# CIVISTA BANCSHARES, INC. (CIVB) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CIVISTA BANCSHARES, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/944745/000095017023008123/civb-20221231.htm
Accession: 0000950170-23-008123
Filing date: 2023-03-15
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CIVB/
All MD&A years: /company/CIVB/mda/
Previous year: /company/CIVB/mda/fy2021/ (FY 2021)
Next year: /company/CIVB/mda/fy2023/ (FY 2023)

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

(Amounts in thousands, except per share data)

General

The following paragraphs more fully discuss the significant highlights, changes and trends as they relate to the Company’s financial condition, results of operations, liquidity and capital resources as of December 31, 2022 and 2021, and during the three-year period ended December 31, 2022. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which are included elsewhere in this report.

Financial Condition

At December 31, 2022, the Company’s total assets were $3,537,830, compared to $3,012,905 at December 31, 2021. The increase in assets is primarily the result of the Company's acquisition by merger of Comunibanc Corp. and VFG effective July 1, 2022 and October 3, 2022, respectively. In addition, loans and securities increased $546,917 and $55,528, respectively, partially offset by a decrease in cash and due from financial institutions of $210,098. Other factors contributing to the change in assets are discussed in the following sections.

Loans held for sale decreased $1,289, or 65.4%, from $1,972 at December 31, 2021 to $683 at December 31, 2022. The decrease is due to a decrease in refinances, resulting in lower volume. At December 31, 2022, seven loans totaling $683 were held for sale as compared to 14 loans totaling $1,972 at December 31, 2021.

At December 31, 2022, the Company’s net loans totaled $2,518,155 and increased by 27.7% from $1,971,238 at December 31, 2021. The increase in net loans was spread across most segments. Commercial & Agriculture loans increased $32,093, Commercial Real Estate – Owner Occupied loans increased $75,695, Commercial Real Estate - Non-Owner Occupied loans increased $189,426, Residential Real Estate loans increased $122,721, Real Estate Construction loans increased $86,000, Lease financing receivables increased $36,797 and Consumer and Other loans increased $9,766. The increases in the foregoing loan segments were offset by a decrease in Farm Real Estate loans of $3,711. In connection with the acquisition of Comunibanc Corp. in July 2022, the Company acquired Commercial & Agriculture loans totaling $9,972, Commercial Real Estate – Owner Occupied loans totaling $30,515, Commercial Real Estate – Non-Owner Occupied loans totaling $45,917, Residential Real Estate loans totaling $56,621, Real Estate Construction loans totaling $10,587, Farm Real Estate loans totaling $2,925 and Consumer and Other loans totaling $12,665. In connection with the acquisition of VFG in October 2022, the Company acquired Commercial & Agriculture loans and Lease financing receivables totaling $25,509 and $35,909, respectively.

35

Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table shows the amount of commercial and agriculture, commercial real estate, residential real estate, real estate construction, farm real estate and consumer and other loans outstanding as of December 31, 2022, which, based on the contract terms for repayments of principal, are due in the periods indicated. In addition, the amounts due after one year are classified according to their sensitivity to changes in interest rates.

[[GREPCENT_TABLE]]
[["","","Maturing"],["","","Within one year","","","After one but within five years","","","After five but within fifteen years","","","After fifteen years","","","Total"],["","","(Dollars in thousands)"],["Commercial & Agriculture","","$","95,232","","","$","114,913","","","$","67,660","","","$","790","","","$","278,595"],["Commercial Real Estate:"],["Owner Occupied","","","6,731","","","","75,064","","","","250,049","","","","39,303","","","","371,147"],["Non-Owner Occupied","","","36,703","","","","340,894","","","","593,326","","","","47,813","","","","1,018,736"],["Residential Real Estate","","","7,195","","","","26,097","","","","248,249","","","","271,240","","","","552,781"],["Real Estate Construction","","","38,826","","","","105,573","","","","52,405","","","","46,323","","","","243,127"],["Farm Real Estate","","","671","","","","5,176","","","","14,796","","","","4,065","","","","24,708"],["Lease financing receivables","","","4,732","","","","28,477","","","","3,588","","","","\u2014","","","","36,797"],["Consumer and Other","","","1,480","","","","14,839","","","","3,916","","","","540","","","","20,775"],["Total","","$","191,570","","","$","711,033","","","$","1,233,989","","","$","410,074","","","$","2,546,666"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Due After One Year"],["","","Fixed Rate","","","Variable Rate"],["","","(Dollars in thousands)"],["Commercial & Agriculture","","$","129,321","","","$","54,041"],["Commercial Real Estate:"],["Owner Occupied","","","76,230","","","","288,186"],["Non-Owner Occupied","","","253,085","","","","728,949"],["Residential Real Estate","","","159,972","","","","385,613"],["Real Estate Construction","","","56,800","","","","147,501"],["Farm Real Estate","","","6,555","","","","17,483"],["Lease financing receivables","","","32,064","","","","\u2014"],["Consumer and Other","","","17,668","","","","1,628"],["Total","","$","731,695","","","$","1,623,401"]]
[[/GREPCENT_TABLE]]

The preceding maturity information is based on contract terms at December 31, 2022 and does not include any possible “rollover” at maturity date. In the normal course of business, Civista considers and acts on the borrowers’ requests for renewal of loans at maturity. Evaluation of such requests includes a review of the borrower’s credit history, the collateral securing the loan and the purpose for such request.

