><br><br>Accruing
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
Commercial & Agriculture	$	225	$	—	$	92	$	317	$	176,743	$	41	$	177,101	$	—
Commercial Real Estate:
Owner Occupied		547		413		564		1,524		208,597		—		210,121		—
Non-Owner Occupied		288		290		372		950		522,648		—		523,598		—
Residential Real Estate		7,118		677		806		8,601		448,366		883		457,850		—
Real Estate Construction		—		12		27		39		135,156		—		135,195		—
Farm Real Estate		33		—		158		191		38,322		—		38,513		—
Consumer and Other		117		57		9		183		19,380		—		19,563		—
Total	$	8,328	$	1,449	$	2,028	$	11,805	$	1,549,212	$	924	$	1,561,941	$	—

The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of December 31, 2019 and 2018.

	2019		2018
Commercial & Agriculture	$	173	$	270
Commercial Real Estate:
Owner Occupied		938		942
Non-Owner Occupied		8		374
Residential Real Estate		4,183		3,886
Real Estate Construction		9		41
Farm Real Estate		284		338
Consumer and Other		4		18
Total	$	5,599	$	5,869

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. 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 2019, 2018 and 2017 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 $571, $587 and $712, respectively. The amount of interest income on such loans recognized on a cash basis was $379 in 2019, $360 in 2018 and $139 in 2017.

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

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. TDRs accounted for $91 of the allowance for loan losses as of December 31, 2019, $141 as of December 31, 2018 and $169 as of December 31, 2017.

Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2019, 2018 and 2017 were as follows:

	For the Twelve Month Period Ended<br><br><br>December 31, 2019
	Number<br><br><br>of<br><br><br>Contracts		Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment		Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—
Non-Owner Occupied		1		382		382
Residential Real Estate		—		—		—
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—
Total Loan Modifications		1	$	382	$	382

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

	For the Twelve Month Period Ended<br><br><br>December 31, 2018
	Number<br><br><br>of<br><br><br>Contracts		Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment		Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—
Non-Owner Occupied		—		—		—
Residential Real Estate		1		23		23
Real Estate Construction		—		—		—
Farm Real Estate		1		110		110
Consumer and Other		—		—		—
Total Loan Modifications		2	$	133	$	133
	For the Twelve Month Period Ended<br><br><br>December 31, 2017
---	---	---	---	---	---	---
	Number<br><br><br>of<br><br><br>Contracts		Pre-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment		Post-<br><br><br>Modification<br><br><br>Outstanding<br><br><br>Recorded<br><br><br>Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate:
Owner Occupied		—		—		—
Non-Owner Occupied		—		—		—
Residential Real Estate		1		13		13
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—
Total Loan Modifications		1	$	13	$	13

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, 2019, 2018 and 2017, there were no defaults on loans that were modified and considered TDRs during the previous twelve months.

Impaired Loans: Larger (greater than $350) commercial loan, commercial real estate loan and farm real estate loan relationships, all TDRs and residential real estate and consumer loans that are part of a larger relationship are tested for impairment. 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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN 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, 2019 and 2018.

	December 31, 2019						December 31, 2018
	Recorded<br><br><br>Investment		Unpaid<br><br><br>Principal<br><br><br>Balance		Related<br><br><br>Allowance		Recorded<br><br><br>Investment		Unpaid<br><br><br>Principal<br><br><br>Balance		Related<br><br><br>Allowance
With no related allowance recorded:
Commercial & Agriculture	$	367	$	367			$	367	$	367
Commercial Real Estate:
Owner Occupied		168		168				193		193
Non-Owner Occupied		374		374				31		34
Residential Real Estate		1,571		1,643				1,017		1,089
Farm Real Estate		666		666				256		256
Total		3,146		3,218				1,864		1,939
With an allowance recorded:
Commercial Real Estate:
Owner Occupied		258		258	$	9		291		291	$	12
Residential Real Estate		193		197		82		262		265		122
Farm Real Estate		—		—		—		440		440		7
Total		451		455		91		993		996		141
Total:
Commercial & Agriculture		367		367		—		367		367		—
Commercial Real Estate:
Owner Occupied		426		426		9		484		484		12
Non-Owner Occupied		374		374		—		31		34		—
Residential Real Estate		1,764		1,840		82		1,279		1,354		122
Farm Real Estate		666		666		—		696		696		7
Total	$	3,597	$	3,673	$	91	$	2,857	$	2,935	$	141

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

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, 2019, 2018 and 2017.

For the year ended:	December 31, 2019				December 31, 2018
	Average<br><br><br>Recorded<br><br><br>Investment		Interest<br><br><br>Income<br><br><br>Recognized		Average<br><br><br>Recorded<br><br><br>Investment		Interest<br><br><br>Income<br><br><br>Recognized
Commercial & Agriculture	$	367	$	33	$	636	$	25
Commercial Real Estate:
Owner Occupied		456		32		610		33
Non-Owner Occupied		308		20		39		5
Residential Real Estate		1,271		58		1,519		75
Farm Real Estate		683		29		716		29
Total	$	3,085	$	172	$	3,520	$	167
For the year ended:	December 31, 2017
---	---	---	---	---
	Average<br><br><br>Recorded<br><br><br>Investment		Interest<br><br><br>Income<br><br><br>Recognized
Commercial & Agriculture	$	1,375	$	34
Commercial Real Estate:
Owner Occupied		1,507		75
Non-Owner Occupied		233		6
Residential Real Estate		1,515		73
Farm Real Estate		613		28
Total	$	5,243	$	216

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, 2019 and 2018, respectively, there were no foreclosed assets included in other assets. As of December 31, 2019 and 2018, the Company had initiated formal foreclosure procedures on $1,022 and $311, respectively, of consumer residential mortgages.

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

	At December 31,<br><br><br>2019			At December 31,<br><br><br>2018
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	336		$	15
Acquisition of PCI loans		—			334
Accretion		(164	)		(13	)
Transfers from non-accretable to accretable		83			—
Balance at end of period	$	255		$	336

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued)

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

	At December 31, 2019		At December 31, 2018
	Acquired Loans with<br><br><br>Specific Evidence of<br><br><br>Deterioration of Credit<br><br><br>Quality (ASC 310-30)		Acquired Loans with<br><br><br>Specific Evidence of<br><br><br>Deterioration of Credit<br><br><br>Quality (ASC 310-30)
	(In Thousands)
Outstanding balance	$	1,149	$	1,805
Carrying amount		467		924

There was $0 and $8 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2019 and 2018, respectively.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, as of December 31, 2019, 2018 and 2017.

