CIVISTA BANCSHARES, INC. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: September 30, 2020

☐	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		(I.R.S. 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

N/A

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

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

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common		CIVB		NASDAQ Capital Market

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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Shares, no par value, outstanding at November 5, 2020—15,914,173 shares

CIVISTA BANCSHARES, INC.

Index

PART I.	Financial Information
Item 1.	Financial Statements:
	Consolidated Balance Sheets (Unaudited) September 30, 2020 and December 31, 2019	2
	Consolidated Statements of Operations (Unaudited) Three- and nine-months ended September 30, 2020 and 2019	3
	Consolidated Statements of Comprehensive Income (Unaudited) Three- and nine-months ended September 30, 2020 and 2019	4
	Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) Three- and nine-months ended September 30, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2020 and 2019	7
	Notes to Interim Consolidated Financial Statements (Unaudited)	8-37
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38-50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51-52
Item 4.	Controls and Procedures	53

PART II.	Other Information
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signatures		56

Part I – Financial Information

ITEM 1.

Financial Statements

CIVISTA BANCSHARES, INC.

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

	September 30, 2020			December 31, 2019
ASSETS
Cash and due from financial institutions	$	194,773		$	48,535
Securities available for sale		365,874			358,499
Equity securities		817			1,191
Loans held for sale		13,256			2,285
Loans, net of allowance of $22,637 and $14,767		2,018,303			1,694,203
Other securities		20,537			20,280
Premises and equipment, net		22,958			22,871
Accrued interest receivable		10,227			7,093
Goodwill		76,851			76,851
Other intangible assets		8,045			8,305
Bank owned life insurance		45,732			44,999
Swap assets		24,727			8,918
Other assets		15,893			15,527
Total assets	$	2,817,993		$	2,309,557
LIABILITIES
Deposits
Noninterest-bearing	$	660,120		$	512,553
Interest-bearing		1,408,649			1,166,211
Total deposits		2,068,769			1,678,764
Short-term Federal Home Loan Bank advances		—			101,500
Long-term Federal Home Loan Bank advances		125,000			125,000
Securities sold under agreements to repurchase		25,813			18,674
Other borrowings		183,695			—
Subordinated debentures		29,427			29,427
Swap liabilities		24,727			8,918
Accrued expenses and other liabilities		18,507			17,148
Total liabilities		2,475,938			1,979,431
SHAREHOLDERS’ EQUITY
Common shares, no par value, 20,000,000 shares authorized, 17,664,951 shares issued at September 30, 2020 and 17,623,706 shares issued at December 31, 2019		276,940			276,422
Retained earnings		84,628			67,974
Treasury shares, 1,719,472 common shares at September 30, 2020 and 936,164 common shares at December 31, 2019, at cost		(33,900	)		(21,144	)
Accumulated other comprehensive income		14,387			6,874
Total shareholders’ equity		342,055			330,126
Total liabilities and shareholders’ equity	$	2,817,993		$	2,309,557

See notes to interim unaudited consolidated financial statements

Page 2

CIVISTA BANCSHARES, INC.

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

	Three months ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020			2019
Interest and dividend income
Loans, including fees	$	21,638	$	20,776		$	64,924		$	63,395
Taxable securities		1,325		1,712			4,100			5,155
Tax-exempt securities		1,536		1,449			4,589			4,208
Federal funds sold and other		59		86			531			775
Total interest and dividend income		24,558		24,023			74,144			73,533
Interest expense
Deposits		1,631		2,099			5,418			5,966
Federal Home Loan Bank advances		452		1,152			1,480			2,581
Subordinated debentures		194		350			757			1,094
Other borrowings		271		—			275			—
Securities sold under agreements to repurchase and other		4		4			18			14
Total interest expense		2,552		3,605			7,948			9,655
Net interest income		22,006		20,418			66,196			63,878
Provision for loan losses		2,250		150			7,862			150
Net interest income after provision for loan losses		19,756		20,268			58,334			63,728
Noninterest income
Service charges		1,414		1,726			3,812			4,733
Net gain on sale of securities		92		3			92			17
Net gain (loss) on equity securities		20		112			(126	)		81
Net gain on sale of loans		2,413		815			5,501			1,701
ATM/Interchange fees		1,183		1,014			3,226			2,871
Wealth management fees		1,006		975			2,916			2,733
Bank owned life insurance		243		254			733			753
Tax refund processing fees		—		—			2,375			2,750
Swap fees		158		199			1,260			287
Other		257		331			727			890
Total noninterest income		6,786		5,429			20,516			16,816
Noninterest expense
Compensation expense		10,595		9,707			32,063			29,059
Net occupancy expense		1,010		902			3,050			2,906
Equipment expense		494		561			1,507			1,504
Contracted data processing		415		435			1,340			1,301
FDIC assessment		288		(1	)		531			297
State franchise tax		427		499			1,394			1,398
Professional services		669		756			2,289			2,151
Amortization of intangible assets		227		235			686			710
ATM/Interchange expense		538		514			1,316			1,437
Marketing		361		404			1,056			1,111
Software maintenance expense		506		396			1,350			1,101
Other operating expenses		2,197		2,323			7,115			6,843
Total noninterest expense		17,727		16,731			53,697			49,818
Income before taxes		8,815		8,966			25,153			30,726
Income tax expense		1,133		1,258			3,134			4,688
Net Income		7,682		7,708			22,019			26,038
Preferred stock dividends		—		162			—			490
Net income available to common shareholders	$	7,682	$	7,546		$	22,019		$	25,548
Earnings per common share, basic	$	0.48	$	0.48		$	1.36		$	1.64
Earnings per common share, diluted	$	0.48	$	0.46		$	1.36		$	1.54

See notes to interim unaudited consolidated financial statements

Page 3

CIVISTA BANCSHARES, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Net income	$	7,682		$	7,708		$	22,019		$	26,038
Other comprehensive income, net of reclassification adjustment:
Unrealized holding gains on available for sale securities		856			3,724			9,294			16,164
Tax effect		(180	)		(782	)		(1,952	)		(3,393	)
Pension liability adjustment		72			147			217			441
Tax effect		(15	)		(31	)		(46	)		(93	)
Total other comprehensive income		733			3,058			7,513			13,119
Comprehensive income	$	8,415		$	10,766		$	29,532		$	39,157

See notes to interim unaudited consolidated financial statements

Page 4

CIVISTA BANCSHARES, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share data)

							Common Shares											Accumulated Other		Total
							Outstanding Shares			Amount		Retained Earnings			Treasury Shares			Comprehensive Income		Shareholders’ Equity
Balance, June 30, 2020								16,052,979		$	276,841	$	78,712		$	(32,594	)	$	13,654	$	336,613
Net Income								—			—		7,682			—			—		7,682
Other comprehensive income								—			—		—			—			733		733
Stock-based compensation								—			99		—			—			—		99
Common stock dividends ($0.11 per share)								—			—		(1,766	)		—			—		(1,766	)
Purchase of treasury stock								(107,500	)		—		—			(1,306	)		—		(1,306	)
Balance, September 30, 2020								15,945,479		$	276,940	$	84,628		$	(33,900	)	$	14,387	$	342,055

	Preferred Shares						Common Shares											Accumulated Other		Total
	Outstanding Shares			Amount			Outstanding Shares			Amount		Retained Earnings			Treasury Shares			Comprehensive Income		Shareholders’ Equity
Balance, June 30, 2019		10,120		$	9,364			15,633,059		$	267,275	$	56,199		$	(17,235	)	$	8,609	$	324,212
Net Income		—			—			—			—		7,708			—			—		7,708
Other comprehensive income		—			—			—			—		—			—			3,058		3,058
Conversion of Series B preferred shares to common shares		(222	)		(206	)		28,416			206		—			—			—		—
Stock-based compensation		—			—			—			78		—			—			—		78
Common stock dividends ($0.11 per share)		—			—			—			—		(1,722	)		—			—		(1,722	)
Preferred stock dividends ($16.25 per share)		—			—			—			—		(162	)							(162	)
Purchase of treasury stock		—			—			(188,200	)		—		—			(3,909	)		—		(3,909	)
Balance, September 30, 2019		9,898		$	9,158			15,473,275		$	267,559	$	62,023		$	(21,144	)	$	11,667	$	329,263

See notes to interim unaudited consolidated financial statements

Page 5

CIVISTA BANCSHARES, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share data)

							Common Shares											Accumulated Other			Total
							Outstanding Shares			Amount		Retained Earnings			Treasury Shares			Comprehensive Income			Shareholders’ Equity
Balance, December 31, 2019								16,687,542		$	276,422	$	67,974		$	(21,144	)	$	6,874		$	330,126
Net Income								—			—		22,019			—			—			22,019
Other comprehensive income								—			—		—			—			7,513			7,513
Stock-based compensation								41,245			518		—			—			—			518
Common stock dividends ($0.33 per share)								—			—		(5,365	)		—			—			(5,365	)
Purchase of treasury stock								(783,308	)		—		—			(12,756	)		—			(12,756	)
Balance, September 30, 2020								15,945,479		$	276,940	$	84,628		$	(33,900	)	$	14,387		$	342,055

	Preferred Shares						Common Shares											Accumulated Other			Total
	Outstanding Shares			Amount			Outstanding Shares			Amount		Retained Earnings			Treasury Shares			Comprehensive Income (loss)			Shareholders’ Equity
Balance, December 31, 2018		10,120		$	9,364			15,603,499		$	266,901	$	41,320		$	(17,235	)	$	(1,452	)	$	298,898
Net Income		—			—			—			—		26,038			—			—			26,038
Other comprehensive income		—			—			—			—		—			—			13,119			13,119
Conversion of Series B preferred shares to common shares		(222	)		(206	)		28,416			206		—			—			—			—
Stock-based compensation		—			—			29,560			452		—			—			—			452
Common stock dividends ($0.31 per share)		—			—			—			—		(4,845	)		—			—			(4,845	)
Preferred stock dividends ($48.75 per share)		—			—			—			—		(490	)		—			—			(490	)
Purchase of treasury stock		—			—			(188,200	)		—		—			(3,909	)		—			(3,909	)
Balance, September 30, 2019		9,898		$	9,158			15,473,275		$	267,559	$	62,023		$	(21,144	)	$	11,667		$	329,263

See notes to interim unaudited consolidated financial statements

Page 6

CIVISTA BANCSHARES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine Months Ended September 30,
	2020			2019
Net cash from operating activities	$	25,301		$	22,522
Cash flows used for investing activities:
Maturities, paydowns and calls of securities, available-for-sale		38,869			37,688
Purchases of securities, available-for-sale		(39,144	)		(48,178	)
Sale of securities available for sale		1,455			16,829
Purchase of other securities		(257	)		—
Redemption of other securities		—			741
Sale of equity securities		247			—
Purchase of bank owned life insurance		—			(955	)
Net loan originations		(339,683	)		(86,351	)
Proceeds from sale of premises and equipment		12			—
Premises and equipment purchases		(1,780	)		(1,729	)
Net cash used for investing activities		(340,281	)		(81,955	)
Cash flows from financing activities:
Proceeds from long-term FHLB advances		—			50,000
Net change in short-term FHLB advances		(101,500	)		(7,500	)
Proceeds from other borrowings		183,695			—
Increase in deposits		390,005			52,728
Increase (decrease) in securities sold under repurchase agreements		7,139			(7,111	)
Purchase of treasury shares		(12,756	)		(3,909	)
Common dividends paid		(5,365	)		(4,845	)
Preferred dividends paid		—			(490	)
Net cash provided by financing activities		461,218			78,873
Increase in cash and due from financial institutions		146,238			19,440
Cash and due from financial institutions at beginning of period		48,535			42,779
Cash and due from financial institutions at end of period	$	194,773		$	62,219
Cash paid during the period for:
Interest	$	7,733		$	9,614
Income taxes		4,595			3,700
Supplemental cash flow information:
Transfer of premises to held-for-sale		—			76
Change in fair value of swap asset		(15,809	)		(8,719	)
Change in fair value of swap asset liability		15,809			8,719
Conversion of preferred shares to common shares		—			206
Securities purchased not settled		—			2,102
Increase in right-of-use asset on leases		—			(2,367	)
Increase in lease liability		—			2,367

See notes to interim unaudited consolidated financial statements

Page 7

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(1) Consolidated Financial Statements

Nature of Operations and Principles of Consolidation: Civista Bancshares, Inc. (CBI) is an Ohio corporation and a registered financial holding company. The Consolidated Financial Statements include the accounts of CBI and its wholly-owned subsidiaries: Civista Bank (Civista), First Citizens Insurance Agency, Inc. (FCIA), Water Street Properties, Inc. (Water St.) and CIVB Risk Management, Inc. (CRMI). CRMI is a wholly-owned captive insurance company which allows the Company to insure against certain risks unique to the operations of CBI and its subsidiaries. The operations of CRMI are located in Wilmington, Delaware. First Citizens Capital LLC (FCC) is wholly-owned by Civista and holds inter-company debt. The operations of FCC are located in Wilmington, Delaware. First Citizens Investments, Inc. (FCI) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware. 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 through September 30, 2020. Water Street Properties was formed to hold properties repossessed by CBI subsidiaries. Revenue from Water St. was less than 1.0% of total revenue through September 30, 2020. The above companies together are referred to as the “Company.” Intercompany balances and transactions are eliminated in consolidation. Management considers the Company to operate primarily in one reportable segment, banking.