36

Analysis of the Allowance for Loan Losses

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

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["","","(Dollars in thousands)"],["Total loans outstanding","","$","2,546,666","","","$","1,997,879","","","$","2,057,502"],["Allowance for credit losses at year end","","","28,511","","","","26,641","","","","25,028"],["Loans accounted for on a nonaccrual basis","","","6,507","","","","3,673","","","","5,125"],["Allowance for loan losses to total loans outstanding","","","1.12","%","","","1.33","%","","","1.22","%"],["Nonaccrual loans to total loans outstanding","","","0.26","%","","","0.18","%","","","0.25","%"],["Allowance for loan losses to nonaccrual loans","","","438.16","%","","","725.32","%","","","488.35","%"],["Average loans outstanding:"],["Commercial & Agriculture","","","236,315","","","","338,916","","","","359,820"],["Commercial Real Estate\u2014Owner Occupied","","","322,132","","","","278,777","","","","256,962"],["Commercial Real Estate\u2014Non-Owner Occupied","","","896,562","","","","755,578","","","","643,622"],["Real Estate Mortgage","","","511,973","","","","433,351","","","","462,834"],["Real Estate Construction","","","179,183","","","","176,775","","","","175,573"],["Farm Real Estate","","","24,388","","","","28,968","","","","33,935"],["Lease financing receivables","","","8,382","","","","\u2014","","","","\u2014"],["Consumer and Other","","","20,147","","","","14,542","","","","20,726"],["Total average loans outstanding","","","2,199,082","","","","2,026,907","","","","1,953,472"],["Net charge-offs (recoveries):"],["Commercial & Agriculture","","","(2",")","","","(150",")","","","13"],["Commercial Real Estate\u2014Owner Occupied","","","(42",")","","","(7",")","","","(111",")"],["Commercial Real Estate\u2014Non-Owner Occupied","","","(74",")","","","(395",")","","","(48",")"],["Real Estate Mortgage","","","(66",")","","","(182",")","","","18"],["Real Estate Construction","","","(4",")","","","(1",")","","","(4",")"],["Farm Real Estate","","","(6",")","","","(12",")","","","(13",")"],["Lease financing receivables","","","23","","","","\u2014","","","","\u2014"],["Consumer and Other","","","53","","","","(36",")","","","(4",")"],["Total net charge-offs (recoveries)","","","(118",")","","","(783",")","","","(149",")"],["Ratio of net charge-offs (recoveries) during the year to average loans outstanding:"],["Commercial & Agriculture","","","(0.00",")%","","","(0.04",")%","","","0.00","%"],["Commercial Real Estate\u2014Owner Occupied","","","(0.01",")%","","","(0.00",")%","","","(0.04",")%"],["Commercial Real Estate\u2014Non-Owner Occupied","","","(0.01",")%","","","(0.05",")%","","","(0.01",")%"],["Real Estate Mortgage","","","(0.01",")%","","","(0.04",")%","","","0.00","%"],["Real Estate Construction","","","(0.00",")%","","","(0.00",")%","","","(0.00",")%"],["Farm Real Estate","","","(0.02",")%","","","(0.04",")%","","","(0.04",")%"],["Lease financing receivables","","","","","","\u2014","","","","\u2014"],["Consumer and Other","","","0.26","%","","","(0.25",")%","","","(0.02",")%"],["Total net recoveries (charge-offs)","","","(0.01",")%","","","(0.04",")%","","","(0.01",")%"]]
[[/GREPCENT_TABLE]]

The amount of net charge-offs fluctuates from year to year due to factors relating to the condition of the general economy, decline in market values of collateral and deterioration of specific businesses.

The determination of the balance of the allowance for loan losses is based on a detailed analysis of the loan portfolio and reflects an amount that, in management’s judgment, is adequate to provide for probable incurred loan losses. Such analysis is based on a review of specific loans, the character of the loan portfolio, current economic conditions, risk management practices and such other factors as management believes require current recognition in estimating probable incurred loan losses.

37

Allocation of Allowance for Loan Losses

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

[[GREPCENT_TABLE]]
[["","","2022","","","2021"],["","","Allowance","","","Percentage of loans to total loans","","","Allowance","","","Percentage of loans to total loans"],["","","(Dollars in thousands)"],["Commercial & Agriculture","","$","3,011","","","","10.9","%","","$","2,600","","","","12.3","%"],["Commercial Real Estate\u2014Owner Occupied","","","4,565","","","","14.5","","","","4,464","","","","14.9"],["Commercial Real Estate\u2014Non-Owner Occupied","","","14,138","","","","40.0","","","","13,860","","","","41.5"],["Real Estate Mortgage","","","3,145","","","","21.7","","","","2,597","","","","21.5"],["Real Estate Construction","","","2,293","","","","9.6","","","","1,810","","","","7.9"],["Farm Real Estate","","","291","","","","1.0","","","","287","","","","1.4"],["Lease financing receivables","","","429","","","","1.5","","","","0","","","","0.0"],["Consumer and Other","","","98","","","","0.8","","","","176","","","","0.5"],["Unallocated","","","541","","","","\u2014","","","","847","","","","\u2014"],["","","$","28,511","","","","100.0","%","","$","26,641","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","2020"],["","","Allowance","","","Percentage of loans to total loans"],["","","(Dollars in thousands)"],["Commercial & Agriculture","","$","2,810","","","","19.9","%"],["Commercial Real Estate\u2014Owner Occupied","","","4,057","","","","13.6"],["Commercial Real Estate\u2014Non-Owner Occupied","","","12,451","","","","34.3"],["Real Estate Mortgage","","","2,484","","","","21.5"],["Real Estate Construction","","","2,439","","","","8.5"],["Farm Real Estate","","","338","","","","1.6"],["Consumer and Other","","","209","","","","0.6"],["Unallocated","","","240","","","","\u2014"],["","","$","25,028","","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Civista measures the adequacy of the allowance for loan losses by using both specific and general components. The specific component relates to the evaluation of each loan identified as impaired. The general component consists of a pooling of commercial credits risk graded as special mention and substandard, based on portfolio experience, and general reserves, which are based on a twelve quarter loss migration analysis, adjusted for current economic factors. Loss migration rates are calculated over a twelve quarter period for all portfolio segments. Factors in the determination of the economic reserve include items such as changes in the economic and business conditions of its market, changes in lending policies and procedures, changes in loan concentrations, as well as a few others. The allowance for loan losses to total loans decreased from 1.33% in 2021 to 1.12% in 2022. The unallocated reserve of Civista decreased to $541 in 2022 from $847 in 2021. Management considers both the decrease in the unallocated reserve and the end-of-period reserve number to be insignificant and within the loan policy guidelines.