	For the Year Ended<br><br><br>December 31, 2019									For the Year Ended<br><br><br>December 31, 2018									For the Year Ended<br><br><br>December 31, 2017
	Unrealized<br><br><br>Gains and<br><br><br>Losses on<br><br><br>Available<br><br><br>for Sale<br><br><br>Securities			Defined<br><br><br>Benefit<br><br><br>Pension<br><br><br>Items			Total			Unrealized<br><br><br>Gains and<br><br><br>Losses on<br><br><br>Available<br><br><br>for Sale<br><br><br>Securities			Defined<br><br><br>Benefit<br><br><br>Pension<br><br><br>Items			Total			Unrealized<br><br><br>Gains and<br><br><br>Losses on<br><br><br>Available<br><br><br>for Sale<br><br><br>Securities			Defined<br><br><br>Benefit<br><br><br>Pension<br><br><br>Items			Total
Beginning balance	$	2,347		$	(3,799	)	$	(1,452	)	$	3,185		$	(4,309	)	$	(1,124	)	$	2,008		$	(4,345	)	$	(2,337	)
Other comprehensive<br><br><br>income (loss) before<br><br><br>reclassifications		10,561			(2,333	)		8,228			(886	)		393			(493	)		620			553			1,173
Amounts reclassified from<br><br><br>accumulated other<br><br><br>comprehensive income<br><br><br>(loss)		(25	)		123			98			326			117			443			(8	)		247			239
Net current-period other<br><br><br>comprehensive income<br><br><br>(loss)		10,536			(2,210	)		8,326			(560	)		510			(50	)		612			800			1,412
Reclassification of certain<br><br><br>income tax effects from<br><br><br>accumulated other<br><br><br>comprehensive income<br><br><br>(loss)		—			—			—			—			—			—			565			(764	)		(199	)
Reclassification of equity<br><br><br>securities from<br><br><br>accumulated other<br><br><br>comprehensive income<br><br><br>(loss)		—			—			—			(278	)		—			(278	)		—			—			—
Ending balance	$	12,883		$	(6,009	)	$	6,874		$	2,347		$	(3,799	)	$	(1,452	)	$	3,185		$	(4,309	)	$	(1,124	)

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss as of December 31, 2019, 2018 and 2017.

	Amount Reclassified from<br><br><br>Accumulated Other<br><br><br>Comprehensive Loss (a)
	For the year ended December 31,
Details about Accumulated Other<br><br><br>Comprehensive Income<br><br><br>(Loss) Components	2019				2018				2017				Affected Line Item in the<br><br><br>Statement Where Net Income is<br><br><br>Presented
Unrealized gains (losses) on available-for-sale<br><br><br>securities	$	32			$	(413	)		$	12			Net gain (loss) on sale of securities
Tax effect		(7	)			87				(4	)		Income taxes
		25				(326	)			8
Amortization of defined benefit pension items
Actuarial losses		(156	)	(b)		(149	)	(b)		(380	)	(b)	Other operating expenses
Tax effect		33				32				133			Income taxes
		(123	)			(117	)			(247	)
Total reclassifications for the period	$	(98	)		$	(443	)		$	(239	)
(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.
---	---

NOTE 7 - PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

	2019			2018
Land and improvements	$	6,651		$	6,553
Buildings and improvements		28,047			27,013
Furniture and equipment		21,988			20,831
Total		56,686			54,397
Accumulated depreciation		(33,815	)		(32,376	)
Premises and equipment, net	$	22,871		$	22,021

Depreciation expense was $2,240, $1,515 and $1,249 for 2019, 2018 and 2017, respectively.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 8 - GOODWILL AND INTANGIBLE ASSETS

There was no change in the carrying amount of goodwill of $76,851 for the year ends December 31, 2019 and December 31, 2018.

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 2019. Based on this test, management concluded that the Company’s goodwill was not impaired at December 31, 2019.

Acquired intangible assets were as follows as of year end.

	2019						2018
	Gross<br><br><br>Carrying<br><br><br>Amount		Accumulated<br><br><br>Amortization		Net<br><br><br>Carrying<br><br><br>Amount		Gross<br><br><br>Carrying<br><br><br>Amount		Accumulated<br><br><br>Amortization		Net<br><br><br>Carrying<br><br><br>Amount
Core deposit intangible assets(1):
Core deposit intangibles		14,792		8,049		6,743		14,792		7,104		7,688
Total core deposit intangible assets	$	14,792	$	8,049	$	6,743	$	14,792	$	7,104	$	7,688
(1)	Excludes fully amortized core deposit intangible assets
---	---

Aggregate core deposit intangible amortization expense was $945, $366 and $586 for 2019, 2018 and 2017, respectively.

Activity for mortgage servicing rights (MSRs) and the related valuation allowance follows:

	2019		2018
Loan Servicing Rights:
Beginning of year	$	1,664	$	743
Additions		247		1,047
Disposals		—		—
Amortized to expense		247		126
Other Charges		—		—
Change in valuation allowance		102		—
End of year	$	1,562	$	1,664
Valuation allowance:
Beginning of year	$	—	$	—
Additions expensed		102		—
Reductions credited to operations		—		—
Direct write-offs		—		—
End of year	$	102	$	—

Aggregate mortgage servicing rights (MSRs) amortization was $247, $126 and $72 for 2019, 2018 and 2017, respectively.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 8 - GOODWILL AND INTANGIBLE ASSETS (Continued)

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

	MSRs		Core deposit<br><br><br>intangibles		Total
2020	$	89	$	914	$	1,003
2021		89		891		980
2022		88		868		956
2023		87		840		927
2024		86		804		890
Thereafter		1,123		2,426		3,549
	$	1,562	$	6,743	$	8,305

NOTE 9 - INTEREST-BEARING DEPOSITS

Interest-bearing deposits as of December 31, 2019 and 2018 were as follows:

		2018
Demand	301,674	$	261,996
Savings and Money markets	588,697		582,128
Certificates of Deposit:
250 and over	58,290		42,815
Other	168,928		173,445
Individual Retirement Accounts	48,622		51,426
Total	1,166,211	$	1,111,810

All values are in US Dollars.