The Consolidated Financial Statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position as of September 30, 2020 and its results of operations and changes in cash flows for the periods ended September 30, 2020 and 2019 have been made. The accompanying Consolidated Financial Statements have been prepared in accordance with instructions of Form 10-Q, and therefore certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been omitted. The results of operations for the periods ended September 30, 2020 are not necessarily indicative of the operating results for the full year. Reference is made to the accounting policies of the Company described in the notes to the audited financial statements contained in the Company’s 2019 annual report. The Company has consistently followed these policies in preparing this Form 10-Q.

The Company provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Franklin, Logan, Madison, Summit, Huron, Ottawa, Richland, Montgomery and Cuyahoga, 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. Civista has two loan concentrations, one is to Lessors of Non-Residential Buildings and Dwellings totaling $498,819, or 24.3% of total loans, as of September 30, 2020, and the other is to Lessors of Residential Buildings and Dwellings totaling $237,783, or 11.6% of total loans, as of September 30, 2020. These segments of the loan portfolio have been conservatively underwritten, monitored and managed by experienced commercial bankers. However, the customers’ ability to repay their loans is dependent on the real estate market and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions that are in excess of federally insured limits.

(2) Significant 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.

Page 8

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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.

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

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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update remove 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 amendments in this Update require 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. We adopted ASU 2018-13 effective January 1, 2020, which did not have a material impact on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40). The amendment in this ASU addressed customers’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also added certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment in this ASU aligned the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted ASU 2018-15 effective January 1, 2020, which did not have a material impact on the Company’s Consolidated Financial Statements.

In October, 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810), which made improvements in (1) applying the variable interest entity (VIE) guidance to private companies under common control and (2) considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. Under the amendments in this Update, a private company may elect not to apply VIE guidance to legal entities under common control (including common control leasing arrangements) if both the parent and the legal entity being evaluated for consolidation are not public business entities. In addition, indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. We adopted ASU 2018-17 effective January 1, 2020, which did not have a material impact on the Company’s Consolidated Financial Statements.

Page 9

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

In November, 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808), which made the following targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements: (1) clarified that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (2) added unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606, and (3) required that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. We adopted ASU 2018-18 effective January 1, 2020, which did not have a material impact on the Company’s Consolidated Financial Statements.

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. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. ASU 2016-13 was to be effective for annual and interim periods beginning after December 15, 2019, with early adoption permitted for annual and interim periods beginning after December 15, 2018. In November 2019, however, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update deferred the effective date of ASU 2016-13 for U.S. Securities and Exchange Commission (“SEC”) filers that are eligible to be smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. 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 effect this ASU will have on the Company’s Consolidated Financial Statements. Management plans on running parallel calculations and finalizing 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 an SEC filer, such as the Company, was to adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In November 2019, however, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), which deferred the effective date for ASC 350, Intangibles – Goodwill and Other, for smaller reporting companies, such as the Company, to fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Page 10

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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 were to be effective for interim and annual reporting periods beginning after December 15, 2019. In November 2019, however, the FASB issued ASU 2019-10, Financial Instruments ‒ Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This Update defers the effective date 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 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 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. 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 date 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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The Update is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements necessitated by reference rate reform. The Update also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. The amendments in this Update are effective for all entities as of March 12, 2020 through December 31, 2022. Management is currently evaluating reference rate options and is reviewing loan agreements, debt securities, derivatives and borrowings impacted by reference rate reform.

Other recent ASU’s issued by the FASB did not, or are not believed by management to have a material effect on the Company’s present or future Consolidated Financial Statements.

(3) Securities

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

September 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities and obligations of U.S. government agencies	$	19,083	$	304	$	(1	)	$	19,386
Obligations of states and political subdivisions		207,077		19,170		(149	)		226,098
Mortgage-backed securities in government sponsored entities		114,113		6,317		(40	)		120,390
Total debt securities	$	340,273	$	25,791	$	(190	)	$	365,874

Page 11

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities and obligations of U.S. government agencies	$	19,401	$	204	$	(4	)	$	19,601
Obligations of states and political subdivisions		193,646		12,409		(21	)		206,034
Mortgage-backed securities in government sponsored entities		129,145		3,863		(144	)		132,864
Total debt securities	$	342,192	$	16,476	$	(169	)	$	358,499

The amortized cost and fair value of securities at September 30, 2020, by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities are shown separately.

Available for sale	Amortized Cost		Fair Value
Due in one year or less	$	11,232	$	11,311
Due after one year through five years		14,540		14,913
Due after five years through ten years		25,421		27,602
Due after ten years		174,967		191,658
Mortgage-backed securities		114,113		120,390
Total securities available for sale	$	340,273	$	365,874

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020			2019		2020			2019
Sale proceeds	$	1,455		$	—	$	1,455		$	16,829
Gross realized gains		94			—		94			47
Gross realized losses		—			—		—			(43	)
Gains (losses) from securities called or settled by the issuer		(2	)		3		(2	)		13

Securities were pledged to secure public deposits, other deposits and liabilities as required by law. The carrying value of pledged securities was approximately $165,109 and $139,004 as of September 30, 2020 and December 31, 2019, respectively.

Securities with unrealized losses at September 30, 2020 and December 31, 2019 not recognized in income are as follows:

September 30, 2020	12 Months or less					More than 12 months					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	—		$	134	$	(1	)	$	134	$	(1	)
Obligations of states and political subdivisions		5,373		(149	)		—		—			5,373		(149	)
Mortgage-backed securities in gov’t sponsored entities		2,984		(40	)		—		—			2,984		(40	)
Total temporarily impaired	$	8,357	$	(189	)	$	134	$	(1	)	$	8,491	$	(190	)

Page 12

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

December 31, 2019	12 Months or less					More than 12 months					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury securities and obligations of U.S. government agencies	$	—	$	—		$	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 entities		10,653		(91	)		7,732		(53	)		18,385		(144	)
Total temporarily impaired	$	12,600	$	(112	)	$	11,140	$	(57	)	$	23,740	$	(169	)

At September 30, 2020, there were a total of 10 securities in the portfolio with unrealized losses mainly due to higher current market rates when compared to the time of purchase. Unrealized losses on securities have not been recognized into income because the issuers’ securities are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to currently higher market rates when compared to the time of purchase. 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 for the three and nine months ended September 30, 2020 and 2019, and the portion of unrealized gains and losses for the period that relates to equity investments held at September 30, 2020 and 2019:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020			2019
Net gains (losses) recognized on equity securities during the period	$	20	$	112	$	(126	)	$	81
Less: Net losses realized on the sale of equity securities during the period		—		—		6			—
Unrealized gains (losses) recognized on equity securities held at reporting date	$	20	$	112	$	(120	)	$	81

(4) Loans

Loan balances were as follows:

	September 30, 2020			December 31, 2019
Commercial & Agriculture	$	435,285		$	203,110
Commercial Real Estate- Owner Occupied		261,235			245,606
Commercial Real Estate- Non-Owner Occupied		683,579			592,222
Residential Real Estate		443,960			463,032
Real Estate Construction		167,560			155,825
Farm Real Estate		35,232			34,114
Consumer and Other		14,089			15,061
Total loans		2,040,940			1,708,970
Allowance for loan losses		(22,637	)		(14,767	)
Net loans	$	2,018,303		$	1,694,203

Included in Commercial & Agriculture as of September 30, 2020 is $259,097 of Paycheck Protection Program (“PPP”) loans.

Included in total loans above are net deferred loan fees of $8,208 and $488 at September 30, 2020 and December 31, 2019, respectively. Included in net deferred loan fees as of September 30, 2020 is $7,498 of net deferred loans fees from PPP loans.

Page 13

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Loan Modifications/Troubled Debt Restructurings

During 2020, Civista modified 813 loans totaling $431,283, primarily consisting of the deferral of principal and/or interest payments. All of the loans modified were performing at December 31, 2019 and comply with the provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to not be considered a troubled debt restructuring.

While most of the loans that received some form of modification have returned to making payments, Civista has received customer deferral requests for another round of modifications on loans. As of September 30, 2020, Civista has 47 loans totaling $52,186 that remain on a CARES Act modification. Details with respect to loan modifications that remain on deferred status are as follows:

	Number of				Weighted Average
Type of Loan	Loans		Balance		Interest Rate
			(In thousands)
Commercial & Agriculture		12	$	1,370		4.61	%
Commercial Real Estate:
Owner Occupied		19		16,076		4.51	%
Non-Owner Occupied		14		27,720		4.96	%
Real Estate Construction		2		7,020		3.59	%
Total		47	$	52,186		4.63	%

(5) Allowance for Loan Losses

Management has an established methodology for determining 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. Loss migration rates for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio segments. Management also considers certain economic factors for trends that management uses to account for the qualitative and environmental changes in risk, which affects the level of the reserve.

The following economic factors are analyzed:

•

Changes in lending policies and procedures

•

Changes in experience and depth of lending and management staff

•

Changes in quality of credit review system

•

Changes in nature and volume of the loan portfolio

•

Changes in past due, classified and nonaccrual loans and TDRs

•

Changes in economic and business conditions

•

Changes in competition or legal and regulatory requirements

•

Changes in concentrations within the loan portfolio

•

Changes in the underlying collateral for collateral dependent loans

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considers the allowance for loan losses of $22,637 adequate to cover loan losses inherent in the loan portfolio, at September 30, 2020. The following tables present, by portfolio segment, the changes in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019.

Page 14

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the three months ended September 30, 2020	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	2,799	$	—		$	1	$	(139	)	$	2,661
Commercial Real Estate:
Owner Occupied		3,411		(147	)		6		685			3,955
Non-Owner Occupied		9,169		—			3		1,406			10,578
Residential Real Estate		2,434		(11	)		117		(83	)		2,457
Real Estate Construction		1,844		—			1		500			2,345
Farm Real Estate		361		—			3		(4	)		360
Consumer and Other		247		(27	)		21		(21	)		220
Unallocated		155		—			—		(94	)		61
Total	$	20,420	$	(185	)	$	152	$	2,250		$	22,637

For the three months ended September 30, 2020, the Company provided $2,250 to the allowance for loan losses. The provision was primarily the result of an increase in Civista’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic, as well as the significant increase in classified assets during the quarter, particularly in the special mention category. Economic impacts from the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. The allowance for Commercial & Agriculture loans decreased due to a decrease in general reserves required for this type as a result of a decrease in loan balances. The result was represented as a decrease in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of factors related to the COVID-19 pandemic, increased loan balances and loss rates and by increased classified and non-accrual loans. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of an increase in loan balances and by an increase in classified loans. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in recoveries for this type of loan. The result was represented by a decrease in the provision. The allowance for Real Estate Construction loans increased due to an increase in loss rates on classified loans, represented by an increase in the provision. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio at September 30, 2020.

Page 15

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the three months ended September 30, 2019	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,828	$	—		$	61	$	43		$	1,932
Commercial Real Estate:
Owner Occupied		2,009		—			43		85			2,137
Non-Owner Occupied		5,867		—			55		226			6,148
Residential Real Estate		1,698		(20	)		67		(136	)		1,609
Real Estate Construction		1,135		—			1		47			1,183
Farm Real Estate		365		—			1		1			367
Consumer and Other		201		(16	)		16		52			253
Unallocated		683		—			—		(168	)		515
Total	$	13,786	$	(36	)	$	244	$	150		$	14,144

For the three months ended September 30, 2019, the Company provided $150 to the allowance for loan losses. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of higher loan balances. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of 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 as a result of an increase in loan balances. This was represented as an increase in the provision. The allowance for Residential Real Estate loans decreased due to 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 an increase in general reserves required as a result of an increase in loan balances. The allowance for Consumer and Other loans increased due to an increase in loss rates. The result was represented as an increase in the provision. Management determined that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at September 30, 2019.