Securities available for sale increased by $55,528, or 9.9%, from $559,874 at December 31, 2021 to $615,402 at December 31, 2022. U.S. Treasury securities and obligations of U.S. government agencies increased $13,139, or 27.4% from $47,890 at December 31, 2021 to $61,029 at December 31, 2022. Obligations of states and political subdivisions available for sale increased by $18,412 from 2021 to 2022. Mortgage-backed securities increased by $23,977 to total $237,125 at December 31, 2022. The Company continues to utilize letters of credit from the Federal Home Loan Bank (FHLB) to replace maturing securities that were pledged for public entities. As of December 31, 2022, the Company was in compliance with all applicable pledging requirements.

Mortgage-backed securities totaled $237,125 at December 31, 2022 and none were considered unusual or “high risk” securities as defined by regulatory authorities. Of this total, $234,666 consisted of pass-through securities issued by the Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), and Government National Mortgage Association (“GNMA”), and the remaining $2,459 of these securities were collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the mortgage-backed securities portfolio at December 31, 2022 was 2.4%. The average maturity at December 31, 2022 was approximately 8.4 years.

38

Securities available for sale had a fair value at December 31, 2022 of $615,402. This fair value includes unrealized gains of approximately $819 and unrealized losses of approximately $67,768. Net unrealized losses totaled $66,949 on December 31, 2022 compared to net unrealized gains of $18,577 on December 31, 2021. The change in unrealized gains is primarily due to changes in market interest rates. Note 3 to the Consolidated Financial Statements provides additional information on unrealized gains and losses.

The following table sets forth the maturities of securities at December 31, 2022 and the weighted average yields of such debt securities. Maturities are reported based on stated maturities and do not reflect principal prepayment assumptions.

[[GREPCENT_TABLE]]
[["","","Within one year","","","After one but within five years","","","After five but within ten years","","","After ten years"],["","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["","","(Dollars in thousands)"],["Available for Sale (2)"],["U.S. Treasury securities and obligations of U.S. government agencies","","$","5,455","","","","0.53","%","","$","27,665","","","","1.52","%","","$","26,770","","","","2.18","%","","$","1,139","","","","2.97","%"],["Obligations of states and political subdivisions (1)","","","341","","","","3.02","","","","13,639","","","","3.40","","","","37,917","","","","3.20","","","","265,351","","","","2.65"],["Mortgage-backed securities in government sponsored entities","","","173","","","","2.00","","","","14,469","","","","3.33","","","","21,122","","","","2.44","","","","201,361","","","","2.53"],["Total","","$","5,969","","","","0.71","%","","$","55,773","","","","2.45","%","","$","85,809","","","","2.99","%","","$","467,851","","","","2.58","%"]]
[[/GREPCENT_TABLE]]

(1)
Weighted average yields on nontaxable obligations have been computed based on actual yields stated on the security.

(2)
The weighted average yield has been computed using the historical amortized cost for available-for-sale securities.

Premises and equipment, net of accumulated depreciation, increased $41,573 from December 31, 2021 to December 31, 2022. The increase is the result of new purchases of $6,508, offset by disposals of $183 and depreciation of $4,456. Premises and equipment, net, acquired from the acquisitions of Comunibanc Corp. and VFG totaled $4,665 and $35,039, respectively.

Goodwill increased by $48,844, from $76,851 at December 31, 2021 to $125,695 at December 31, 2022. The increase is due to the goodwill created from the acquisitions of Comunibanc Corp. and VFG. Other intangible assets increased $3,973 from year-end 2021. The increase includes $4,426 of core deposit intangibles and $419 of mortgage servicing rights from the acquisition of Comunibanc Corp.

Swap assets increased $5,507 from December 31, 2021 to December 31, 2022. The increase is primarily the result of increases in the fair value of swap assets as compared to December 31, 2021.

Bank owned life insurance (BOLI) increased $6,902 from December 31, 2021 to December 31, 2022. BOLI acquired from the merger with Comunibanc Corp. totaled $5,918. The remaining difference is the result of increases in the cash surrender value of the underlying insurance policies.