Scheduled maturities of certificates of deposit, including IRA’s at December 31, 2019 were as follows:

2020	$	171,220
2021		73,991
2022		23,344
2023		4,986
2024		1,261
Thereafter		1,038
Total	$	275,840

Deposits from the Company’s principal officers, directors, and their affiliates at year-end 2019 and 2018 were $8,917 and $6,925, respectively.

As of December 31, 2019, CDs and IRAs totaling $61,552 met or exceeded the FDIC’s insurance limit of $250,000.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

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, 2019						At December 31, 2018
	Federal<br><br><br>Funds<br><br><br>Purchased			Short-term<br><br><br>Borrowings			Federal<br><br><br>Funds<br><br><br>Purchased			Short-term<br><br><br>Borrowings
Outstanding balance at year end	$	—		$	101,500		$	—		$	188,600
Maximum indebtedness during the year		20,000			192,700			20,000			225,300
Average balance during the year		137			112,088			116			113,520
Average rate paid during the year		2.19	%		2.32	%		2.58	%		2.07	%
Interest rate on year end balance		—			1.63	%		—			2.45	%
	At December 31, 2017
---	---	---	---	---	---	---
	Federal<br><br><br>Funds<br><br><br>Purchased			Short-term<br><br><br>Borrowings
Outstanding balance at year end	$	—		$	56,900
Maximum indebtedness during the year		20,000			115,050
Average balance during the year		119			38,825
Average rate paid during the year		1.68	%		1.12	%
Interest rate on year end balance		—			1.42	%

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 was one day at December 31, 2019, 2018 and 2017.

NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES

Long-term advances from the FHLB were $125,000 at December 31, 2019 and $5,000 at December 31, 2018. Outstanding balances have maturity dates ranging from May 2029 to October 2029 with fixed rates ranging from 1.03% to 2.05%. The average rate on outstanding advances was 1.44% at December 31, 2019. Outstanding advances are prepayable in whole only and are subject to a termination fee.

Scheduled principal reductions of FHLB advances outstanding at December 31, 2019 were as follows:

2029	$	125,000
Total	$	125,000

In addition to the borrowings, the Company had outstanding letters of credit with the FHLB totaling $20,000 at year-end 2019 and 2018, respectively, used for pledging to secure public funds. FHLB borrowings and the letters of credit were collateralized by FHLB stock and by $369,750 and $320,400 of residential mortgage loans under a blanket lien arrangement at year-end 2019 and 2018, respectively.

The Company had a FHLB maximum borrowing capacity of $564,516 as of December 31, 2019, with remaining borrowing capacity of approximately $318,016. The borrowing arrangement with the FHLB is subject to annual renewal. The maximum borrowing capacity is recalculated at least quarterly.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 12 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase are used to facilitate the needs of our customers as well as to facilitate our short-term funding needs. Securities sold under repurchase agreements are carried at the amount of cash received in association with the agreement. We continuously monitor the collateral levels and may be required, from time to time, to provide additional collateral based on the fair value of the underlying securities. Securities pledged as collateral under repurchase agreements are maintained with our safekeeping agents.

The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of December 31, 2019 and 2018. All of the repurchase agreements are overnight agreements.

	December 31, 2019		December 31, 2018
Securities pledged for repurchase agreements:
U.S. Treasury securities	$	810	$	861
Obligations of U.S. government agencies		17,864		21,338
Total securities pledged	$	18,674	$	22,199
Gross amount of recognized liabilities for<br><br><br>repurchase agreements	$	18,674	$	22,199
Amounts related to agreements not included in<br><br><br>offsetting disclosures above	$	—	$	—

Information concerning securities sold under agreements to repurchase was as follows:

	2019			2018			2017
Outstanding balance at year end	$	18,674		$	22,199		$	21,755
Average balance during the year		18,321			18,456			18,234
Average interest rate during the year		0.10	%		0.10	%		0.10	%
Maximum month-end balance during the year	$	21,970		$	22,199		$	23,889
Weighted average interest rate at year end		0.10	%		0.10	%		0.10	%

NOTE 13 - SUBORDINATED DEBENTURES

Trusts formed by the Company in March of 2002 and March of 2003 issued floating rate trust preferred securities, in the amounts of $5,000 and $7,500, respectively, through special purpose entities as part of pooled offerings of such securities. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Company may redeem the subordinated debentures, in whole but not in part, at face value. In March 2007, the Company elected to redeem and refinance the $5,000 floating rate subordinated debenture. The refinancing was done at face value and resulted in a 2.00% reduction in the floating rate. The new subordinated debenture has a 30-year maturity and is redeemable, in whole or in part, anytime without penalty. The replacement subordinated debenture does not have any deferred issuance cost associated with it. The interest rate at December 31, 2019 on the $7,500 debenture was 5.26% and the $5,000 debenture was 3.72%.

Additionally, the Company formed an additional trust in September of 2004 that issued $12,500 of 6.05% fixed rate trust preferred securities for five years, then becoming floating rate trust preferred securities, through a special purpose entity as part of a pooled offering of such securities. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Company may redeem the subordinated debentures at face value without penalty. The current rate on the $12,500 subordinated debenture is 4.41%.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 13 - SUBORDINATED DEBENTURES (Continued)

Finally, the Company acquired two additional trust preferred securities as part of its acquisition of Futura Banc Corp (Futura) in December 2007. Futura TPF Trust I and Futura TPF Trust II were formed in June of 2005 in the amounts of $2,500 and $1,927, respectively. Futura had issued subordinated debentures to the trusts in exchange for ownership of all of the common security of the trusts and the proceeds of the preferred securities sold by the trusts. The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on June 15, 2035. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The current rate on the $2,500 subordinated debenture is variable at 3.78%. In June 2010, the rate on the $1,927 subordinated debenture switched from a fixed rate to a floating rate. The current rate on the $1,927 subordinated debenture is 3.78%.