Page 16

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the nine months ended September 30, 2020	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	2,219	$	(15	)	$	5	$	452		$	2,661
Commercial Real Estate:
Owner Occupied		2,541		(148	)		20		1,542			3,955
Non-Owner Occupied		6,584		—			44		3,950			10,578
Residential Real Estate		1,582		(108	)		196		787			2,457
Real Estate Construction		1,250		—			3		1,092			2,345
Farm Real Estate		344		—			10		6			360
Consumer and Other		247		(54	)		55		(28	)		220
Unallocated		—		—			—		61			61
Total	$	14,767	$	(325	)	$	333	$	7,862		$	22,637

For the nine months ended September 30, 2020, the Company provided $7,862 to the allowance for loan losses. The provision was primarily the result of an increase in Civista’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances mainly from Civista’s participation in the PPP loan program, offset by a decrease in loss rates, resulting in an increase in the provision. PPP loans are eligible for a 100% guaranty by the SBA. However, in the event of a loss resulting from a default on a PPP loan, and a determination by the SBA that there was a deficiency in the manner on which the PPP loan was originated or funded, the SBA may deny its liability under the guaranty. The reserve percentage for PPP loans is substantially less than the other loans in this segment resulting in an overall decrease in the reserve percentage. The allowance for Commercial Real Estate – Owner Occupied loans increased due to an increase in general reserves required for this type as a result of higher loan balances, an increase in classified and non-accrual loans and an increase in loss rates. The result was represented as an increase in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of an increase in loan balances, an increase in classified loans, offset by a decrease in loss rates. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of factors related to the COVID-19 pandemic, offset by a decrease in loan balances and loss rates, represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in general reserves required as a result of an increase in loan balances and an increase in loss rates on classified loans, represented by an increase in the provision. The allowance for Farm Real Estate loans increased due to an increase in general reserves required as a result of an increase in loan balances. The result was represented as an increase in the provision. Management feels that the unallocated amount is appropriate and within the relevant range for the allowance that is reflective of the risk in the portfolio at September 30, 2020.

Page 17

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Allowance for loan losses:

For the nine months ended September 30, 2019	Beginning balance		Charge-offs			Recoveries		Provision			Ending Balance
Commercial & Agriculture	$	1,747	$	(27	)	$	65	$	147		$	1,932
Commercial Real Estate:
Owner Occupied		1,962		(60	)		282		(47	)		2,137
Non-Owner Occupied		5,803		—			99		246			6,148
Residential Real Estate		1,531		(223	)		229		72			1,609
Real Estate Construction		1,046		(24	)		1		160			1,183
Farm Real Estate		397		—			3		(33	)		367
Consumer and Other		284		(97	)		67		(1	)		253
Unallocated		909		—			—		(394	)		515
Total	$	13,679	$	(431	)	$	746	$	150		$	14,144

For the nine months ended September 30, 2019, the Company provided $150 to the allowance for loan losses. The allowance for Commercial & Agriculture loans increased due to an increase in general reserves required for this type as a result of higher loan balances, offset by a decrease in the loss rates. The result was represented as an increase in the provision. The allowance for Commercial Real Estate –Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances and higher loss rates, offset by net recoveries on previously charged off amounts, resulting in a decrease in the provision. The allowance for Commercial Real Estate – Non-Owner Occupied loans increased due to an increase in general reserves required as a result of higher loan balances, offset by a decrease in the loss rates. This was represented as an increase in the provision. The allowance for Residential Real Estate loans increased due to an increase in general reserves required for this type as a result of an increase in loan balances and loss rates, represented by an increase in the provision. The allowance for Real Estate Construction loans increased due to an increase in general reserves required as a result of higher loan balances. The allowance for Farm Real Estate loans was reduced by a decrease in classified loan balances and the reserve required for this type of loan. The result was represented as a decrease in the provision. The allowance for Consumer and Other loans decreased due to a decrease in the general reserves required for the type as a result of a decrease in loan balances and loss rates. The result was represented as a decrease in the provision. Management determined that the unallocated amount was appropriate and within the relevant range for the allowance that was reflective of the risk in the portfolio at September 30, 2019.

Page 18

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables present, by portfolio segment, the allocation of the allowance for loan losses and related loan balances as of September 30, 2020 and December 31, 2019.

September 30, 2020	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for impairment		Total
Allowance for loan losses:
Commercial & Agriculture	$	—	$	—	$	2,661	$	2,661
Commercial Real Estate:
Owner Occupied		—		8		3,947		3,955
Non-Owner Occupied		—		—		10,578		10,578
Residential Real Estate		—		85		2,372		2,457
Real Estate Construction		—		—		2,345		2,345
Farm Real Estate		—		—		360		360
Consumer and Other		—		—		220		220
Unallocated		—		—		61		61
Total	$	—	$	93	$	22,544	$	22,637
Outstanding loan balances:
Commercial & Agriculture	$	—	$	—	$	435,285	$	435,285
Commercial Real Estate:
Owner Occupied		—		379		260,856		261,235
Non-Owner Occupied		—		55		683,524		683,579
Residential Real Estate		377		1,168		442,415		443,960
Real Estate Construction		—		—		167,560		167,560
Farm Real Estate		—		634		34,598		35,232
Consumer and Other		—		—		14,089		14,089
Total	$	377	$	2,236	$	2,038,327	$	2,040,940

December 31, 2019	Loans acquired with credit deterioration		Loans individually evaluated for impairment		Loans collectively evaluated for 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

Page 19

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables present credit exposures by internally assigned risk grades as of September 30, 2020 and December 31, 2019. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.

The Company’s internally assigned risk 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.

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. Only those loans that have been risk rated are included below.

September 30, 2020	Pass		Special Mention		Substandard		Doubtful		Ending Balance
Commercial & Agriculture	$	427,539	$	6,009	$	1,737	$	—	$	435,285
Commercial Real Estate:
Owner Occupied		227,536		27,108		6,591		—		261,235
Non-Owner Occupied		597,582		83,622		2,375		—		683,579
Residential Real Estate		75,648		647		5,686		—		81,981
Real Estate Construction		153,132		—		493		—		153,625
Farm Real Estate		32,297		490		2,445		—		35,232
Consumer and Other		1,616		—		18		—		1,634
Total	$	1,515,350	$	117,876	$	19,345	$	—	$	1,652,571

December 31, 2019	Pass		Special Mention		Substandard		Doubtful		Ending 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

Page 20

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following tables present performing and nonperforming loans based solely on payment activity for the periods ended September 30, 2020 and December 31, 2019 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 and if management determines 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.

September 30, 2020	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
Performing	$	361,979	$	13,935	$	12,455	$	388,369
Nonperforming		—		—		—		—
Total	$	361,979	$	13,935	$	12,455	$	388,369

December 31, 2019	Residential Real Estate		Real Estate Construction		Consumer and Other		Total
Performing	$	382,720	$	10,565	$	13,766	$	407,051
Nonperforming		—		—		—		—
Total	$	382,720	$	10,565	$	13,766	$	407,051

The following tables include an aging analysis of the recorded investment of past due loans outstanding as of September 30, 2020 and December 31, 2019.

September 30, 2020	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Purchased Credit- Impaired Loans		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	176	$	300	$	55	$	531	$	434,754	$	—	$	435,285	$	—
Commercial Real Estate:
Owner Occupied		168		369		359		896		260,339		—		261,235		—
Non-Owner Occupied		—		—		7		7		683,572		—		683,579		—
Residential Real Estate		84		441		1,269		1,794		441,789		377		443,960		—
Real Estate Construction		—		—		—		—		167,560		—		167,560		—
Farm Real Estate		—		—		4		4		35,228		—		35,232		—
Consumer and Other		54		6		7		67		14,022		—		14,089		—
Total	$	482	$	1,116	$	1,701	$	3,299	$	2,037,264	$	377	$	2,040,940	$	—

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Purchased Credit- Impaired Loans		Total Loans		Past Due 90 Days and Accruing
Commercial & Agriculture	$	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	$	—

Page 21

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table presents loans on nonaccrual status, excluding purchased credit-impaired (PCI) loans, as of September 30, 2020 and December 31, 2019.

	September 30, 2020		December 31, 2019
Commercial & Agriculture	$	156	$	173
Commercial Real Estate:
Owner Occupied		1,241		938
Non-Owner Occupied		7		8
Residential Real Estate		3,854		4,183
Real Estate Construction		7		9
Farm Real Estate		85		284
Consumer and Other		16		4
Total	$	5,366	$	5,599

Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. Payments received on nonaccrual loans are applied to the unpaid principal balance. A loan may be returned to accruing status only if one of three conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days; the loan is a TDR and has made a minimum of six months payments; or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months.

Modifications: A modification of a loan constitutes a TDR when the Company for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. Exceptions to this policy exist for loan modifications granted as part of the Company’s COVID-19 deferral program, which allows the Company to not classify a modification so long as certain criteria as established in the CARES Act are met at the time of the modification. 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. Residential Real Estate loans modified in a TDR primarily involve interest rate reductions where monthly payments are 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 fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. As of September 30, 2020, TDRs accounted for $93 of the allowance for loan losses. As of December 31, 2019, TDRs accounted for $91 of the allowance for loan losses.

Page 22

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

There were no loans modified as TDRs during the three-month periods ended September 30, 2020 or 2019 or during the nine-month period ended September 30, 2020. Loan modifications that are considered TDRs completed during the nine-month period ended September 30, 2019 were as follows:

	For the Nine-Month Period Ended
	September 30, 2019
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Commercial & Agriculture		—	$	—	$	—
Commercial Real Estate—Owner Occupied		—		—		—
Commercial Real Estate—Non-Owner Occupied		1		382		382
Residential Real Estate		—		—		—
Real Estate Construction		—		—		—
Farm Real Estate		—		—		—
Consumer and Other		—		—		—
Total Loan Modifications		1	$	382	$	382

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

During both the three- and nine-month periods ended September 30, 2020 and September 30, 2019, there were no defaults on loans that were modified and considered TDRs during the respective previous twelve months.

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

Page 23

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The following table includes the recorded investment and unpaid principal balances for impaired loans, excluding PCI loans, with the associated allowance amount, if applicable, as of September 30, 2020 and December 31, 2019.

	September 30, 2020						December 31, 2019
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial & Agriculture	$	—	$	—			$	367	$	367
Commercial Real Estate:
Owner Occupied		149		149				168		168
Non-Owner Occupied		55		55				374		374
Residential Real Estate		993		1,017				1,571		1,643
Farm Real Estate		634		634				666		666
Total		1,831		1,855				3,146		3,218
With an allowance recorded:
Commercial Real Estate:
Owner Occupied		230		230	$	8		258		258	$	9
Residential Real Estate		175		179		85		193		197		82
Total		405		409		93		451		455		91
Total:
Commercial & Agriculture		—		—		—		367		367		—
Commercial Real Estate:
Owner Occupied		379		379		8		426		426		9
Non-Owner Occupied		55		55		—		374		374		—
Residential Real Estate		1,168		1,196		85		1,764		1,840		82
Farm Real Estate		634		634		—		666		666		—
Total	$	2,236	$	2,264	$	93	$	3,597	$	3,673	$	91

The following tables include the average recorded investment and interest income recognized for impaired financing receivables for the three-and nine-month periods ended September 30, 2020 and 2019.

	September 30, 2020				September 30, 2019
For the three months ended	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	—	$	—	$	367	$	12
Commercial Real Estate—Owner Occupied		391		7		448		8
Commercial Real Estate—Non-Owner Occupied		212		5		378		6
Residential Real Estate		1,175		10		1,083		14
Farm Real Estate		644		7		681		7
Total	$	2,422	$	29	$	2,957	$	47

	September 30, 2020				September 30, 2019
For the nine months ended	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial & Agriculture	$	92	$	4	$	367	$	24
Commercial Real Estate—Owner Occupied		406		21		463		25
Commercial Real Estate—Non-Owner Occupied		292		15		292		15
Residential Real Estate		1,464		34		1,148		45
Farm Real Estate		655		20		687		22
Total	$	2,909	$	94	$	2,957	$	131

Page 24

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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

	For the Three-Month Period Ended September 30, 2020			For the Three-Month Period Ended September 30, 2019
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	205		$	259
Acquisition of PCI loans		—			—
Accretion		(101	)		(3	)
Transfer from non-accretable to accretable		74			—
Balance at end of period	$	178		$	256

	For the Nine-Month Period Ended September 30, 2020			For the Nine-Month Period Ended September 30, 2019
	(In Thousands)			(In Thousands)
Balance at beginning of period	$	255		$	336
Acquisition of PCI loans		—			—
Accretion		(270	)		(80	)
Transfer fron non-accretable to accretable		193			—
Balance at end of period	$	178		$	256

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

	At September 30, 2020		At December 31, 2019
	Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30)		Acquired Loans with Specific Evidence of Deterioration of Credit Quality (ASC 310-30)
	(In Thousands)
Outstanding balance	$	789	$	1,149
Carrying amount		377		467

There was no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of September 30, 2020 or December 31, 2019, respectively.

Foreclosed Assets Held For Sale

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of September 30, 2020 and December 31, 2019, respectively, there were no foreclosed assets included in other assets. As of September 30, 2020 and December 31, 2019, the Company had initiated formal foreclosure procedures on $1,056 and $1,022, respectively, of consumer residential mortgages.