Deferred taxes increased $15,029 from December 31, 2021 to December 31, 2022. The increase is primarily the result of an increase in deferred taxes on available for sale securities of $18,017 as a result of increases in interest rates during 2022.

39

Year-end deposit balances totaled $2,619,984 in 2022 compared to $2,416,701 in 2021, an increase of $203,283, or 8.4%. This increase in deposits at December 31, 2022 compared to December 31, 2021 included increases in noninterest bearing demand deposits of $107,427, or 13.6%, savings and money market accounts of $32,590, or 3.9%, certificate of deposit accounts of $68,734, or 33.6%, and individual retirement accounts of $4,163, or 9.9%, offset by a decrease in interest bearing demand accounts of $9,631, or 1.8%. Average deposit balances for 2022 were $2,614,423 compared to $2,488,105 for 2021, an increase of 5.1%. Noninterest bearing deposits averaged $937,890 for 2022, compared to $907,591 for 2021, increasing $30,299, or 3.3%. Savings, NOW, and MMDA accounts averaged $1,423,134 for 2022 compared to $1,315,220 for 2021, increasing $107,914, or 8.2%. Average certificates of deposit decreased $11,895 to total an average balance of $253,399 for 2022. The increase in year-over-year average balances was impacted by the acquisition of an aggregate of $271,194 of deposits from the Comunibanc Corp. acquisition.

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

[[GREPCENT_TABLE]]
[["","","2022","","","2021"],["","","Average balance","","","Average rate paid","","","Average balance","","","Average rate paid"],["","","(Dollars in thousands)"],["Noninterest-bearing demand deposits","","$","937,890","","","N/A","","","$","907,591","","","N/A"],["Interest-bearing demand deposits","","","544,351","","","","0.03","%","","","497,067","","","","0.03","%"],["Savings, including Money Market deposit accounts","","","878,783","","","","0.15","%","","","818,153","","","","0.13","%"],["Certificates of deposit, including IRA\u2019s","","","253,399","","","","0.95","%","","","265,294","","","","1.11","%"],["","","$","2,614,423","","","","","","$","2,488,105"]]
[[/GREPCENT_TABLE]]

Uninsured deposits at December 31, 2022 and 2021 were $563,092 and $599,380, respectively. Uninsured deposits as December 31, 2022 and 2021 are based on estimates and include portions of FDIC-insured deposit accounts that exceed the insurance limit of $250,000 per separately insured depositor.

Maturities of certificates of deposits and individual retirement accounts of more than $250,000 outstanding at December 31, 2022 are summarized as follows.

[[GREPCENT_TABLE]]
[["","","Certificates of Deposits","","","Individual Retirement Accounts","","","Total"],["","","(Dollars in thousands)"],["3 months or less","","$","129,736","","","$","7,334","","","$","137,070"],["Over 3 through 6 months","","","35,392","","","","7,125","","","","42,517"],["Over 6 through 12 months","","","59,322","","","","10,578","","","","69,900"],["Over 12 months","","","48,816","","","","21,042","","","","69,858"],["","","$","273,266","","","$","46,079","","","$","319,345"]]
[[/GREPCENT_TABLE]]

FHLB advances increased $322,278 from December 31, 2021 to December 31, 2022. Short-term FHLB advances increased $393,700 year over year due to an increase in over night funding. Long-term FHLB advances decreased due to the repayment in 2022 of an FHLB advance in the amount of $75,000. This advance had terms of one hundred twenty months with a fixed rate of 1.03% and was puttable. The advance was not replaced. Long-term advances acquired in the acquisition of Comunibanc Corp. totaled $21,706, of which $18,128 has been paid down.

Other borrowings increased $15,516 from December 31, 2021 to December 31, 2022. Other borrowings increased due to the assumption of an aggregate of $58,142 of borrowings from the acquisition of VFG and payoffs of $42,626.

Civista offers repurchase agreements in the form of sweep accounts to commercial checking account customers. These repurchase agreements totaled $25,143 at December 31, 2022 compared to $25,495 at December 31, 2021. U.S. Treasury securities and obligations of U.S. government agencies maintained under Civista’s control are pledged as collateral for the repurchase agreements. Additional detail related to these repurchase agreements can be found in Note 12 to the Consolidated Financial Statements.

Swap liabilities increased $5,507 from December 31, 2021 to December 31, 2022. The increase is primarily the result of increases in the fair value of swap liabilities as compared to December 31, 2021.

40

Total shareholders’ equity decreased $20,377, or 5.7%, during 2022 to $334,835. The change in shareholders’ equity resulted from the issuance of common shares as part of the consideration in the acquisitions of Comunibanc Corp. and VFG, which added $21,122 and $10,500, respectively, to shareholders equity. Shareholders' equity was also positively impacted by net income of $39,427. Additionally, $819 was recognized as stock-based compensation in 2022 in connection with the grant of restricted common shares. These increases to shareholders’ equity were offset by, an increase in the Company’s pension liability, net of tax, of $581, a decrease in the fair value of securities available for sale, net of tax, of $67,446 and decreases due to the purchase of treasury shares and dividends on common shares of $16,887 and $8,493, respectively. For further explanation of these items, see Note 1, Note 15 and Note 16 to the Consolidated Financial Statements. The Company paid $0.56 per common share in dividends in 2022 compared to $0.52 per common share in dividends in 2021.