NOTE 14 - INCOME TAXES

Income taxes were as follows for the years ended December 31:

	2019		2018		2017
Current	$	4,713	$	2,444	$	5,414
State		307		45		—
Deferred		663		151		435
Change in corporate tax rate		—		—		511
Income taxes	$	5,683	$	2,640	$	6,360

Effective tax rates differed from the statutory federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 due to the following:

	2019			2018			2017
Income taxes computed at the statutory federal tax<br><br><br>rate	$	8,308		$	3,524		$	7,781
Add (subtract) tax effect of:
Nontaxable interest income, net of nondeductible<br><br><br>interest expense		(1,194	)		(834	)		(1,107	)
Low income housing tax credit		(903	)		(903	)		(686	)
Cash surrender value of BOLI		(211	)		(143	)		(201	)
Nondeductible merger costs		—			1,034			—
Change in corporate tax rate		—			—			511
Change in tax position BOLI		(353	)		—			—
Other		36			(38	)		62
Income tax expense	$	5,683		$	2,640		$	6,360

The Tax Cut and Jobs Act, enacted on December 22, 2017, lowered the federal corporate income tax rate from 35% to 21% effective January 1, 2018.  As a result, the carrying value of net deferred tax assets was reduced, which increased income tax expense by $511 for the year ended December 31, 2017.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 14 - INCOME TAXES (Continued)

Year-end deferred tax assets and liabilities were due to the following:

	2019			2018
Deferred tax assets
Allowance for loan losses	$	3,245		$	3,056
Deferred compensation		1,191			1,217
Pension costs		81			—
Intangible assets		394			475
Purchase accounting adjustments		226			566
Net operating loss carryforward		1,081			1,374
Other		220			364
Deferred tax asset		6,438			7,052
Deferred tax liabilities
Tax depreciation in excess of book depreciation		(808	)		(556	)
Discount accretion on securities		(18	)		(31	)
FHLB stock dividends		(969	)		(1,053	)
Unrealized gain on securities available for sale		(3,424	)		(624	)
Pension costs		—			(469	)
Prepaids		(326	)		(301	)
BOLI		—			(337	)
Other		(359	)		(271	)
Deferred tax liability		(5,904	)		(3,642	)
Net deferred tax asset	$	534		$	3,410

No valuation allowance was established at December 31, 2019 and 2018, 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.

The Company and its subsidiaries are subject to U.S. federal income tax. The Company is subject to tax in Ohio based upon its net worth and in Indiana based upon its net income.

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 2016 have 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) plan was $1,074, $892 and $805 in 2019, 2018 and 2017, respectively. The Company’s matching contribution is 100% 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.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 15 - RETIREMENT PLANS (Continued)

In October 2015, the Company, on behalf of it and its subsidiaries, entered into Pension Shortfall Agreements (the “Shortfall Agreements”) with ten employees of the Bank. 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 $161 in 2019, $180 in 2018 and $18 in 2017. Included in pension shortfall expense was interest expense, totaling $20, $24 and $18 in 2019, 2018 and 2017, respectively, which was also recorded in and credited to the accounts of the ten individuals covered by this plan.

Information about the pension plan is as follows:

	2019			2018
Change in benefit obligation:
Beginning benefit obligation	$	13,338		$	17,916
Service cost		—			—
Interest cost		479			627
Curtailment gain		—			—
Settlement loss		—			98
Actuarial (gain)/loss		3,546			(1,800	)
Benefits paid		(1,793	)		(104	)
Settlement payments		—			(3,399	)
Ending benefit obligation		15,570			13,338
Change in plan assets, at fair value:
Beginning plan assets		15,572			19,306
Actual return		1,404			(207	)
Employer contribution		—			—
Benefits paid		(1,793	)		(104	)
Settlement payments		—			(3,399	)
Administrative expenses		—			(24	)
Ending plan assets		15,183			15,572
Funded status at end of year	$	(387	)	$	2,234

Amounts recognized in accumulated other comprehensive income (loss) at December 31, consist of unrecognized actuarial loss of $6,009, net of $1,597 tax in 2019 and $3,799, net of $1,010 tax in 2018.

The accumulated benefit obligation for the defined benefit pension plan was $15,570 at December 31, 2019 and $13,338 at December 31, 2018.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 15 - RETIREMENT PLANS (Continued)

The components of net periodic pension expense were as follows:

	2019			2018			2017
Service cost	$	—		$	—		$	—
Interest cost		479			627			679
Expected return on plan assets		(811	)		(1,355	)		(1,178	)
Net amortization and deferral		156			149			380
Net periodic pension cost (benefit)		(176	)		(579	)		(119	)
Additional loss due to settlement		—			1,188			237
Total pension cost (benefit)	$	(176	)	$	609		$	118
Net loss (gain) recognized in other comprehensive<br><br><br>income	$	2,798		$	(1,453	)	$	(322	)
Total recognized in net periodic benefit cost<br><br><br>and other comprehensive loss (before tax)	$	2,622		$	(2,032	)	$	(441	)

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 fiscal year is $156.  The Company incurred settlement costs in 2019, 2018 and 2017 of $0, $1,188 and $237, respectively.

The weighted average assumptions used to determine benefit obligations at year-end were as follows:

	2019			2018			2017
Discount rate on benefit obligation		3.13	%		4.14	%		3.51	%
Long-term rate of return on plan assets		4.96	%		7.00	%		7.00	%
Rate of compensation increase		0.00	%		0.00	%		0.00	%

The weighted average assumptions used to determine net periodic pension cost were as follows:

	2019			2018			2017
Discount rate on benefit obligation		4.14	%		3.51	%		4.00	%
Long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%
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 2019, 2018 and 2017 was zero.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 15 - RETIREMENT PLANS (Continued)

The Company’s pension plan asset allocation at year-end 2019 and 2018 and target allocation for 2020 by asset category are as follows:

	Target<br><br><br>Allocation	Percentage of Plan<br><br><br>Assets<br><br><br>at Year-end
Asset Category	2020	2019			2018
Equity securities	0-30%		20.0	%		33.1	%
Debt securities	70-100		80.0			20.7
Money market funds	0		0.0			46.2
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 4.96% in 2019 and 7.00% in 2018. 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 not expect to make any contribution to its pension plan in 2020. Employer contributions totaled $0 in 2019. Decreased plan assets and increased benefit obligations and actuarial gains led to a change in funded status from $2,234 at December 31, 2018 to a deficit of $387 at December 31, 2019.

The following tables set forth by level, within the fair value hierarchy, the pension plan’s assets at fair value as of December 31, 2019 and 2018:

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Common/collective trust:
Bonds	$	12,146	$	—	$	—	$	12,146
Equities		3,037		—		—		3,037
Total assets at fair value	$	15,183	$	—	$	—	$	15,183

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 15 - RETIREMENT PLANS (Continued)

	December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	2,689	$	—	$	—	$	2,689
Common/collective trust:
Bonds		3,221		—		—		3,221
Equities		5,153		—		—		5,153
Money market		4,509		—		—		4,509
Total assets at fair value	$	15,572	$	—	$	—	$	15,572

Investment in equity securities, debt securities, money market funds and mutual funds are valued at the closing price reported on the active market on which the individual securities are traded.