Page 25

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(6) Other Comprehensive Income

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

	For the Three-Month Period Ended									For the Three-Month Period Ended
	September 30, 2020(a)									September 30, 2019(a)
	Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total			Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total
Beginning balance	$	19,549		$	(5,895	)	$	13,654		$	12,176		$	(3,567	)	$	8,609
Other comprehensive income before reclassifications		749			—			749			2,944			—			2,944
Amounts reclassified from accumulated other comprehensive income (loss)		(73	)		57			(16	)		(2	)		116			114
Net current-period other comprehensive income		676			57			733			2,942			116			3,058
Ending balance	$	20,225		$	(5,838	)	$	14,387		$	15,118		$	(3,451	)	$	11,667

(a)	Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

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

	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)
Details about Accumulated Other Comprehensive Income (Loss) Components	For the Three months ended September 30, 2020			For the Three months ended September 30, 2019			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on available-for-sale securities	$	92		$	3		Net gain (loss) on sale of securities
Tax effect		(19	)		(1	)	Income tax expense
		73			2
Amortization of defined benefit pension items
Actuarial gains/(losses) (b)		(72	)		(147	)	Other operating expenses
Tax effect		15			31		Income tax expense
		(57	)		(116	)
Total reclassifications for the period	$	16		$	(114	)

(a)	Amounts in parentheses indicate expenses/losses and other amounts indicate income/benefit.

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

Page 26

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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

	For the Nine-Month Period Ended								For the Nine-Month Period Ended
	September 30, 2020(a)								September 30, 2019(a)
	Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total		Unrealized Gains and Losses on Available-for- Sale Securities			Defined Benefit Pension Items			Total
Beginning balance	$	12,883		$	(6,009	)	$	6,874	$	2,347		$	(3,799	)	$	(1,452	)
Other comprehensive income before reclassifications		7,415			—			7,415		12,784			—			12,784
Amounts reclassified from accumulated other comprehensive income (loss)		(73	)		171			98		(13	)		348			335
Net current-period other comprehensive income		7,342			171			7,513		12,771			348			13,119
Ending balance	$	20,225		$	(5,838	)	$	14,387	$	15,118		$	(3,451	)	$	11,667

(a)	Amounts in parentheses indicate debits on the Consolidated Balance Sheets.

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

	Amount Reclassified from Accumulated Other Comprehensive Income (Loss) (a)
Details about Accumulated Other Comprehensive Income (Loss) Components	For the Nine months ended September 30, 2020			For the Nine months ended September 30, 2019			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains on available-for-sale securities	$	92		$	17		Net gain (loss) on sale of securities
Tax effect		(19	)		(4	)	Income tax expense
		73			13
Amortization of defined benefit pension items
Actuarial gains/(losses) (b)		(217	)		(441	)	Other operating expenses
Tax effect		46			93		Income tax expense
		(171	)		(348	)
Total reclassifications for the period	$	(98	)	$	(335	)

(a)	Amounts in parentheses indicate expenses/losses and other amounts indicate income/benefit.

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

Page 27

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(7) Goodwill and Intangible Assets

There was no change in the carrying amount of goodwill of $76,851 for the periods ended September 30, 2020 and December 31, 2019.

Acquired intangible assets, other than goodwill, as of September 30, 2020 and December 31, 2019 were as follows:

	2020						2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortized intangible assets(1):
Core deposit intangibles	$	14,792	$	8,735	$	6,057	$	14,792	$	8,049	$	6,743
Total amortized intangible assets	$	14,792	$	8,735	$	6,057	$	14,792	$	8,049	$	6,743

(1)	Excludes fully amortized intangible assets

Aggregate core deposit intangible amortization expense was $227, $235, $686 and $710 for the three and nine months ended September 30, 2020 and 2019, respectively.

Activity for mortgage servicing rights (MSRs) and the related valuation allowance for the three- and nine-months ended September 30, 2020 and September 30, 2019 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Loan Servicing Rights:
Balance at Beginning of Period	$	1,717		$	1,642		$	1,562		$	1,664
Additions		381			71			924			144
Disposals		—			—			—			—
Amortized to expense		(135	)		(81	)		(361	)		(176	)
Other charges		—			—			—			—
Change in valuation allowance		25			—			(137	)		—
Balance at End of Period	$	1,988		$	1,632		$	1,988		$	1,632


Valuation allowance:
Balance at Beginning of Period	$	264		$	—		$	102		$	—
Additions expensed		—			—			162			—
Reductions credited to operations		(25	)		—			(25	)		—
Direct write-offs		—			—			—			—
Balance at End of Period	$	239		$	—		$	239		$	—

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

	MSRs		Core deposit intangibles		Total
2020	$	29	$	227	$	256
2021		116		891		1,007
2022		115		868		983
2023		115		841		956
2024		114		804		918
Thereafter		1,499		2,426		3,925
	$	1,988	$	6,057	$	8,045

Page 28

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(8) Short-Term and Other Borrowings

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

	At September 30, 2020				At December 31, 2019
	Federal Funds Purchased		Short-term Borrowings		Federal Funds Purchased		Short-term Borrowings
Outstanding balance	$	—	$	—	$	—	$	101,500
Interest rate on balance		—		—		—		1.63	%

	Three Months Ended September 30,										Nine Months Ended September 30,
	2020			2020		2019		2019			2020			2020			2019		2019
	Federal Funds Purchased			Short-term Borrowings		Federal Funds Purchased		Short-term Borrowings			Federal Funds Purchased			Short-term Borrowings			Federal Funds Purchased		Short-term Borrowings
Maximum indebtedness	$	35,000		$	—	$	—	$	167,500		$	50,000		$	102,700		$	—	$	192,700
Average balance		543			—		—		146,977			385			10,888			—		117,229
Average rate paid		(1.47	)%		—		—		2.34	%		0.35	%		1.64	%		—		2.44	%

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

These borrowing transactions can range from overnight to six months in maturity. The average maturity was one day at September 30, 2020.

Other borrowings consist of the Paycheck Protection Program Lending Facility (“PPPLF”). The PPPLF makes funds available to lenders who qualify as “eligible borrowers” and is intended to facilitate lending, to small businesses under the PPP of the CARES Act. Under the PPPLF, the Federal Reserve Banks will lend to eligible borrowers on a non-recourse basis, taking PPP loans as collateral. During the second quarter of 2020, the Company borrowed $183,695 under the PPPLF. The maturity date of the PPPLF borrowing will equal the maturity date of the PPP loans pledged to secure the borrowing. The rate paid on the borrowing is at 0.35%.

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 September 30, 2020 and December 31, 2019. All of the repurchase agreements are overnight agreements.

	September 30, 2020		December 31, 2019
Securities pledged for repurchase agreements:
U.S. Treasury securities	$	910	$	810
Obligations of U.S. government agencies		24,903		17,864
Total securities pledged	$	25,813	$	18,674
Gross amount of recognized liabilities for repurchase agreements	$	25,813	$	18,674
Amounts related to agreements not included in offsetting disclosures above	$	—	$	—

Page 29

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(9) Earnings per Common Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Basic
Net income	$	7,682	$	7,708	$	22,019	$	26,038
Preferred stock dividends		—		162		—		490
Net income available to common shareholders—basic	$	7,682	$	7,546	$	22,019	$	25,548
Weighted average common shares outstanding—basic		16,045,544		15,577,371		16,201,898		15,604,410
Basic earnings per common share	$	0.48	$	0.48	$	1.36	$	1.64
Diluted
Net income available to common shareholders—basic	$	7,682	$	7,546	$	22,019	$	25,548
Preferred stock dividends		—		162		0		490
Net income available to common shareholders—diluted	$	7,682	$	7,708	$	22,019	$	26,038
Weighted average common shares outstanding for basic earnings per common share		16,045,544		15,577,371		16,201,898		15,604,410
Add: Dilutive effects of convertible preferred shares		—		1,272,516		—		1,286,876
Average shares and dilutive potential common shares outstanding—diluted		16,045,544		16,849,887		16,201,898		16,891,286
Diluted earnings per common share	$	0.48	$	0.46	$	1.36	$	1.54

For the three- and nine-month periods ended September 30, 2019, there were 1,272,516 and 1,286,876, respectively of average dilutive shares related to the Company’s convertible preferred shares. Under the “if converted” method, all convertible preferred shares are assumed to be converted into common shares at the corresponding conversion rate. These additional shares are then added to the common shares outstanding to calculate diluted earnings per share. Effective December 20, 2019, the Company redeemed all convertible preferred shares and corresponding depositary shares that remained outstanding.

Page 30

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

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

Some financial instruments, such as loan commitments, credit lines, letters of credit and overdraft protection, are issued to meet customers’ financing needs. These are agreements to provide credit or to support the credit of others, as long as the conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk of credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of commitment. The contractual amounts of financial instruments with off-balance-sheet risk were as follows for September 30, 2020 and December 31, 2019:

	Contract Amount
	September 30, 2020				December 31, 2019
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitment to extend credit:
Lines of credit and construction loans	$	25,020	$	432,210	$	15,155	$	396,516
Overdraft protection		6		41,212		5		37,286
Letters of credit		600		986		624		776
	$	25,626	$	474,408	$	15,784	$	434,578

Commitments to make loans are generally made for a period of one year or less. Fixed rate loan commitments included in the table above had interest rates ranging from 3.50% to 8.00% at September 30, 2020 and from 4.50% to 8.50% at December 31, 2019. 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 reserve balance maintained in accordance with such requirements was $0 on September 30, 2020 and $7,127 on December 31, 2019. Such amounts are included within cash and due from financial institutions on the Consolidated Balance Sheet.

(11) Pension Information

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

Net periodic pension cost was as follows:

	Three months ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Service cost	$	—		$	—		$	—		$	—
Interest cost		121			128			363			384
Expected return on plan assets		(187	)		(256	)		(561	)		(768	)
Other components		72			147			217			441
Net periodic pension cost	$	6		$	19		$	19		$	57

The Company does not expect to make any contribution to its pension plan in 2020. The Company made no contribution to its pension plan in 2019.

Page 31

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

(12) Equity Incentive Plan

At the Company’s 2014 annual meeting, the shareholders adopted the Company’s 2014 Incentive Plan (“2014 Incentive Plan”). The 2014 Incentive Plan authorizes the Company to grant options, stock awards, stock units and other awards for up to 375,000 common shares of the Company. There were 198,756 shares available for future grants under this plan at September 30, 2020.

No options were granted under the 2014 Incentive Plan during the periods ended September 30, 2020 and 2019.

Each year, 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 awarded under the Company’s 2014 Incentive Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

On May 21, 2019, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 8,946 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2020 Annual Meeting. This issuance was expensed in its entirety when the shares were issued in the amount of $196.

On May 21, 2020, directors of the Company’s banking subsidiary, Civista, were paid a retainer in the form of non-restricted common shares of the Company. The aggregate of 14,266 common shares were issued to Civista directors as payment of their retainer for their service on the Civista Board of Directors covering the period up to the 2021 Annual Meeting. This issuance was expensed in its entirety when the shares were issued in the amount of $196.

The Company classifies share-based compensation for employees with “Compensation expense” in the Consolidated Statements of Operations.

The following is a summary of the Company’s outstanding restricted shares and changes therein for the three- and nine-month periods ended September 30, 2020:

	Three months ended				Nine Months Ended
	September 30, 2020				September 30, 2020
	Number of Restricted Shares		Weighted Average Grant Date Fair Value		Number of Restricted Shares			Weighted Average Grant Date Fair Value
Nonvested at beginning of period		54,274	$	20.90		44,027		$	20.48
Granted		—		—		26,979			21.26
Vested		—		—		(16,732	)		20.36
Forfeited		—		—		—			—
Nonvested at end of period		54,274	$	20.90		54,274		$	20.90

The following is a summary of the status of the Company’s outstanding restricted shares as of September 30, 2020:

At June 30, 2020
Date of Award	Shares		Remaining Expense		Remaining Vesting Period (Years)
January 15, 2016		2,056	$	5		0.25
March 20, 2017		2,388		31		1.25
April 10, 2018		2,643		11		0.25
April 10, 2018		4,670		70		2.25
March 14, 2019		6,796		79		1.25
March 14, 2019		8,742		129		3.25
March 13, 2020		12,982		212		4.25
March 13, 2020		13,997		214		2.25
		54,274	$	751		2.55

Page 32

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The Company recorded $99, $78, $322 and $256 of share-based compensation expense during the three- and nine-months ended September 30, 2020 and 2019, respectively, and $196 of director retainer fees for shares granted under the 2014 Incentive Plan. At September 30, 2020, the total compensation cost related to unvested awards not yet recognized is $751, which is expected to be recognized over the weighted average remaining life of the grants of 2.55 years.

(13) Fair Value Measurement

The Company uses a fair value hierarchy to measure fair value. This hierarchy describes three levels of inputs that may be used to measure fair value. Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset.

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

Equity securities: The Company’s equity securities are not actively traded in an open market. The fair value of these 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 swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs based on similar transactions as of the valuation date and classified Level 2. The changes in fair value of these assets/liabilities had no impact on net income or comprehensive income.