Total outstanding common shares at December 31, 2022 were 15,728,234, which increased from 14,954,200 common shares outstanding at December 31, 2021. Common shares outstanding increased due to the issuance of 984,723 common shares to former shareholders of Comunibanc Corp. in connection with the acquisition of Comunibanc Corp. effective July 1, 2022 and 500,293 common shares in connection with the acquisition of VFG effective October 3, 2022. Additionally, common shares outstanding was impacted by the Company’s repurchase of 747,443 common shares during 2022 at an average repurchase price of $22.59. The Company repurchased 349,168 common shares pursuant to a stock repurchase program announced on May 4, 2022 and 392,847 common shares pursuant to a stock repurchase program announced on August 12, 2021. The repurchase program publicly announced on May 4, 2022 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until May 9, 2023. The repurchase plan publicly announced on August 12, 2021 authorized the Company to repurchase a maximum aggregate value of $13,500 of the Company’s common shares until August 10, 2022. An additional 5,428 common shares were surrendered by officers to the Company to pay taxes upon vesting of restricted shares and 3,411 restricted common shares were forfeited. The repurchase of common shares was offset by the grant of 31,774 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. In addition, 8,098 common shares were issued to Civista directors as a retainer payment for service on the Civista Board of Directors.

Results of Operations

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

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

41

Comparison of Results of Operations for the Years Ended December 31, 2022 and December 31, 2021

Net Income

The Company’s net income for the year ended December 31, 2022 was $39,427, compared to $40,546 for the year ended December 31, 2021. The change in net income was the result of the items discussed in the following sections.

Net Interest Income

Net interest income for 2022 was $110,204, an increase of $14,779, or 15.5%, from 2021. From 2021 to 2022, average earning assets increased 4.5%, interest income increased $19,511, and interest expense on interest-bearing liabilities increased $4,732. The Company continually examines its rate structure to ensure that its interest rates are competitive and reflective of the current rate environment in which it competes.

Total interest income increased $19,511 to $121,253 for the year ended December 31, 2022, which is attributable to an increase of $13,581 in interest and fees on loans. This change was the result of an increase in the average balance of loans, accompanied by a higher yield on the portfolio. The average balance of loans increased by $172,175, or 8.5%, to $2,199,082 for the year ended December 31, 2022, as compared to $2,026,907 for the year ended December 31, 2021. The loan yield increased to 4.69% for 2022, from 4.42% in 2021.

Interest on taxable securities increased $3,650 to $9,123 for the year ended December 31, 2022, compared to $5,473 for the same period in 2021. The average balance of taxable securities increased $108,787 to $341,600 for the year ended December 31, 2022, as compared to $232,813 for the year ended December 31, 2021. The yield on taxable securities increased 8 basis points to 2.49% for 2022, compared to 2.41% for 2021. Interest on tax-exempt securities increased $1,609 to $7,859 for the year ended December 31, 2022, compared to $6,250 for the same period in 2021. The average balance of tax-exempt securities increased $46,195 to $263,981 for the year ended December 31, 2022 as compared to $217,786 for the year ended December 31, 2021. The yield on tax-exempt securities decreased 40 basis points to 3.56% for 2021, compared to 3.96% for 2021.

Total interest expense increased $4,732 or 74.9%, to $11,049 for the year ended December 31, 2022, compared with $6,317 for the same period in 2021. The increase in interest expense can be attributed to an increase in the average rate paid, accompanied by an increase in the average balance of interest-bearing liabilities. For the year ended December 31, 2022, the average balance of interest-bearing liabilities increased $181,264 to $1,918,906, as compared to $1,737,642 for the year ended December 31, 2021. Interest incurred on deposits decreased by $335 to $3,840 for the year ended December 31, 2022, compared to $4,175 for the same period in 2021. The decrease in deposit expense was due to a decrease in the average rate paid, as the average rate paid on demand and savings accounts decreased from 0.09% in 2021 to 0.01% in 2022 and the average rate paid on time deposits decreased from 1.11% to 0.95% in 2022, which was partially offset by an increase in the average balance of interest-bearing deposits of $96,019 for the year ended December 31, 2022 as compared to the same period in 2021. Interest expense incurred on FHLB advances and subordinated debentures increased 223.8% from 2021. The increase was due to an increase in the average balance of short-term FHLB balances and subordinated debentures of $66,875 and $66,956, respectively, accompanied by an increas in rates. The average balance of other borrowings increased $4,002 for the period ended December 31, 2022, as compared to the same period in 2021, as a result of the Company’s acquisition of VFG.

Refer to “Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential” and “Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate” on pages 46 through 48 for further analysis of the impact of changes in interest-bearing assets and liabilities on the Company’s net interest income.

42

Provision and Allowance for Loan Losses

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

[[GREPCENT_TABLE]]
[["","","As of and for year ended December 31,"],["","","2022","","","2021","","","2020"],["Net loan charge-offs (recoveries)","","$","(118",")","","$","(783",")","","$","(149",")"],["Provision for loan losses charged to expense","","","1,752","","","","830","","","","10,112"],["Net loan charge-offs (recoveries) as a percent of average outstanding loans","","","(0.01",")%","","","(0.04",")%","","","(0.01",")%"],["Allowance for loan losses","","$","28,511","","","$","26,641","","","$","25,028"],["Allowance for loan losses as a percent of year-end outstanding loans","","","1.12","%","","","1.33","%","","","1.22","%"],["Impaired loans, excluding purchase credit impaired loans (PCI)","","$","624","","","$","1,222","","","$","2,666"],["Impaired loans as a percent of gross year-end loans (1)","","","0.02","%","","","0.06","%","","","0.13","%"],["Nonaccrual and 90 days or more past due loans, excluding PCI","","$","6,507","","","$","3,673","","","$","5,125"],["Nonaccrual and 90 days or more past due loans, excluding PCI as a percent of gross year-end loans (1)","","","0.26","%","","","0.18","%","","","0.25","%"]]
[[/GREPCENT_TABLE]]