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:

2020	$	204
2021		246
2022		314
2023		375
2024		416
2025 through 2029		480
Total	$	2,035

Supplemental Retirement Plan

Civista established a supplemental retirement plan (“SERP”) in 2013, which covers key members of management. 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, 2019, was $2,836, compared to $2,570 at December 31, 2018. The expense related to the SERP was $394, $351 and $365 for 2019, 2018 and 2017, respectively. Distributions to participants made in 2019, 2018 and 2017 totaled $128, $87, and $41, respectively.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(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 240,001 shares available for grants under this plan at December 31, 2019.

No options had been granted under the 2014 Incentive Plan as of December 31, 2019 and 2018.

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, 2019, 2018 and 2017, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate common shares of 8,946, 7,071 and 7,171, respectively were issued to Civista directors 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 $196, $165 and $152, 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, 2019:

	December 31, 2019
	Number of<br><br><br>Restricted<br><br><br>Shares			Weighted<br><br><br>Average<br><br><br>Grant Date<br><br><br>Fair Value
Nonvested at beginning of period		39,970		$	19.10
Granted		21,106			20.65
Vested		(16,557	)		17.31
Forfeited		(492	)		22.41
Nonvested at end of period		44,027			20.48

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 16 - EQUITY INCENTIVE PLAN (Continued)

The following is a summary of the status of the Company’s awarded restricted shares as of December 31, 2019:

At December 31, 2019
Date of Award	Shares		Remaining Expense		Remaining Vesting Period (Years)
January 15, 2016		4,108	$	21		1.00
March 20, 2017		3,725		—		0.00
March 20, 2017		3,581		49		2.00
April 10, 2018		5,282		47		1.00
April 10, 2018		6,225		93		3.00
March 14, 2019		10,188		130		2.00
March 14, 2019		10,918		158		4.00
		44,027	$	498		2.25

During the twelve months ended December 31, 2019, 2018 and 2017, the Company recorded share-based compensation expense of $335, $263 and $274, respectively and director retainer fees of $196, $165 and $152, respectively, for shares granted under the 2014 Incentive Plan. At December 31, 2019, the total compensation cost related to unvested awards not yet recognized is $498, which is expected to be recognized over the weighted average remaining life of the grants of 2.25 years.

NOTE 17 - FAIR VALUE MEASUREMENT

U.S. generally accepted accounting principles establish 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 the equity security available for sale not actively traded in an open market is determined by using market data inputs for similar securities that are observable. (Level 2 inputs).  The fair value of the other equity security is determined from third-party pricing services or a computerized pricing model and classified Level 2.

Fair value swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 17 - FAIR VALUE MEASUREMENT (Continued)

Impaired loans: The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age 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 above as a Level 3 measurement.

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

Assets and liabilities measured at fair value are summarized below.

Fair Value Measurements at December 31, 2019 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<br><br><br>U.S. Government agencies	$	—	$	19,601	$	—
Obligations of states and political subdivisions		—		206,034		—
Mortgage-backed securities in government<br><br><br>sponsored entities		—		132,864		—
Total securities available for sale		—		358,499		—
Equity securities		—		1,191		—
Swap asset		—		8,918		—
Liabilities measured at fair value on a recurring<br><br><br>basis:
Swap liability		—		8,918		—
Assets measured at fair value on a nonrecurring<br><br><br>basis:
Impaired Loans	$	—	$	—	$	1

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 17 - FAIR VALUE MEASUREMENT (Continued)

Fair Value Measurements at December 31, 2018 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<br><br><br>U.S. Government agencies	$	—	$	30,685	$	—
Obligations of states and political subdivisions		—		172,071		—
Mortgage-backed securities in government<br><br><br>sponsored entities		—		143,538		—
Total securities available for sale		—		346,294		—
Equity securities		—		1,070		—
Swap asset		—		2,837		—
Liabilities measured at fair value on a recurring<br><br><br>basis:
Swap liability		—		2,837		—
Assets measured at fair value on a nonrecurring<br><br><br>basis:
Impaired Loans	$	—	$	—	$	1,803

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, 2019 and 2018.

	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019	Fair Value		Valuation<br><br><br>Technique	Unobservable<br><br><br>Input	Range	Weighted<br><br><br>Average
Impaired loans	$	1	Appraisal of collateral	Appraisal adjustments	30%	30%
				Holding period	22 months	22 months
	Quantitative Information about Level 3 Fair Value Measurements
---	---	---	---	---	---	---
December 31, 2018	Fair Value		Valuation<br><br><br>Technique	Unobservable<br><br><br>Input	Range	Weighted<br><br><br>Average
Impaired loans	$	1,803	Appraisal of collateral	Appraisal adjustments	0% - 30%	26%
				Liquidation expense	0% - 10%	8%
				Holding period	0 - 30 months	21 months

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 17 - FAIR VALUE MEASUREMENT (Continued)

The carrying amount and fair value of financial instruments carried at amortized cost were as follows:

December 31, 2019	Carrying<br><br><br>Amount		Total<br><br><br>Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	48,535	$	48,535	$	48,535	$	—	$	—
Other securities		20,280		20,280		20,280		—		—
Loans, held for sale		2,285		2,331		2,331		—		—
Loans, net of allowance for loan losses		1,694,203		1,713,863		—		—		1,713,863
Bank owned life insurance		44,999		44,999		44,999		—		—
Accrued interest receivable		7,093		7,093		7,093		—		—
Financial Liabilities:
Nonmaturing deposits		1,402,924		1,402,924		1,402,924		—		—
Time deposits		275,840		276,616		—		—		276,616
Short-term FHLB advances		101,500		101,500		101,500		—		—
Long-term FHLB advances		125,000		123,893		—		—		123,893
Securities sold under agreement to repurchase		18,674		18,674		18,674		—		—
Subordinated debentures		29,427		34,452		—		—		34,452
Accrued interest payable		277		277		277		—		—
December 31, 2018	Carrying<br><br><br>Amount		Total<br><br><br>Fair Value		Level 1		Level 2		Level 3
---	---	---	---	---	---	---	---	---	---	---
Financial Assets:
Cash and due from financial institutions	$	42,779	$	42,779	$	42,779	$	—	$	—
Other securities		21,021		21,021		21,021		—		—
Loans, held for sale		1,391		1,391		1,391		—		—
Loans, net of allowance for loan losses		1,548,262		1,517,278		—		—		1,517,278
Bank owned life insurance		43,037		43,037		43,037		—		—
Accrued interest receivable		6,723		6,723		6,723		—		—
Financial Liabilities:
Nonmaturing deposits		1,312,207		1,312,207		1,312,207		—		—
Time deposits		267,686		267,943		—		—		267,943
Short-term FHLB advances		188,600		188,600		188,600		—		—
Long-term FHLB advances		5,000		4,983		—		—		4,983
Securities sold under agreement to repurchase		22,199		22,199		22,199		—		—
Subordinated debentures		29,427		34,620		—		—		34,620
Accrued interest payable		230		230		230		—		—

The fair value approximates carrying amount for all items except those described below. Fair value for other securities approximates carrying value. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the cash flow analysis or underlying collateral values. For swaps, fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 17 - FAIR VALUE MEASUREMENT (Continued)

For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

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.