Impaired loans: The Company has measured impairment on impaired loans based on the discounted cash flows of the loan or 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 as a Level 3 measurement. If the fair value of the collateral exceeds the carrying amount of the loan, then the loan is not included in the table below as it is not currently being carried at its fair value.

Assets and liabilities measured at fair value are summarized in the table below.

	Fair Value Measurements at September 30, 2020 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	19,366	$	—
Obligations of states and political subdivisions		—		226,098		—
Mortgage-backed securities in government sponsored entities		—		120,390		—
Total securities available for sale		—		365,854		—
Equity securities		—		817		—
Swap asset		—		24,727		—
Liabilities measured at fair value on a recurring basis:
Swap liability	$	—	$	24,727	$	—

Page 33

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

	Fair Value Measurements at December 31, 2019 Using:
Assets:	(Level 1)		(Level 2)		(Level 3)
Assets measured at fair value on a recurring basis:
Securities available for sale
U.S. Treasury securities and obligations of U.S. Government agencies	$	—	$	19,601	$	—
Obligations of states and political subdivisions		—		206,034		—
Mortgage-backed securities in government 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 basis:
Swap liability		—		8,918		—
Assets measured at fair value on a nonrecurring basis:
Impaired loans	$	—	$	—	$	1

The following table presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2019.

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2019

Fair Value

Valuation Technique

Unobservable Input

Range

Weighted Average

Impaired loans

Appraisal of collateral

Appraisal adjustments

30%

Holding period

22 months

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at September 30, 2020 are as follows:

September 30, 2020	Carrying Amount		Total Fair Value		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from financial institutions	$	194,773	$	194,773	$	194,773	$	—	$	—
Other securities		20,537		20,537		20,537		—		—
Loans, held for sale		13,256		13,521		13,521		—		—
Loans, net of allowance		2,018,303		2,046,882		—		—		2,046,882
Bank owned life insurance		45,732		45,732		45,732		—		—
Accrued interest receivable		10,227		10,227		10,227		—		—
Financial Liabilities:
Nonmaturing deposits		1,776,668		1,776,668		1,776,668		—		—
Time deposits		292,101		293,168		—		—		293,168
Long-term FHLB advances		125,000		131,095		—		—		131,095
Other borrowings		183,695		183,677		—		—		183,677
Securities sold under agreement to repurchase		25,813		25,813		25,813		—		—
Subordinated debentures		29,427		31,990		—		—		31,990
Accrued interest payable		492		492		492		—		—

Page 34

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

The carrying amount and fair values of financial instruments not measured at fair value on a recurring or nonrecurring basis at December 31, 2019 are as follows:

December 31, 2019	Carrying Amount		Total 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		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		—		—

(14) 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.

The following table summarizes the Company’s interest rate swap positions as of September 30, 2020.

	Classification on the Consolidated Balance Sheet	Notional Amount			Fair Value			Weighted Average Rate Received/(Paid)
Derivative Assets	Other Assets	$	232,397		$	24,727			4.52	%
Derivative Liabilities	Accrued expenses and other liabilities		(232,397	)		(24,727	)		-4.52	%
Net Exposure		$	—		$	—

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

	Classification on the Consolidated Balance Sheet	Notional Amount			Fair Value			Weighted Average Rate Received/(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 Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All interest rate swap 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 fair value of derivatives with “Other” in the Consolidated Statements of Operation.

Page 35

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

At September 30, 2020, the Company had cash and securities at fair value pledged for collateral on its interest rate swaps with third party financial institutions of $10,310 and $16,139, respectively. At December 31, 2019, securities with a fair value of $14,032 were pledged as collateral.

(15) Qualified Affordable Housing Project Investments

The Company invests in certain qualified affordable housing projects. At September 30, 2020 and December 31, 2019, the balance of the investment for qualified affordable housing projects was $5,624 and $5,154, 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 $6,459 and $5,417 at September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $156 and $133, respectively, offset by tax credits and other benefits from its investment in affordable housing tax credits of $304 and $275, respectively. During the nine months ended September 30, 2020 and 2019, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $489 and $399, respectively, offset by tax credits and other benefits from its investment in affordable housing tax credits of $888 and $827, respectively. During the three and nine months ended September 30, 2020 and 2019, the Company did not incur impairment losses related to its investment in qualified affordable housing projects.

(16) Revenue Recognition

The Company accounts for revenues from contracts with customers under ASC 606, Revenue from Contracts with Customers. Revenue associated with financial instruments, including revenue from loans and securities are outside the scope of the new standard and accounted for under other existing GAAP. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of the new guidance. Noninterest revenue streams in-scope of ASC 606 are discussed below.

Service Charges

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

ATM/Interchange Fees

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

Wealth Management Fees

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

Page 36

Civista Bancshares, Inc.

Notes to Interim Consolidated Financial Statements (Unaudited)

Form 10-Q

(Amounts in thousands, except share data)

Tax Refund Processing Fees

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

Other

Other noninterest income consists of other recurring revenue streams such as check order fees, wire transfer fees, safety deposit box rental fees, item processing fees and other miscellaneous revenue streams. Check order income mainly represents fees charged to customers for checks. Wire transfer fees represent revenue from processing wire transfers. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Item processing fee income represents fees charged to other financial institutions for processing their transactions. Payment is typically received in the following month.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2020 and 2019.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Noninterest Income
In-scope of Topic 606:
Service charges	$	1,414	$	1,726	$	3,812	$	4,733
ATM/Interchange fees		1,183		1,014		3,226		2,871
Wealth management fees		1,006		975		2,916		2,733
Tax refund processing fees		—		—		2,375		2,750
Other		214		280		633		675
Noninterest Income (in-scope of Topic 606)		3,817		3,995		12,962		13,762
Noninterest Income (out-of-scope of Topic 606)		2,969		1,434		7,554		3,054
Total Noninterest Income	$	6,786	$	5,429	$	20,516	$	16,816

Page 37

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

ITEM 2.

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

Introduction

The following discussion focuses on the consolidated financial condition of the Company at September 30, 2020 compared to December 31, 2019, and the consolidated results of operations for the three- and nine-month periods ended September 30, 2020, compared to the same periods in 2019. This discussion should be read in conjunction with the Consolidated Financial Statements and footnotes included in this Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q may contain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as the Company’s financial condition, anticipated operating results, cash flows, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “believe,” “belief,” “expect,” “anticipate,” “may,” “could,” “intend,” “intent,” “estimate,” “plan,” “foresee,” “likely,” “will,” “should” or other similar words or phrases. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks, uncertainties and assumptions that are difficult to predict and could cause our actual results, performance or achievements to differ materially from those expressed in or implied by the forward-looking statements. Factors that could cause actual results, performance or achievements to differ from those discussed in the forward-looking statements include, but are not limited to, changes in financial markets or national or local economic conditions, including impacts from the COVID-19 pandemic on local, national and global economic conditions; higher default rates on loans made to our customers related to the impact of COVID-19 on our customers’ operations and financial conditions; the effects of various governmental responses to the COVID-19 pandemic, including stimulus packages and programs; potential litigation or other risks related to participating in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), sustained weakness or deterioration in the real estate market; volatility and direction of market interest rates; credit risks of lending activities; changes in the allowance for loan losses; legislation or regulatory changes or actions; increases in Federal Deposit Insurance Corporation (“FDIC”) insurance premiums and assessments; changes in tax laws; failure of or breach in our information and data processing systems; unforeseen litigation; and other risks identified from time-to-time in the Company’s other public documents on file with the SEC, including those risks identified in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by “Item 1A. Risk Factors” of the Company’s Quarterly Reports on Form 10-Q. The Company does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements, except as required by law.

Financial Condition

Total assets of the Company at September 30, 2020 were $2,817,993 compared to $2,309,557 at December 31, 2019, an increase of $508,436, or 22.0%. The increase in total assets was due to increases in cash and due from financial institutions of $146,238, accompanied by other increases in securities available for sale, loans held for sale, loans, accrued interest receivable and swap assets of $7,375, $10,971, $324,100, $3,134 and $15,809, respectively. Total liabilities at September 30, 2020 were $2,475,938 compared to $1,979,431 at December 31, 2019, an increase of $496,507, or 25.1%. The increase in total liabilities was primarily attributable to increases in noninterest-bearing demand accounts, interest-bearing demand accounts, other borrowings and swap liabilities of $147,567, $242,438, $183,695 and $15,809, respectively, partially offset by a decrease in short-term FHLB advances of $101,500.

Page 38

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Loans outstanding as of September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020			December 31, 2019			$ Change			% Change
Commercial & Agriculture	$	435,285		$	203,110		$	232,175			114.3	%
Commercial Real Estate—Owner Occupied		261,235			245,606			15,629			6.4	%
Commercial Real Estate—Non-Owner Occupied		683,579			592,222			91,357			15.4	%
Residential Real Estate		443,960			463,032			(19,072	)		-4.1	%
Real Estate Construction		167,560			155,825			11,735			7.5	%
Farm Real Estate		35,232			34,114			1,118			3.3	%
Consumer and Other		14,089			15,061			(972	)		-6.5	%
Total loans		2,040,940			1,708,970			331,970			19.4	%
Allowance for loan losses		(22,637	)		(14,767	)		(7,870	)		53.3	%
Net loans	$	2,018,303		$	1,694,203		$	324,100			19.1	%

Included in Commercial & Agriculture as of September 30, 2020 is $259,097 of PPP loans.

Loans held for sale increased $10,971 or 480.1% since December 31, 2019. The increase is due to an increase in volume due to refinances as rates have declined. At September 30, 2020, 68 loans totaling $13,256 were held for sale as compared to 15 loans totaling $2,285 at December 31, 2019.

Net loans have increased $324,100 or 19.1% since December 31, 2019. The Commercial & Agriculture, Commercial Real Estate – Owner Occupied, Commercial Real Estate – Non-Owner Occupied, Real Estate Construction and Farm Real Estate loan portfolios increased $232,175, $15,629, $91,357, $11,735 and $1,118, respectively, since December 31, 2019, while the Residential Real Estate and Consumer and Other loan portfolios decreased $19,072 and $972, respectively, since December 31, 2019. The increase in Commercial & Agriculture loans is the result of PPP loans totaling $259,097 at September 30, 2020. At September 30, 2020, the net loan to deposit ratio was 97.6% compared to 100.9% at December 31, 2019. The decrease in the net loan to deposit ratio is the result of an increase in deposits.

During the first nine months of 2020, provisions made to the allowance for loan losses from earnings totaled $7,862, compared to a provision of $150 during the same period in 2019. The increase in provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic and the significant increase in classified loans during the period. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Net recoveries for the first nine months of 2020 totaled $8, compared to net recoveries of $315 in the first nine months of 2019. For the first nine months of 2020, the Company charged off a total of 20 loans. One Commercial and Agriculture loan totaling $15, two Commercial Real Estate – Owner Occupied totaling $148, eight Residential Real Estate loans totaling $108 and nine Consumer and Other loans totaling $54 were charged off in the first nine months of the year. In addition, during the first nine months of 2020, the Company had recoveries on previously charged-off Commercial and Agriculture loans of $5, Commercial Real Estate – Owner Occupied loans of $20, Commercial Real Estate – Non-Owner Occupied loans of $44, Residential Real Estate loans of $196, Real Estate Construction loans of $3, Farm Real Estate loans of $10 and Consumer and Other loans of $55. For each loan category, as well as in total, the percentage of net charge-offs to loans was less than one percent. Nonperforming loans decreased by $233 since December 31, 2019, which was due to a decrease in loans on nonaccrual status of $233. Each of these factors was considered by management as part of the examination of both the level and mix of the allowance by loan type as well as the overall level of the allowance.

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

Page 39

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Management analyzes each impaired Commercial and Commercial Real Estate loan relationship with a balance of $350 or larger, on an individual basis and designates a loan as impaired when it is in nonaccrual status or when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Loans held for sale are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. The allowance for loan losses as a percent of total loans was 1.11% at September 30, 2020 and 0.86% December 31, 2019.

The available for sale security portfolio increased by $7,375, from $358,499 at December 31, 2019 to $365,874 at September 30, 2020. Management continually evaluates our securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which the Company is exposed. These evaluations may cause the Company to change the level of funds it deploys into investment securities and change the composition of its investment securities portfolio. As of September 30, 2020, the Company was in compliance with all pledging requirements.

Accrued interest receivable increased $3,134, from $7,093 at December 31, 2019 to $10,227 at September 30, 2020. The increase is the result of loan modifications consisting of the deferral of principal and/or interest payments, which are the result of the COVID-19 pandemic.

Premises and equipment, net, increased $87 from December 31, 2019 to September 30, 2020. The increase is the result of new purchases of $1,780, offset by depreciation of $1,683 and proceeds from the sale of premises and equipment of $10.

Bank owned life insurance (BOLI) increased $733 from December 31, 2019 to September 30, 2020. The increase is the result of increases in the cash surrender value of the underlying insurance policies.