(1)
Nonaccrual loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered nonaccrual if it is maintained on a cash basis because of deterioration in the borrower’s financial condition, where payment in full of principal or interest is not expected and where the principal and interest have been in default for 90 days, unless the asset is both well-secured and in process of collection. A loan is considered impaired when it is probable that all of the interest and principal due will not be collected according to the terms of the original contractual agreement.

The Company’s policy is to maintain the allowance for loan losses at a level sufficient to provide for probable losses incurred in the current portfolio. Management believes the analysis of the allowance for loan losses supported a reserve of $28,511 at December 31, 2022. The Company provides for loan losses through regular provisions to the allowance for loan losses as necessary. The amount of the provision is affected by loan charge-offs, recoveries and changes in specific and general allocations required for the allowance for loan losses. A number of factors impact the provisions for loan losses, such as the level of higher risk loans in the portfolio, changes in practices related to loans, changes in collateral values and other factors. We continue to actively manage this process and have provided to maintain the reserve at a level that assures adequate coverage ratios.

Provisions for loan losses totaled $1,752, $830 and $10,112 in 2022, 2021 and 2020, respectively. The Company’s provision for loan losses increased $922 during 2022, as compared to 2021, primarily to support strong organic loan growth in the portfolio. Of this increase, $452,000 was provided to cover lease production from our VFG subsidiary since acquisition. The Bank strengthened the reserve in 2020 due to the 2020 economic shutdown and restrictions in response to the ongoing COVID-19 pandemic. While conditions improved in 2021 due to vaccinations and booster shots, ongoing challenges due to supply chain and workforce shortages slowed the process improvement. Our risk profile has steadily improved since peak levels, but we remain cautious given the impact of higher inflationary costs, rising interest rates and other pre-recessionary conditions that impact loan customers. Our Commercial and Commercial Real Estate portfolios have been, and are expected to continue to be, impacted the most.

43

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

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

Noninterest Income

Noninterest income decreased $2,376, or 7.6%, to $29,076 for the year ended December 31, 2022, from $31,452 for the comparable 2021 period. The decrease was primarily due to decreases in net gain on sale of securities of $1,776, net gain on sale of loans and leases of $4,645 and bank owned life insurance of $216, which were partially offset by increases in service charges of $1,169, lease revenue and residual income of $2,310 and other income of $812.

Net gain on sale of securities decreased due to the 2021 sale of VISA Class B shares, which resulted in a gain of $1,785. Net gain on sale of loans and leases decreased primarily as a result of a decrease in volume of loans sold. During the twelve-months ended December 31, 2022, 692 loans were sold, totaling $127,795. During the twelve-months ended December 31, 2021, 1,341 loans were sold, totaling $260,294. Bank owned life insurance decreased due to death benefits paid in 2021. Service charges increased due to increased account service charges and overdraft fees of $462 and $680, respectively. Lease revenue and residual income increased due to the acquisition of VFG. Other income increased due to increases in wire transfer fees, merchant credit card fees, loan servicing fees, amortization of mortgage servicing rights and rental and brokerage fee income from the acquisition of VFG.

Noninterest Expense

Noninterest expense increased $12,827, or 16.5%, to $90,493 for the year ended December 31, 2022, from $77,666 for the comparable 2021 period. The increase was primarily due to increases in compensation expense of $6,371, net occupancy expense of $488, equipment expense of $3,232, data processing expense of $1,063, professional services of $2,673, amortization expense of $406, marketing expense of $410 and software expense of $678, which was partially offset by a decrease in FDIC assessments of $450 and other operating expense of $1,960.

The increase in compensation expense was due to increased payroll, payroll taxes, employee insurance and commissions and incentives. The year-to-date average full time equivalent (FTE) employees were 480.8 at December 31, 2022, an increase of 29 FTEs over 2021 due to the acquisitions of Comunibanc Corp. and VFG. The increase in net occupancy expense was due to increases in building repairs and maintenance and building depreciation. The increase in equipment expense was due to a general increase in computer, printer, office and security equipment costs and an increase in equipment depreciation related to the acquisition of VFG. The increase in data processing expense was due to deconversion fees of $1,032 related to the acquisition of Comunibanc Corp. The increase in professional services was due to acquisition related costs of $1,718, accompanied by increases in legal and audit fees and consulting fees. The increase in amortization expense is related to the acquisition of Comunibanc Corp. Marketing expense increased due to a general increase in marketing and increased marketing efforts in newly acquired markets. Software expense increase due to a general increase in legacy software maintenance contracts and the implementation of our new digital banking. The decrease in FDIC assessments was attributable to lower assessment multipliers charged to Civista. Other operating expenses decreased due to the prepayment expense of $3,717 paid in 2021 related to the early payoff of an FHLB long-term advance, offset by increases in travel, lodging and meals, donations, stationery and supplies and bad check expense.