	2019				2018
	Fixed<br><br><br>Rate		Variable<br><br><br>Rate		Fixed<br><br><br>Rate		Variable<br><br><br>Rate
Commitments to extend credit:
Lines of credit and construction loans	$	15,155	$	396,516	$	14,984	$	359,220
Overdraft protection		5		37,286		3		37,201
Letters of credit		624		776		624		850
	$	15,784	$	434,578	$	15,611	$	397,271

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 4.50% to 8.00% at December 31, 2019 and 2.88% to 8.50% at December 31, 2018. 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 $7,127 on December 31, 2019 and $8,891 on December 31, 2018.

NOTE 19 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS

CBI and Civista 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 of Tier 1 capital to average assets. Management believes, as of December 31, 2019, that the Companies met all capital adequacy requirements to which they were subject.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 19 - CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued)

As of December 31, 2019, and 2018, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Companies 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 the institution’s category.

The Company’s and Civista’s actual capital levels and minimum required capital levels at December 31, 2019 and 2018 were as follows:

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Purposes
	Amount		Ratio			Amount		Ratio			Amount		Ratio
2019
Total Risk Based Capital
Consolidated	$	285,268		16.1	%	$	141,506		8.0	%	n/a		n/a
Civista		250,920		14.2			141,445		8.0		$	176,807		10.0	%
Tier I Risk Based Capital
Consolidated		270,501		15.3			106,129		6.0		n/a		n/a
Civista		235,094		13.3			106,084		6.0			141,445		8.0
CET1 Risk Based Capital
Consolidated		241,074		13.6			79,597		4.5		n/a		n/a
Civista		224,653		12.7			79,563		4.5			114,924		6.5
Leverage
Consolidated		270,501		12.3			87,652		4.0		n/a		n/a
Civista		235,094		10.8			87,362		4.0			109,203		5.0
2018
Total Risk Based Capital
Consolidated	$	260,531		16.1	%	$	129,080		8.0	%	n/a		n/a
Civista		228,620		14.2			128,918		8.0		$	161,407		10.0	%
Tier I Risk Based Capital
Consolidated		246,852		15.3			96,810		6.0		n/a		n/a
Civista		213,922		13.3			96,689		6.0			129,125		8.0
CET1 Risk Based Capital
Consolidated		208,061		12.9			72,608		4.5		n/a		n/a
Civista		203,441		12.6			72,517		4.5			104,914		6.5
Leverage
Consolidated		246,852		12.8			80,788		4.0		n/a		n/a
Civista		213,922		10.6			80,642		4.0			100,802		5.0

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 requirements. At December 31, 2019, Civista had $53,609 of net profits available to pay dividends to CBI without requiring regulatory approval.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of CBI follows:

	December 31,
Condensed Balance Sheets	2019			2018
Assets:
Cash	$	24,089		$	19,678
Equity securities		1,191			1,070
Investment in bank subsidiary		319,714			288,866
Investment in nonbank subsidiaries		15,181			14,081
Other assets		1,683			7,639
Total assets	$	361,858		$	331,334
Liabilities:
Deferred income taxes and other liabilities	$	2,305		$	3,009
Subordinated debentures		29,427			29,427
Total liabilities		31,732			32,436
Shareholders’ Equity:
Preferred stock		—			9,364
Common stock		276,422			266,901
Accumulated earnings		67,974			41,320
Treasury Stock		(21,144	)		(17,235	)
Accumulated other comprehensive loss		6,874			(1,452	)
Total shareholders’ equity		330,126			298,898
Total liabilities and shareholders’ equity	$	361,858		$	331,334
	For the years ended December 31,
---	---	---	---	---	---	---	---	---	---
Condensed Statements of Operations	2019			2018			2017
Dividends from bank subsidiaries	$	13,300		$	10,000		$	—
Interest expense		(1,423	)		(1,320	)		(1,035	)
Pension expense		176			199			(925	)
Acquisition expense		—			(10,738	)		—
Other expense, net		(1,107	)		(1,740	)		(1,071	)
Income (loss) before equity in undistributed net<br><br><br>earnings of subsidiaries		10,946			(3,599	)		(3,031	)
Income tax benefit		494			1,751			1,407
Equity in undistributed net earnings of subsidiaries		22,438			15,987			17,496
Net income	$	33,878		$	14,139		$	15,872
Comprehensive income	$	42,204		$	14,089		$	17,284

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(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	2019			2018			2017
Operating activities:
Net income	$	33,878		$	14,139		$	15,872
Adjustment to reconcile net income to net cash<br><br><br>from operating activities:
Change in other assets and other liabilities		4,437			794			(2,147	)
Gain on sale of fixed assets		—			(110	)		(66	)
Equity in undistributed net earnings of<br><br><br>subsidiaries		(22,438	)		(15,987	)		(17,496	)
Net cash from (used for) operating activities		15,877			(1,164	)		(3,837	)
Investing activities:
Proceeds from sale of premises and equipment		—		899				138
Disposal of investment in subsidiary		41			—			—
Acquisition and additional capitalization of<br><br><br>subsidiary, net of cash acquired		—			(5,216	)		(275	)
Net cash from (used for) investing activities		41			(4,317	)		(137	)
Financing activities:
Cash paid on fractional shares on preferred stock<br><br><br>conversion to common stock		(2	)		—			—
Net proceeds from common stock issuance		—			—			32,821
Purchase of treasury stock		(3,909	)		—			—
Payment to repurchase series B preferred stock		(402	)		—			—
Payment to repurchase common stock		—			—			(4	)
Cash dividends paid		(7,194	)		(4,749	)		(3,682	)
Net cash from (used for) financing activities		(11,507	)		(4,749	)		29,135
Net change in cash and cash equivalents		4,411			(10,230	)		25,161
Cash and cash equivalents at beginning of year		19,678			29,908			4,747
Cash and cash equivalents at end of year	$	24,089		$	19,678		$	29,908

NOTE 21 - PREFERRED SHARES

On December 19, 2013, the Company completed the sale of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a 6.50% Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B, of the Company, with a liquidation preference of $1,000 per share (equivalent to $25.00 per depositary share). The Company sold the maximum of 1,000,000 depositary shares in the offering, resulting in gross proceeds to the Company of $25,000.