Swap assets increased $15,809 from December 31, 2019 to September 30, 2020. The increase of $15,809 is primarily the result of an increase in volume of swap activity related to our Commercial Real Estate loan growth.

Total deposits as of September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020		December 31, 2019		$ Change		% Change
Noninterest-bearing demand	$	660,120	$	512,553	$	147,567		28.8	%
Interest-bearing demand		394,975		301,674		93,301		30.9	%
Savings and money market		721,571		588,697		132,874		22.6	%
Time deposits		292,103		275,840		16,263		5.9	%
Total Deposits	$	2,068,769	$	1,678,764	$	390,005		23.2	%

Total deposits at September 30, 2020 increased $390,005 from year-end 2019. Noninterest-bearing deposits increased $147,567 from year-end 2019, while interest-bearing deposits, including savings and time deposits, increased $242,438 from December 31, 2019. The increase in noninterest-bearing deposits was partially due to increases in cash balances related to the Company’s participation in a tax refund processing program, which added noninterest-bearing deposits of $24,533. In addition, personal demand and business demand deposit accounts increased $16,207 and $107,479, respectively. Much of the increase in business demand deposit accounts resulted from customer deposits of PPP loan proceeds. The increase in interest-bearing deposits was primarily due to an increase in non-public interest-bearing demand, savings and money markets and brokered money market accounts of $45,565, $98,619 and $29,801, respectively. Public fund interest-bearing demand and public fund time deposit accounts increased $47,045 and $20,072, respectively. The year-to-date average balance of total deposits increased $356,818 compared to the average balance for the same period in 2019 mainly due to increases in noninterest-bearing business demand and tax refund processing program accounts of $116,689 and $73,694, respectively, accompanied by increases in non-public interest-bearing demand, savings and money markets and public funds interest-bearing demand of $33,434, $67,661 and $38,446, respectively. In addition, the average balance of time deposits increased $16,263 as compared to the same period in 2019.

Short-term FHLB advances decreased $101,500 from December 31, 2019 to September 30, 2020. The decrease is due to a decrease in overnight borrowings. Securities sold under agreements to repurchase, which tend to fluctuate, have increased $7,139 from December 31, 2019 to September 30, 2020.

Page 40

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Other borrowings increased $183,695 from December 31, 2019 to September 30, 2020. The increase is the result of borrowings by Civista under the Paycheck Protection Program Lending Facility (“PPPLF”) to provide funding for PPP loans.

Swap liabilities increased $15,809 from December 31, 2019 to September 30, 2020. The increase of $15,809 is primarily the result of an increase in volume of swap activity related to our Commercial Real Estate loan growth, as well as an increase in the fair value resulting from the low interest rate environment.

Shareholders’ equity at September 30, 2020 was $342,055, or 12.1% of total assets, compared to $330,126, or 14.3% of total assets, at December 31, 2019. The increase was the result of net income of $22,019, a decrease in the Company’s pension liability, net of tax, of $171, and an increase in the fair value of securities available for sale, net of tax, of $7,342, offset by dividends on common shares of $5,365 and the purchase of treasury shares of $12,756.

Total outstanding common shares at September 30, 2020 were 15,945,479, which decreased from 16,687,542 common shares outstanding at December 31, 2019. Common shares outstanding decreased as a result of 783,308 common shares being repurchased by the Company at an average repurchase price of $16.29. The Company repurchased 672,000 common shares pursuant to a stock repurchase program announced on December 17, 2019, 107,500 common shares pursuant to a stock repurchase program announced on May 4, 2020 and 3,808 common shares surrendered to pay taxes upon vesting of restricted shares. The repurchase plan publicly-announced on December 17, 2019 authorized the Company to repurchase up to 672,000 shares of the Company’s common shares until December 17, 2020. The repurchase plan publicly-announced on May 4, 2020 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until April 20, 2021. The repurchase of in common shares was offset by the grant of 26,979 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. In addition, 14,266 common shares were issued to Civista directors as a retainer payment for service on the Civista Board of Directors.

Results of Operations

Three Months Ended September 30, 2020 and 2019

The Company had net income of $7,682 for the three months ended September 30, 2020, a decrease of $26 from net income of $7,708 for the same three months of 2019. Basic earnings per common share were $0.48 for the quarter ended September 30, 2020, compared to $0.48 for the same period in 2019. Diluted earnings per common share were $0.48 for the quarter ended September 30, 2020, compared to $0.46 for the same period in 2019. The primary reasons for the changes in net income are explained below.

Net interest income for the three months ended September 30, 2020 was $22,006, an increase of $1,588 from $20,418 for the same three months of 2019. This increase is the result of an increase of $535 in total interest income with a decrease of $1,053 in interest expense. Interest-earning assets averaged $2,617,884 during the three months ended September 30, 2020, an increase of $596,104 from $2,021,780 for the same period of 2019. The Company’s average interest-bearing liabilities increased from $1,385,867 during the three months ended September 30, 2019 to $1,764,283 during the three months ended September 30, 2020. The Company’s fully tax equivalent net interest margin for the three months ended September 30, 2020 and 2019 was 3.44% and 4.12%, respectively.

Total interest income was $24,558 for the three months ended September 30, 2020, an increase of $535 from $24,023 of total interest income for the same period in 2019. The increase in interest income is attributable to an increase of $862 in interest and fees on loans, partially offset by an increase in the average balance of loans, which resulted from a lower yield on the portfolio. The average balance of loans increased by $414,482 or 25.5% to $2,040,492 for the three months ended September 30, 2020 as compared to $1,626,010 for the same period in 2019. The loan yield decreased to 4.22% for 2020, from 5.07% in 2019 mainly due to the impact of lower interest rates in 2020 as compared to the same period of 2019. During the quarter, the average balance of PPP loans was $259,037. These loans had an average yield of 2.90% including the amortization of PPP fees.

Page 41

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Interest on taxable securities decreased $387 to $1,325 for the three months ended September 30, 2020, compared to $1,712 for the same period in 2019. The average balance of taxable securities decreased $15,798 to $183,196 for the three months ended September 30, 2020 as compared to $198,994 for the same period in 2019. The yield on taxable securities decreased 49 basis points to 3.01% for 2020, compared to 3.50% for 2019. Interest on tax-exempt securities increased $87 to $1,536 for the three months ended September 30, 2020, compared to $1,449 for the same period in 2019. The average balance of tax-exempt securities increased $24,867 to $205,398 for the three months ended September 30, 2020 as compared to $180,531 for the same period in 2019. The yield on tax-exempt securities decreased 19 basis points to 4.14% for 2020, compared to 4.33% for 2019 due to the impact of lower interest rates in 2020 as compared to the same period of 2019.

Interest expense decreased $1,053 or 29.2% to $2,552 for the three months ended September 30, 2020, compared with $3,605 for the same period in 2019. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, offset by a decrease in rates on demand and savings accounts, FHLB borrowings and subordinated debentures. For the three months ended September 30, 2020, the average balance of interest-bearing liabilities increased $378,416 to $1,764,283, as compared to $1,385,867 for the same period in 2019. Interest incurred on deposits decreased by $468 to $1,631 for the three months ended September 30, 2020, compared to $2,099 for the same period in 2019. Although the average balance of interest-bearing deposits increased to $261,686 for the three months ended September 30, 2020 as compared to the same period in 2019, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.33% in 2019 to 0.14% in 2020. The rate paid on time deposits decreased from 2.03% to 1.69% in 2020. Interest expense incurred on FHLB advances and subordinated debentures decreased 38.9% from 2019. The average balance on FHLB balances decreased $76,977 for the three months ended September 30, 2020 as compared to the same period in 2019. In addition, the rate paid on subordinated debentures decreased 210 basis points for the three months ended September 30, 2020 as compared to the same period in 2019. The average balance of other borrowings increased $183,695 for the three months ended September 30, 2020 as compared to the same period in 2019 as a result of the Company’s borrowings under the PPPLF to fund PPP loans.

Page 42

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

The following table presents the condensed average balance sheets for the three months ended September 30, 2020 and 2019. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

	Three Months Ended September 30,
	2020									2019
Assets:	Average balance			Interest			Yield/ rate*			Average balance			Interest		Yield/ rate*
Interest-earning assets:
Loans, including fees**	$	2,040,492		$	21,638			4.22	%	$	1,626,010		$	20,776		5.07	%
Taxable securities		183,196			1,325			3.01	%		198,994			1,712		3.50	%
Tax-exempt securities		205,398			1,536			4.14	%		180,531			1,449		4.33	%
Interest-bearing deposits in other banks		188,798			59			0.12	%		16,245			86		2.10	%
Total interest-earning assets	$	2,617,884		$	24,558			3.83	%	$	2,021,780		$	24,023		4.83	%
Noninterest-earning assets:
Cash and due from financial institutions		29,647									29,745
Premises and equipment, net		23,214									21,790
Accrued interest receivable		10,109									6,926
Intangible assets		84,906									85,617
Other assets		42,916									25,432
Bank owned life insurance		45,574									44,579
Less allowance for loan losses		(21,214	)								(13,920	)
Total Assets	$	2,833,036								$	2,221,949
Liabilities and Shareholders Equity:
Interest-bearing liabilities:
Demand and savings	$	1,108,512		$	389			0.14	%	$	871,673		$	730		0.33	%
Time		292,806			1,242			1.69	%		267,959			1,369		2.03	%
Short-term FHLB advances		—			—			0.00	%		146,977			867		2.34	%
Long-term FHLB advances		125,000			452			1.44	%		55,000			285		2.06	%
Other borrowings		183,695			271			0.59	%		—			—		0.00	%
Federal funds purchased		543			(2	)		-1.47	%		—			—		0.00	%
Subordinated debentures		29,427			194			2.62	%		29,427			350		4.72	%
Repurchase Agreements		24,300			6			0.10	%		14,831			4		0.11	%
Total interest-bearing liabilities	$	1,764,283		$	2,552			0.58	%	$	1,385,867		$	3,605		1.03	%
Noninterest-bearing deposits		683,473									482,895
Other liabilities		46,002									27,084
Shareholders’ Equity		339,278									326,103
Total Liabilities and Shareholders’ Equity	$	2,833,036								$	2,221,949
Net interest income and interest rate spread				$	22,006			3.25	%				$	20,418		3.80	%
Net interest margin								3.44	%							4.12	%

*—Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $411 and $389 for the periods ended September 30, 2020 and 2019, respectively.

**—Average balance includes nonaccrual loans.

Page 43

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Net interest income may also be analyzed by comparing the volume and rate components of interest income and interest expense. The following table provides an analysis of the changes in interest income and expense between the three months ended September 30, 2020 and 2019.

	Increase (decrease) due to:
	Volume (1)			Rate (1)			Net
	(Dollars in thousands)
Interest income:
Loans, including fees	$	4,756		$	(3,894	)	$	862
Taxable securities		(154	)		(233	)		(387	)
Tax-exempt securities		158			(71	)		87
Interest-bearing deposits in other banks		124			(151	)		(27	)
Total interest income	$	4,884		$	(4,349	)	$	535
Interest expense:
Demand and savings	$	162		$	(503	)	$	(341	)
Time		119			(246	)		(127	)
Short-term FHLB advances		(867	)		—			(867	)
Long-term FHLB advances		274			(107	)		167
Other borrowings		271			—			271
Federal funds purchased		(2	)		—			(2	)
Subordinated debentures		—			(156	)		(156	)
Repurchase agreements		2			—			2
Total interest expense	$	(41	)	$	(1,012	)	$	(1,053	)
Net interest income	$	4,925		$	(3,337	)	$	1,588

(1)	The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

The Company provides for loan losses through regular provisions to the allowance for loan losses. Provisions for loan losses totaled $2,250 and $150 during the quarters ended September 30, 2020 and 2019. The increase in the provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic and the substantial increase in special mention loans. Economic impacts relating to the COVID-19 pandemic include the loss of revenue being experienced by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Our Commercial, Commercial Real Estate and Consumer portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the three-month periods ended September 30, 2020 and 2019 are as follows:

	Three months ended September 30,
	2020		2019		$ Change			% Change
Service charges	$	1,414	$	1,726	$	(312	)		-18.1	%
Net gain on sale of securities		92		3		89			2966.7	%
Net loss on equity securities		20		112		(92	)		-82.1	%
Net gain on sale of loans		2,413		815		1,598			196.1	%
ATM/Interchange fees		1,183		1,014		169			16.7	%
Wealth management fees		1,006		975		31			3.2	%
Bank owned life insurance		243		254		(11	)		-4.3	%
Swap fees		158		199		(41	)		-20.6	%
Other		257		331		(74	)		-22.4	%
Total noninterest income	$	6,786	$	5,429	$	1,357			25.0	%

Page 44

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Noninterest income for the three months ended September 30, 2020 was $6,786, an increase of $1,357 or 25.0% from $5,429 for the same period of 2019. The increase was primarily due to increases in net gain on sale of securities, net gain on sale of loans and ATM/Interchange fees, offset by decreases in service charges, swap fees and other. Net loss on equity securities decreased as a result of market value decreases. Net gain on sale of loans increased primarily as a result of an increase in volume of loans sold. During the three-months ended September 30, 2020, 418 loans were sold, totaling $84,315. During the three-months ended September 30, 2019, 214 loans were sold, totaling $36,040. ATM/Interchange fees increased as a result of increased transaction volume. Service charges decreased as a result of lower overdraft charges. Swap fees decreased due to the volume of swaps performed during the quarter ended September 30, 2020 as compared to the same period of 2019. Other income decreased due to a decrease in wire transfer fees, an increase in claims paid and loss reserves related to our captive insurance company and the amortization of mortgage servicing rights as a result of higher loan payoffs.