44

Income Tax Expense

Income tax expense was $7,608 in 2022 compared to $7,835 in 2021. Income tax expense as a percentage of pre-tax income was 16.2% in 2022 compared to 16.2% in 2021. A lower federal effective tax rate than the statutory rate of 21% in 2022 and 2021 is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits.

Comparison of Results of Operations for the Years Ended December 31, 2021 and December 31, 2020

A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 and year-to-year comparisons between 2021 and 2020, which are not included in this Form 10-K, can be found under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and are incorporated by reference herein.

45

Changes in Interest Income and Interest Expense

Resulting from Changes in Volume and Changes in Rate

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

[[GREPCENT_TABLE]]
[["","","Increase (decrease) due to:"],["","","Volume (1)","","","Rate (1)","","","Net"],["2022 compared to 2021"],["Interest income:"],["Loans","","$","7,880","","","$","5,701","","","$","13,581"],["Taxable securities","","","3,438","","","","212","","","","3,650"],["Nontaxable securities","","","2,275","","","","(666",")","","","1,609"],["Interest-bearing deposits in other banks","","","(393",")","","","1,064","","","","671"],["Total interest income","","$","13,200","","","$","6,311","","","$","19,511"],["Interest expense:"],["Savings and interest-bearing demand accounts","","$","104","","","$","119","","","$","223"],["Certificates of deposit","","","(128",")","","","(430",")","","","(558",")"],["Short-term Federal Home Loan Bank advances","","","2,566","","","","\u2014","","","","2,566"],["Long-term Federal Home Loan Bank advances","","","(556",")","","","(97",")","","","(653",")"],["Securities sold under repurchase agreements","","","(3",")","","","(9",")","","","(12",")"],["Federal funds purchased","","","\u2014","","","","5","","","","5"],["Other borrowings","","","335","","","","\u2014","","","","335"],["Subordinated debentures","","","2,313","","","","513","","","","2,826"],["Total interest expense","","$","4,631","","","$","101","","","$","4,732"],["Net interest income","","$","8,569","","","$","6,210","","","$","14,779"],["2021 compared to 2020"],["Interest income:"],["Loans","","$","3,262","","","$","(1,469",")","","$","1,793"],["Taxable securities","","","1,360","","","","(1,246",")","","","114"],["Nontaxable securities","","","439","","","","(312",")","","","127"],["Interest-bearing deposits in other banks","","","422","","","","(579",")","","","(157",")"],["Total interest income","","$","5,483","","","$","(3,606",")","","$","1,877"],["Interest expense:"],["Savings and interest-bearing demand accounts","","$","382","","","$","(976",")","","$","(594",")"],["Certificates of deposit","","","(377",")","","","(1,735",")","","","(2,112",")"],["Short-term Federal Home Loan Bank advances","","","(134",")","","","0","","","","(134",")"],["Long-term Federal Home Loan Bank advances","","","(405",")","","","(230",")","","","(635",")"],["Securities sold under repurchase agreements","","","2","","","","(4",")","","","(2",")"],["Federal funds purchased","","","(1",")","","","1","","","","\u2014"],["Other borrowings","","","(354",")","","","\u2014","","","","(354",")"],["Subordinated debentures","","","187","","","","(177",")","","","10"],["Total interest expense","","$","(700",")","","$","(3,121",")","","$","(3,821",")"],["Net interest income","","$","6,183","","","$","(485",")","","$","5,698"]]
[[/GREPCENT_TABLE]]

(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.

46

Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential

The following table sets forth, for the years ended December 31, 2022, 2021 and 2020, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and noninterest-earning assets (Amounts in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["Assets","","Average balance","","","Interest","","","Yield/ rate","","","Average balance","","","Interest","","","Yield/ rate","","","Average balance","","","Interest","","","Yield/ rate"],["Interest-earning assets:"],["Loans (1)(2)(3)(5)","","$","2,199,082","","","$","103,151","","","","4.69","%","","$","2,026,907","","","$","89,570","","","","4.42","%","","$","1,953,472","","","$","87,777","","","","4.49","%"],["Taxable securities (4)","","","341,600","","","","9,123","","","","2.49","%","","","232,813","","","","5,473","","","","2.41","%","","","183,721","","","","5,359","","","","3.03","%"],["Non-taxable securities (4)(5)","","","263,981","","","","7,859","","","","3.56","%","","","217,786","","","","6,250","","","","3.96","%","","","202,982","","","","6,123","","","","4.15","%"],["Interest-bearing deposits in other banks","","","146,849","","","","1,120","","","","0.76","%","","","347,573","","","","449","","","","0.13","%","","","155,960","","","","606","","","","0.39","%"],["Total interest earning assets","","","2,951,512","","","","121,253","","","","4.12","%","","","2,825,079","","","","101,742","","","","3.69","%","","","2,496,135","","","","99,865","","","","4.10","%"],["Noninterest-earning assets:"],["Cash and due from financial institutions","","","84,777","","","","","","","","","","35,404","","","","","","","","","","77,848"],["Premises and equipment, net","","","34,577","","","","","","","","","","22,617","","","","","","","","","","22,831"],["Accrued interest receivable","","","8,650","","","","","","","","","","8,010","","","","","","","","","","9,043"],["Intangible assets","","","96,492","","","","","","","","","","84,747","","","","","","","","","","84,953"],["Other assets","","","50,765","","","","","","","","","","37,378","","","","","","","","","","37,675"],["Bank owned life insurance","","","50,076","","","","","","","","","","46,435","","","","","","","","","","45,454"],["Less allowance for loan losses","","","(27,721",")","","","","","","","","","(26,366",")","","","","","","","","","(19,231",")"],["Total","","$","3,249,128","","","","","","","","","$","3,033,304","","","","","","","","","$","2,754,708"]]
[[/GREPCENT_TABLE]]

(1)
For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale.