Using proceeds from the sale of the depositary shares, the Company redeemed all of its outstanding Series A Preferred Shares for an aggregate purchase price of $22,857, which redemption was completed as of February 15, 2014.

All outstanding depositary shares were redeemed or converted into common shares by December 20, 2019.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 22 - EARNINGS PER COMMON SHARE

The factors used in the earnings per share computation follow.

	2019		2018		2017
Basic
Net income	$	33,878	$	14,139	$	15,872
Preferred stock dividends		647		959		1,244
Net income available to common<br><br><br>shareholders—basic	$	33,231	$	13,180	$	14,628
Weighted average common shares<br><br><br>outstanding—basic		15,652,881		11,971,786		9,906,856
Basic earnings per share	$	2.12	$	1.10	$	1.48
Diluted
Net income available to common<br><br><br>shareholders—basic	$	33,231	$	13,180	$	14,628
Preferred stock dividends on convertible<br><br><br>preferred stock		647		959		1,244
Net income available to common<br><br><br>shareholders—diluted	$	33,878	$	14,139	$	15,872
Weighted average common shares outstanding<br><br><br>for earnings per common share basic		15,652,881		11,971,786		9,906,856
Add: dilutive effects of convertible preferred<br><br><br>shares		1,198,859		1,883,921		2,445,760
Average shares and dilutive potential<br><br><br>common shares outstanding—diluted		16,851,740		13,855,707		12,352,616
Diluted earnings per share	$	2.01	$	1.02	$	1.28

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, and the impact of the Company’s convertible preferred shares using the “if converted” method.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)

	Interest<br><br><br>Income		Net<br><br><br>Interest<br><br><br>Income		Net<br><br><br>Income (Loss)			Basic<br><br><br>Earnings (loss)<br><br><br>per<br><br><br>Common<br><br><br>Share			Diluted<br><br><br>Earnings (loss)<br><br><br>per<br><br><br>Common<br><br><br>Share
2019
First quarter (1)(2)	$	24,584	$	21,719	$	9,669		$	0.61		$	0.57
Second quarter (1)(9)		24,926		21,741		8,660			0.55			0.51
Third quarter (3)(9)		24,023		20,418		7,708			0.48			0.46
Fourth quarter (4)		24,521		21,222		7,841			0.48			0.47
2018
First quarter (2)(5)	$	15,924	$	14,772	$	6,989		$	0.65		$	0.55
Second quarter (6)(7)(8)(9)		16,160		14,766		3,014			0.26			0.24
Third quarter (8)(9)(10)		17,886		15,824		(3,433	)		(0.31	)		(0.31	)
Fourth quarter (10)		23,707		20,745		7,569			0.48			0.45
(1)	Interest income and net interest income increased due to increased volume and rate on loans, non-taxable securities and interest-bearing deposits in other banks.
---	---
(2)	Net income increased due to fees on tax refund processing program.
---	---
(3)	Interest income and net interest income decreased due to a decrease in rate on interest earning assets and an increase on rate on interest-bearing liabilities.
---	---
(4)	Interest income and net interest income increased due to an increase in loan volume and a decrease in rate on interest-bearing liabilities.
---	---
(5)	Interest income and net interest income increased due to volume and rate increases on interest-bearing deposits in other banks.
---	---
(6)	Interest income increased due to increases in loan volume and rate.
---	---
(7)	Net interest income decreased due to increased volume and rate on FHLB overnight borrowings.
---	---
(8)	Net income decreased due to merger related expenses.
---	---
(9)	Net income decreased due to a decrease in fees on the tax refund program.
---	---
(10)	Interest income and net interest income increased due to increased volume in earning assets.
---	---

NOTE 24 - DERIVATIVES

To accommodate customer need and to support the Company’s asset/liability positioning, on occasion we enter into interest rate swaps with a customer and a bank counterparty. The interest rate swaps are free-standing derivatives and are recorded at fair value. The Company enters into a floating rate loan and a fixed rate swap with our customer. Simultaneously, the Company enters into an offsetting fixed rate swap with a bank counterparty. In connection with each swap transaction, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay a bank counterparty the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These transactions allow the Company’s customer to effectively convert variable rate loans to fixed rate loans. Since the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts offset each other and do not significantly impact the Company’s results of operations. None of the Company’s derivatives are designated as hedging instruments.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 24 - DERIVATIVE HEDGING INSTRUMENTS (Continued)

The following table summarizes the Company’s interest rate swap positions as of December 31, 2019.

	Classification on the Consolidated Balance Sheet	Notional<br><br><br>Amount			Fair Value			Weighted<br><br><br>Average Rate<br><br><br>Received/<br><br><br>(Paid)
Derivative Assets	Other Assets	$	151,648		$	8,918			5.04	%
Derivative Liabilities	Accrued expenses and other liabilities		(151,648	)		(8,918	)		-5.04	%
Net Exposure		$	—		$	—

The following table summarizes the Company’s interest rate swap positions as of December 31, 2018.

	Classification on the Consolidated Balance Sheet	Notional<br><br><br>Amount			Fair Value			Weighted<br><br><br>Average Rate<br><br><br>Received/<br><br><br>(Paid)
Derivative Assets	Other Assets	$	120,131		$	2,837			5.19	%
Derivative Liabilities	Accrued expenses and other liabilities		(120,131	)		(2,837	)		-5.19	%
Net Exposure		$	—		$	—

The Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All hedge transactions must be approved in advance by the Lenders Loan Committee or the Directors Loan Committee of the Board of Directors. The Company classifies changes in the fair value of derivatives with “Other” in the Consolidated Statements of Operation.