Noninterest expense for the three-month periods ended September 30, 2020 and 2019 are as follows:

	Three months ended September 30,
	2020		2019			$ Change			% Change
Compensation expense	$	10,595	$	9,707		$	888			9.1	%
Net occupancy expense		1,010		902			108			12.0	%
Equipment expense		494		561			(67	)		-11.9	%
Contracted data processing		415		435			(20	)		-4.6	%
FDIC assessment		288		(1	)		289			28900.0	%
State franchise tax		427		499			(72	)		-14.4	%
Professional services		669		756			(87	)		-11.5	%
Amortization of intangible assets		227		235			(8	)		-3.4	%
ATM/Interchange expense		538		514			24			4.7	%
Marketing		361		404			(43	)		-10.6	%
Software maintenance expense		506		396			110			27.8	%
Other		2,197		2,323			(126	)		-5.4	%
Total noninterest expense	$	17,727	$	16,731		$	996			6.0	%

Noninterest expense for the three months ended September 30, 2020 was $17,727, an increase of $996, or 6.0%, from $16,731 reported for the same period of 2019. The primary reasons for the increase were increases in compensation expense, net occupancy expense, FDIC assessment and software maintenance expense, offset by decreases in equipment expense, state franchise tax, professional services and marketing expense. The increase in compensation expense was due to increased commission and incentive based costs, offset by a decrease in employee insurance costs. The increase in net occupancy is the result of increased COVID-19 pandemic related expenses to janitorial services and supplies of $94. The quarter-over-quarter decrease in equipment expense is due to lower equipment repair and maintenance cost. The quarter-over-quarter increase in FDIC assessments was attributable to an increase in the assessment base and small bank credits applied to the 2019 assessments. The state franchise tax decrease is related to a refund of taxes paid in 2020. The quarter-over-quarter decrease in professional services costs is the result of decreases in investment advisory fees, examination fees and legal and audit fees. The increase in software maintenance expense is due to a general increase in software maintenance contracts. The quarter-over-quarter decrease in marketing expense is primarily due to a decrease in business promotion expense.

Income tax expense for the three months ended September 30, 2020 totaled $1,133, down $125 compared to the same period in 2019. The effective tax rates for the three-month periods ended September 30, 2020 and 2019 were 12.9% and 14.0%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits and bank owned life insurance income. The decrease in the effective tax rate is due to higher non-taxable income and lower taxable income for the three months ended September 30, 2020, as compared to the same period in 2019.

Page 45

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Nine Months Ended September 30, 2020 and 2019

The Company had net income of $22,019 for the nine months ended September 30, 2020, a decrease of $4,019 from net income of $26,038 for the same nine months of 2019. Basic earnings per common share were $1.36 for the period ended September 30, 2020, compared to $1.64 for the same period in 2019. Diluted earnings per common share were $1.36 for the period ended September 30, 2020, compared to $1.54 for the same period in 2019. The primary reasons for the changes in net income are explained below.

Net interest income for the nine months ended September 30, 2020 was $66,196, an increase of $2,318 from $63,878 in the same nine months of 2019. This increase is the result of an increase of $611 in total interest income with a decrease of $1,707 in interest expense. Interest-earning assets averaged $2,459,933 during the nine months ended September 30, 2020, an increase of $451,202 from $2,008,731 for the same period of 2019. The Company’s average interest-bearing liabilities increased from $1,326,084 at September 30, 2019 to $1,590,433 at September 30, 2020. The Company’s fully tax equivalent net interest margin for the nine months ended September 30, 2020 and 2019 was 3.70% and 4.35%, respectively.

Total interest income increased $611 to $74,144 for the period ended September 30, 2020, which is attributable to an increase of $1,529 in interest and fees on loans. This change was the result of an increase in the average balance of loans, accompanied by a lower yield on the portfolio. The average balance of loans increased by $322,037 or 20.2% to $1,913,514 for the period ended September 30, 2020, as compared to $1,591,477 for the period ended September 30, 2019. The loan yield decreased to 4.53% for 2020, from 5.33% in 2019.

Interest on taxable securities decreased $1,055 to $4,100 for the period ended September 30, 2020, compared to $5,155 for the same period in 2019. The average balance of taxable securities decreased $17,588 to $185,577 for the period ended September 30, 2020 as compared to $203,165 for the period ended September 30, 2019. The yield on taxable securities decreased 37 basis points to 3.07% for 2020, compared to 3.44% for 2019. Interest on tax-exempt securities increased $381 to $4,589 for the period ended September 30, 2020, compared to $4,208 for the same period in 2019. The average balance of tax-exempt securities increased $31,501 to $201,303 for the period ended September 30, 2020 as compared to $169,802 for the period ended September 30, 2019. The yield on tax-exempt securities decreased 22 basis points to 4.18% for 2020, compared to 4.40% for 2019.

Interest on interest-bearing deposits in other banks decreased $244 to $531 for the period ended September 30, 2020, compared to $775 for the same period in 2019. The average balance of interest-bearing deposits in other banks increased $115,252 to $159,539 for the period ended September 30, 2020 as compared to $44,287 for the period ended September 30, 2019. The yield on interest-bearing deposits in other banks decreased 190 basis points to 0.44% for 2020, compared to 2.34% for 2019.

Interest expense decreased $1,707 or 17.7% to $7,948 for the period ended September 30, 2020, compared with $9,655 for the same period in 2019. The change in interest expense can be attributed to an increase in the average balance of interest-bearing liabilities, offset by a decrease in rate. For the period ended September 30, 2020, the average balance of interest-bearing liabilities increased $264,349 to $1,590,433, as compared to $1,326,084 for the period ended September 30, 2019. Interest incurred on deposits decreased by $548 to $5,418 for the period ended September 30, 2020, compared to $5,966 for the same period in 2019. Although the average balance of interest-bearing deposits increased by $166,487 for the period ended September 30, 2020 as compared to the same period in 2019, deposit expense decreased due to a decrease in the rate paid on demand and savings accounts from 0.33% in 2019 to 0.19% in 2020. The rate paid on time deposits decreased from 1.89% to 1.85% in 2020. Interest expense incurred on FHLB advances and subordinated debentures decreased 39.1% from 2019. The average balance on Short-term FHLB balances decreased $106,341 for the period ended September 30, 2020 as compared to the same period in 2019, while the average balance on Long-term FHLB advances increased $96,007 for the period ended September 30, 2020 as compared to the same period in 2019. The rate paid on Short-term and Long-term FHLB advances decreased 80 and 61 basis points, respectively for the period ended September 30, 2020 as compared to the same period in 2019. In addition, the rate paid on subordinated debentures decreased 153 basis points for the period ended September 30, 2020 as compared to the same period in 2019. The average balance of other borrowings increased $103,133 for the period ended September 30, 2020 as compared to the same period in 2019 as a result of the Company’s borrowings under the PPPLF to fund PPP loans.

Page 46

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

The following table presents the condensed average balance sheets for the nine months ended September 30, 2020 and 2019. The daily average loan amounts outstanding are net of unearned income and include loans held for sale and nonaccrual loans. The average balance of securities is computed using the carrying value of securities. Rates are annualized and taxable equivalent yields are computed using a 21% tax rate for tax-exempt interest income. The average yield has been computed using the historical amortized cost average balance for available-for-sale securities.

	Nine Months Ended September 30,
	2020								2019
Assets:	Average balance			Interest		Yield/ rate*			Average balance			Interest		Yield/ rate*
Interest-earning assets:
Loans, including fees**	$	1,913,514		$	64,924		4.53	%	$	1,591,477		$	63,395		5.33	%
Taxable securities		185,577			4,100		3.07	%		203,165			5,155		3.44	%
Tax-exempt securities		201,303			4,589		4.18	%		169,802			4,208		4.40	%
Interest-bearing deposits in other banks		159,539			531		0.44	%		44,287			775		2.34	%
Total interest-earning assets	$	2,459,933		$	74,144		4.13	%	$	2,008,731		$	73,533		5.00	%
Noninterest-earning assets:
Cash and due from financial institutions		94,083								53,517
Premises and equipment, net		22,830								21,844
Accrued interest receivable		8,729								6,929
Intangible assets		84,965								85,863
Other assets		37,802								22,607
Bank owned life insurance		45,332								44,186
Less allowance for loan losses		(17,759	)							(13,896	)
Total Assets	$	2,735,915							$	2,229,781
Liabilities and Shareholders Equity:
Interest-bearing liabilities:
Demand and savings	$	1,010,719		$	1,433		0.19	%	$	862,098		$	2,159		0.33	%
Time		287,740			3,985		1.85	%		269,874			3,807		1.89	%
Short-term FHLB advance		10,888			134		1.64	%		117,229			2,137		2.44	%
Long-term FHLB advance		125,000			1,346		1.44	%		28,993			444		2.05	%
Other borrowings		103,133			275		0.36	%		—			—		—
Federal funds purchased		385			1		0.35	%		—			—		—
Subordinated debentures		29,427			757		3.44	%		29,427			1,094		4.97	%
Repurchase Agreements		23,141			17		0.10	%		18,463			14		0.10	%
Total interest-bearing liabilities	$	1,590,433		$	7,948		0.67	%	$	1,326,084		$	9,655		0.97	%
Noninterest-bearing deposits		757,696								567,365
Other liabilities		53,633								21,843
Shareholders’ Equity		334,153								314,489
Total Liabilities and Shareholders’ Equity	$	2,735,915							$	2,229,781
Net interest income and interest rate spread				$	66,196		3.46	%				$	63,878		4.03	%
Net interest margin							3.70	%							4.35	%

*—Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, included in the yields above, was $1,230 and $1,130 for the periods ended September 30, 2020 and 2019, respectively.

**—Average balance includes nonaccrual loans.

Page 47

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

	Increase (decrease) due to:
	Volume (1)			Rate (1)			Net
	(Dollars in thousands)
Interest income:
Loans, including fees	$	11,730		$	(10,201	)	$	1,529
Taxable securities		(526	)		(529	)		(1,055	)
Tax-exempt securities		593			(212	)		381
Interest-bearing deposits in other banks		771			(1,015	)		(244	)
Total interest income	$	12,568		$	(11,957	)	$	611
Interest expense:
Demand and savings	$	326		$	(1,052	)	$	(726	)
Time		248			(70	)		178
Short-term FHLB advance		(1,475	)		(528	)		(2,003	)
Long-term FHLB advance		1,070			(168	)		902
Other borrowings		275			—			275
Federal funds purchased		1			—			1
Subordinated debentures		—			(337	)		(337	)
Repurchase agreements		3			—			3
Total interest expense	$	448		$	(2,155	)	$	(1,707	)
Net interest income	$	12,120		$	(9,802	)	$	2,318

(1)	The change in interest income and interest expense due to changes in both volume and rate, which cannot be segregated, has been allocated proportionately to the change due to volume and the change due to rate.

The Company provides for loan losses through regular provisions to the allowance for loan losses. Provisions for loan losses totaled $7,862 and $150 during the periods ended September 30, 2020 and 2019, respectively. The increase in the provision was due to an increase in the bank’s qualitative factors, primarily changes in international, national, regional and local conditions, related to the economic shutdown driven by the ongoing COVID-19 pandemic. Economic impacts related to the COVID-19 pandemic include the loss of revenue being experience by our business clients, disruption of supply chains, additional employee costs for businesses due to the pandemic, higher unemployment rates throughout our footprint and a large number of customers requesting payment relief. Our Commercial, Commercial Real Estate and Consumer portfolios have been, and are expected to continue to be impacted the most.

Noninterest income for the nine-month periods ended September 30, 2020 and 2019 are as follows:

	Nine months ended September 30,
	2020			2019		$ Change			% Change
Service charges	$	3,812		$	4,733	$	(921	)		-19.5	%
Net gain on sale of securities		92			17		75			441.2	%
Net gain (loss) on equity securities		(126	)		81		(207	)		-255.6	%
Net gain on sale of loans		5,501			1,701		3,800			223.4	%
ATM/Interchange fees		3,226			2,871		355			12.4	%
Wealth management fees		2,916			2,733		183			6.7	%
Bank owned life insurance		733			753		(20	)		-2.7	%
Tax refund processing fees		2,375			2,750		(375	)		-13.6	%
Swap fees		1,260			287		973			339.0	%
Other		727			890		(163	)		-18.3	%
Total noninterest income	$	20,516		$	16,816	$	3,700			22.0	%

Page 48

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Noninterest income for the nine months ended September 30, 2020 was $20,516, an increase of $3,700 or 22.0% from $16,816 for the same period of 2019. The increase was primary due to increases in net gain on sale of loans of $3,800, ATM/Interchange fees of $355 and swap fees of $973, partially offset by a decrease in service charges of $921, tax refund processing fees of $375 and other income of $163. In addition, net gain on sale of securities increased $75 due to security sales, while net gain (loss) on equity securities decreased $207 as a result of market value decreases. Net gain on sale of loans increased primarily as a result of an increase in volume of loans sold. During the nine-months ended September 30, 2020, 1,076 loans were sold, totaling $211,143. During the nine-months ended September 30, 2019, 465 loans were sold, totaling $80,482. ATM/Interchange fees increased as a result of increased transaction volume. Swap fees increased due to the volume of swaps performed during the nine-months ended September 30, 2020 as compared to the same period of 2019. Service charges decreased due to Civista waiving $93 of service fees on deposits accounts related to the COVID-19 pandemic. In addition, overdraft fees decreased during 2020. Other income decreased due to the amortization of mortgage servicing rights as a result of higher loan payoffs.

Additionally, the Company processes state and federal income tax refund payments for customers of third-party income tax preparation vendors for which we receive a fee for processing the refund payments. Tax refund processing fees were $2,375 for the period ended September 30, 2019, a decrease of $375 from $2,750 for the same period of 2019. The decrease is the result of a decrease in volume of transactions processed during the period. This fee income is seasonal in nature, the majority of which is earned in the first quarter of the year.

Noninterest expense for the nine-month periods ended September 30, 2020 and 2019 are as follows:

	Nine months ended September 30,
	2020		2019		$ Change			% Change
Compensation expense	$	32,063	$	29,059	$	3,004			10.3	%
Net occupancy expense		3,050		2,906		144			5.0	%
Equipment expense		1,507		1,504		3			0.2	%
Contracted data processing		1,340		1,301		39			3.0	%
FDIC assessment		531		297		234			78.8	%
State franchise tax		1,394		1,398		(4	)		-0.3	%
Professional services		2,289		2,151		138			6.4	%
Amortization of intangible assets		686		710		(24	)		-3.4	%
ATM/Interchange expense		1,316		1,437		(121	)		-8.4	%
Marketing		1,056		1,111		(55	)		-5.0	%
Software maintenance expense		1,350		1,101		249			22.6	%
Other operating expenses		7,115		6,843		272			4.0	%
Total noninterest expense	$	53,697	$	49,818	$	3,879			7.8	%

Noninterest expense for the nine months ended September 30, 2020 was $53,697, an increase of $3,879, or 7.8%, from $49,818 reported for the same period of 2019. The primary reasons for the increase were increases in compensation expenses of $3,004, FDIC assessments of $234, professional services costs of $138, software maintenance expense of $249 and other operating expenses of $272, offset by decreases in ATM/Interchange expense of $121. The increase in compensation expense was due to increased payroll, overtime pay, 401k expenses, payroll taxes and commission and incentive based costs, offset by a decrease in employee insurance costs. The year-to-date average full time equivalent (FTE) employees were 452.1 at September 30, 2020, an increase of 11.3 FTEs over 2019, which increased payroll and payroll related expenses. Payroll and payroll related expenses also increased due to annual pay increases and increases in commission based costs as the result of increased loan activity. The year-over-year increase in FDIC assessments was attributable to small bank assessment credits applied to the 2019 assessment charges. The increase in professional services costs is the result of increased consulting services to implement cost savings and customer services and increased recruitment costs. The decrease in ATM/Interchange expense is primarily due to a settlement received in the second quarter of 2020. The increase in software maintenance expense is due to a general increase in software maintenance contracts. The increase in other operating expense is primarily due to increases in software depreciation, amortization of low income housing investments, other loan expense, MSR valuation expense, ATM/debit card losses and communication expense, offset by decreases in travel, lodging and meals.

Page 49

Civista Bancshares, Inc.

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

Form 10-Q

(Amounts in thousands, except share data)

Income tax expense for the nine months ended September 30, 2020 totaled $3,134, down $1,554 compared to the same period in 2019. The effective tax rates for the nine month periods ended September 30, 2020 and 2019 were 12.5% and 15.3%, respectively. The difference between the statutory federal income tax rate and the Company’s effective tax rate is the permanent tax differences, primarily consisting of tax-exempt interest income from municipal investments and loans, low income housing tax credits and bank owned life insurance income. The decrease in the effective tax rate is due to lower taxable income for the nine-months ended September 30, 2020, as compared to the same period in 2019.

Capital Resources

Shareholders’ equity totaled $342,055 at September 30, 2020 compared to $330,126 at December 31, 2019. The Company repurchased common shares during the period, which totaled $12,756. The increase in shareholders’ equity was also impacted by net income of $22,019, a $171 net decrease in the Company’s pension liability and an increase in the fair value of securities available for sale, net of tax, of $7,342, which was partially offset by dividends on common stock of $5,365.

All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of September 30, 2020 and December 31, 2019 as identified in the following table:

	Total Risk Based Capital			Tier I Risk Based Capital			CET1 Risk Based Capital			Leverage Ratio
Company Ratios—September 30, 2020		15.9	%		14.7	%		13.2	%		10.7	%
Company Ratios—December 31, 2019		16.1	%		15.3	%		13.6	%		12.3	%
For Capital Adequacy Purposes		8.0	%		6.0	%		4.5	%		4.0	%
To Be Well Capitalized Under Prompt
Corrective Action Provisions		10.0	%		8.0	%		6.5	%		5.0	%

Liquidity

The Company maintains a conservative liquidity position. All securities are classified as available for sale. Securities, with maturities of one year or less, totaled $11,311, or 3.1% of the total security portfolio at September 30, 2020. The available for sale portfolio helps to provide the Company with the ability to meet its funding needs. The Condensed Consolidated Statements of Cash Flows (Unaudited) contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings.

As reported in the Condensed Consolidated Statements of Cash Flows (Unaudited), our cash flows are classified for financial reporting purposes as operating, investing or financing cash flows. Net cash provided by operating activities was $25,301 and $22,522 for the nine months ended September 30, 2020 and 2019, respectively. The primary additions to cash from operating activities are from proceeds from the sale of loans. In addition, in 2020, additions from the change in the provision of loan losses and net deferred loan fees of $7,862 and $7,721, respectively added to cash from operating activities. The primary use of cash from operating activities is from loans originated for sale. The increase in originations and sales of loans held for sale is due to an increase in volume due to refinances as rates have declined. Net cash used for investing activities was $340,281 and $81,955 for the nine months ended September 30, 2020 and 2019, respectively, principally reflecting our loan and investment security activities. Cash provided by and used for deposits, borrowings and purchase of treasury shares comprised most of our financing activities, which resulted in net cash provided by of $461,218 and $78,873 for the nine months ended September 30, 2020 and 2019, respectively.

Future loan demand of Civista may be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. Through its correspondent banks, Civista maintains federal funds borrowing lines totaling $50,000. As of September 30, 2020, Civista had total credit availability with the FHLB of $617,547 with standby letters of credit totaling $20,000 and a remaining borrowing capacity of approximately $472,547. In addition, CBI maintains a credit line totaling $10,000.

Page 50

Civista Bancshares, Inc.

Quantitative and Qualitative Disclosures About Market Risk

Form 10-Q

(Amounts in thousands, except share data)

ITEM 3.

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.

Page 51

Civista Bancshares, Inc.

Quantitative and Qualitative Disclosures About Market Risk

Form 10-Q

(Amounts in thousands, except share data)

Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities; and hedging existing assets, liabilities, or anticipated transactions. An institution might also invest in more complex financial instruments intended to hedge or otherwise change interest-rate risk. Interest rate swaps, futures contracts, options on futures, and other such derivative financial instruments often are used for this purpose. Because these instruments are sensitive to interest rate changes, they require management expertise to be effective. The Company has not purchased derivative financial instruments to hedge interest rate risk in the past and does not currently intend to purchase such instruments in the near future. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refinance its obligations at new, lower rates. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short-term or due on demand, while most of its assets may be invested in long-term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. FHLB advances and wholesale borrowings may also be used as important sources of liquidity for the Company.

The following table provides information about the Company’s financial instruments that were sensitive to changes in interest rates as of December 31, 2019 and September 30, 2020, based on certain prepayment and account decay assumptions that management believes are reasonable. The table shows the changes in the Company’s net portfolio value (in amount and percent) that would result from hypothetical interest rate increases of 200 basis points and 100 basis points and interest rate decreases of 100 basis points and 200 basis points at September 30, 2020 and December 31, 2019.

The Company had derivative financial instruments as of December 31, 2019 and September 30, 2020. The changes in fair value of the assets and liabilities of the underlying contracts offset each other. 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
	September 30, 2020							December 31, 2019
Change in Rates	Dollar Amount		Dollar Change		Percent Change			Dollar Amount		Dollar Change			Percent Change
+200bp		494,363		45,414		10	%		449,843		31,596			8	%
+100bp		481,410		32,461		7	%		437,195		18,948			5	%
Base		448,949		—		—			418,247		—			—
-100bp		488,371		39,422		9	%		394,943		(23,304	)		-6	%
-200bp		516,305		67,356		15	%		416,878		(1,369	)		0	%

The change in net portfolio value from December 31, 2019 to September 30, 2020, can be attributed to a couple of factors. There was a drop in the yield curve from the end of the year, and both the volume and mix of assets and funding sources has changed. The volume of loans has increased, but the mix has shifted toward cash. Both the increase in loans and cash are primarily a result of PPP loans and the proceeds of those loans on deposit, respectively. Similarly, the volume and mix of liabilities has shifted toward deposits and other borrowings. Deposits increased as a result of PPP loan proceeds on deposit and other borrowings increased as a result of PPP funding acquired from the PPPLF. The mix shifts from the end of the year led to a slight increase in the base net portfolio value. Generally, assets have shifted toward less volatile components while liabilities have shifted toward more volatile components. Combined, this led to an increase 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 than assets. Accordingly, we see an increase in the net portfolio value. For 100 and 200 basis point downward changes in rates, the market value of assets would increase more quickly than the market value of liabilities, leading to an increase in the net portfolio value.

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Civista Bancshares, Inc.

Controls and Procedures

Form 10-Q

(Amounts in thousands, except share data)

ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive and our principal financial officers, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our principal executive and our principal financial officers concluded that our disclosure controls and procedures as of September 30, 2020, were effective.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Civista Bancshares, Inc.

Other Information

Form 10-Q

Part II—Other Information

Item 1.

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 1A.

Risk Factors

There were no material changes during the current period to the risk factors disclosed in “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented by the risk factors in “Item 1A. Risk Factors” of the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the third quarter of 2020, the Company purchased common shares as follows:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares (Units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2020 - July 30, 2020		—	$	—		—	$	13,500,000
August 1, 2020 - August 31, 2020		—	$	—		—	$	13,500,000
September 1, 2020 - September 30, 2020		107,500	$	12.15		107,500	$	12,193,701
Total		107,500	$	12.15		107,500	$	12,193,701

On May 4, 2020, the Company announced the implementation of a common share repurchase program which authorized the Company to repurchase a maximum aggregate value of $13,500,000 of its outstanding common shares. The expiration date of the common share repurchase program is April 20, 2021. A total of 107,500 common shares had been repurchased for an aggregate purchase price of $1,306,299 as of September 30, 2020 under the repurchase program.

Item 3.

Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

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Civista Bancshares, Inc.

Other Information

Form 10-Q

Item 6.

Exhibits

Exhibit	Description	Location

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, 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)

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 the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020, formatted in Inline Extensible Business Reporting Language: (i) Consolidated Balance Sheets (Unaudited) as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income (Unaudited) for the three- and nine- months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income (Unaudited) for the three- and nine- months ended September 30, 2020 and 2019; (iv) Consolidated Statement of Shareholders’ Equity (Unaudited) for the three- and nine- months ended September 30, 2020 and 2019; (v) Condensed Consolidated Statement of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019; and (vi) Notes to Interim Consolidated Financial Statements (Unaudited).	Included herewith

104	Cover page formatted in Inline Extensible Business Reporting Language.	Included herewith

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Civista Bancshares, Inc.

Signatures

Form 10-Q

Pursuant to the requirements 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.

Civista Bancshares, Inc.


/s/ Dennis G. Shaffer		November 9, 2020
Dennis G. Shaffer		Date
Chief Executive Officer and President


/s/ Todd A. Michel		November 9, 2020
Todd A. Michel		Date
Senior Vice President, Controller

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