NOTE 25 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS

The Company invests in qualified affordable housing projects. At December 31, 2019 and 2018, the balance of the Company’s investments in qualified affordable housing projects was $5,154 and $4,276, respectively. These balances are reflected in the other assets line on the Consolidated Balance Sheet. The unfunded commitments related to the investments in qualified affordable housing projects totaled $5,417 and $4,922 at December 31, 2019 and 2018, respectively.

During the years ended December 31, 2019, 2018 and 2017, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $570, $473 and $354, respectively, which was included within pre-tax income on the Consolidated Statements of Operations.

Additionally, during the years ended December 31, 2019, 2018 and 2017, the Company recognized tax credits and other benefits from its investments in affordable housing tax credits of $995, $903 and $686, respectively.  During the years ended December 31, 2019, 2018 and 2017, the Company did not incur impairment losses related to its investment in qualified affordable housing projects.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 26 – REVENUE RECOGNITION

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. 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. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Service Charges

Service charges consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

ATM/Interchange Fees

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Mastercard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Wealth Management Fees

Wealth management fees are primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received in the following month through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Tax Refund Processing Fees

The Company facilitates the payment of federal and state income tax refunds in partnership with a third-party vendor. Refund Transfers (“RTs”) are fee-based products whereby a tax refund is issued to the taxpayer after the Company has received the refund from the federal or state government. As part of this agreement the Company earns fee income, the majority of which is received in the first quarter of the year. The Company’s fee income revenue is recognized based on the estimated percent of business completed by each date.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 26 – REVENUE RECOGNITION (Continued)

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, 2019, 2018 and 2017.

	For the years ended December 31,
	2019		2018		2017
Noninterest Income
In-scope of Topic 606:
Service charges	$	6,395	$	5,208	$	4,777
ATM/Interchange fees		4,056		2,794		2,304
Wealth management fees		3,670		3,669		3,068
Tax refund processing fees		2,750		2,750		2,750
Other		911		892		738
Noninterest Income (in-scope of Topic 606)		17,782		15,313		13,637
Noninterest Income (out-of-scope of Topic 606)		4,661		2,818		2,697
Total Noninterest Income	$	22,443	$	18,131	$	16,334

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2019 and December 31, 2018, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 27 - 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 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.

The balance sheet information related to our operating leases were as follows as of December 31, 2019:

	Classification on the Consolidated Balance Sheet	December 31, 2019
Assets:
Operating lease	Other assets	$	3,273
Liabilities:
Operating lease	Accrued expenses and other liabilities	$	3,273

The cost components of our operating leases were as follows for the period ended December 31, 2019:

	December 31, 2019
Lease cost
Operating lease cost	$	429
Short-term lease cost		262
Sublease income		(49	)
Total lease cost	$	642

CIVISTA BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019, 2018 and 2017

(Amounts in thousands, except share data)

NOTE 27 – LEASES (Continued)

Maturities of our lease liabilities for all operating leases for each of the next five years and thereafter is as follows:

2020	$	511
2021		497
2022		438
2023		430
2024		422
Thereafter		1,381
Total lease payments	$	3,679
Less: Imputed Interest		406
Present value of lease liabilities	$	3,273

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of December 31, 2019:

Weighted-average remaining lease term - operating leases (years)	6.25
Weighted-average discount rate - operating leases	2.92	%

Operating leases: The Company leases certain branch properties, office space and equipment under operating leases. Rent expense was $642, $579, and $558 for 2019, 2018 and 2017, respectively. Rent commitments, before considering renewal options that are generally present, at December 31, 2019 were as follows:

2020	$	660
2021		367
2022		293
2023		215
2024		206
Thereafter		595
Total	$	2,336

The rent commitments listed above are primarily for the leasing of seven financial services branches.

86

civb-ex211_9.htm

Exhibit 21.1

SUBSIDIARIES OF REGISTRANT

Subsidiary	Jurisdiction of Organization
Civista Bank	Ohio
First Citizens Insurance Agency, Inc.	Ohio
Water Street Properties, Inc.	Ohio
First Citizens Investments, Inc.	Delaware
First Citizens Capital LLC	Delaware
CIVB Risk Management, Inc.	Delaware
First Citizens Statutory Trust II	Connecticut
First Citizens Statutory Trust III	Delaware
First Citizens Statutory Trust IV	Delaware
Futura TPF Trust I	Delaware
Futura TPF Trust II	Delaware

civb-ex231_6.htm

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors of Civista Bancshares, Inc.

We consent to the incorporation by reference in Registration Statements File No. 333-202316 on Form S-8 and File No. 333-227006 on Form S-3 of Civista Bancshares, Inc. of our report dated March 16, 2020, relating to our audit of the consolidated financial statements and internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated by reference in this Annual Report on Form 10-K of Civista Bancshares, Inc. for the year ended December 31, 2019.

/s/ S.R. Snodgrass, P.C.

Cranberry Township, Pennsylvania

March 16, 2020

civb-ex311_12.htm

Exhibit 31.1

Certification of Principal Executive Officer

CERTIFICATIONS FOR ANNUAL REPORT ON FORM 10-K

I, Dennis G. Shaffer, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Civista Bancshares, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and  have:
---	---
a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
---	---
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---
Signature and Title:	/s/ Dennis G. Shaffer, President, CEO	Date:	March 16, 2020
---	---	---	---

civb-ex312_13.htm

Exhibit 31.2

Certification of Principal Financial Officer

1BCERTIFICATIONS FOR ANNUAL REPORT ON FORM 10-K

I, Todd A. Michel, certify that:

1.	I have reviewed this Annual Report on Form 10-K of Civista Bancshares, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
---	---
3.	Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
---	---
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and  have:
---	---
a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
---	---
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
---	---
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
---	---
5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
---	---
a.	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to  adversely affect the registrant’s ability to record, process, summarize and report financial information; and
---	---
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
---	---
Signature and Title:	/s/ Todd A. Michel, Senior Vice President, Controller	Date:	March 16, 2020
---	---	---	---

civb-ex321_7.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Civista Bancshares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019, as filed with the Securities and Exchange Commission on the date of this certification (the Report), I, Dennis G. Shaffer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
---	---
/s/ Dennis G. Shaffer
---
Dennis G. Shaffer
Chief Executive Officer
March 16, 2020

civb-ex322_10.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Civista Bancshares, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2019, as filed with the Securities and Exchange Commission on the date of this certification (the Report), I, Todd A. Michel, Senior Vice President and Controller of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
---	---
/s/ Todd A. Michel
---
Todd A. Michel
Senior Vice President, Controller
March 16, 2020