(2)
Included in loan interest income are loan fees of $2,024 in 2022, $1,661 in 2021 and $1,025 in 2020.

(3)
Non-accrual loans are included in loan totals and do not have a material impact on the analysis presented.

(4)
Average balance is computed using the carrying value of securities. The average yield has been computed using the historical amortized cost average balance for available for sale securities.

(5)
Yield/Rate is calculated using the tax-equivalent adjustment of 21% for 2022, 2021 and 2020.

47

Distribution of Assets, Liabilities and Shareholders’ Equity;

Interest Rates and Interest Differential (Continued)

The following table sets forth, for the years ended December 31, 2022, 2021 and 2020, the distribution of liabilities, including interest amounts and average rates of major categories of interest-bearing liabilities and shareholders’ equity (Amounts in thousands):

[[GREPCENT_TABLE]]
[["","","2022","","","2021","","","2020"],["Liabilities and Shareholders\u2019 Equity","","Average balance","","","Interest","","","Yield/ rate","","","Average balance","","","Interest","","","Yield/ rate","","","Average balance","","","Interest","","","Yield/ rate"],["Interest-bearing liabilities:"],["Savings and interest-bearing demand accounts","","$","1,423,134","","","$","1,442","","","","0.01","%","","$","1,315,220","","","$","1,219","","","","0.09","%","","$","1,050,544","","","$","1,813","","","","0.17","%"],["Certificates of deposit","","","253,399","","","","2,398","","","","0.95","%","","","265,294","","","","2,956","","","","1.11","%","","","288,262","","","","5,068","","","","1.76","%"],["Short-term Federal Home Loan Bank advances","","","66,875","","","","2,566","","","","3.84","%","","","\u2014","","","","\u2014","","","","\u2014","","","","8,151","","","","134","","","","1.64","%"],["Long-term Federal Home Loan Bank advances","","","45,325","","","","510","","","","1.13","%","","","94,041","","","","1,163","","","","1.24","%","","","125,000","","","","1,798","","","","1.44","%"],["Other borrowings","","","4,002","","","","335","","","","8.37","%","","","\u2014","","","","\u2014","","","","\u2014","","","","101,295","","","","354","","","","0.35","%"],["Securities sold under repurchase agreements","","","22,293","","","","11","","","","0.05","%","","","26,165","","","","23","","","","0.09","%","","","24,390","","","","25","","","","0.10","%"],["Federal funds purchased","","","137","","","","6","","","","4.38","%","","","137","","","","1","","","","0.73","%","","","288","","","","1","","","","0.35","%"],["Subordinated debentures","","","103,741","","","","3,781","","","","3.64","%","","","36,785","","","","955","","","","2.66","%","","","29,427","","","","945","","","","3.21","%"],["Total interest-bearing liabilities","","","1,918,906","","","","11,049","","","","0.58","%","","","1,737,642","","","","6,317","","","","0.36","%","","","1,627,357","","","","10,138","","","","0.62","%"],["Noninterest-bearing liabilities:"],["Demand deposits","","","937,890","","","","","","","","","","907,591","","","","","","","","","","739,648"],["Other liabilities","","","76,189","","","","","","","","","","38,868","","","","","","","","","","51,242"],["","","","1,014,079","","","","","","","","","","946,459","","","","","","","","","","790,890"],["Shareholders\u2019 equity","","","316,143","","","","","","","","","","349,203","","","","","","","","","","336,461"],["Total","","$","3,249,128","","","","","","","","","$","3,033,304","","","","","","","","","$","2,754,708"],["Net interest income and interest rate spread (1)","","","","","$","110,204","","","","3.54","%","","","","","$","95,425","","","","3.33","%","","","","","$","89,727","","","","3.48","%"],["Net interest margin (2)","","","","","","","","","3.75","%","","","","","","","","","3.47","%","","","","","","","","","3.70","%"]]
[[/GREPCENT_TABLE]]

(1)
Interest rate spread is calculated by subtracting the rate on average interest-bearing liabilities from the yield on average interest-earning assets.

(2)
Net interest margin is calculated by dividing tax-equivalent adjusted net interest income by average interest-earning assets.

48

Liquidity and Capital Resources

Civista maintains a conservative liquidity position. All securities are classified as available for sale. At December 31, 2022, securities with maturities of one year or less totaled $5,796, or 0.9% of the total securities portfolio. The available for sale portfolio helps to provide Civista with the ability to meet its funding needs. The Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements detail the Company’s cash flows from operating activities resulting from net earnings.

Net cash provided by operating activities for 2022, 2021 and 2020 was $25,183, $40,761, and $32,654, respectively. The primary additions to cash from operating activities are from net income, adjusted for amortization of intangible assets, amortization of securities net of accretion, the provision for loan losses, depreciation and proceeds from sale of loans. The primary use of cash from operating activities is from loans originated for sale. Net cash used for investing activities was $410,364, $130,496, and $340,982 in 2022, 2021 and 2020, respectively, principally reflecting our loan and investment security activities. Deposits and borrowings comprised most of our financing activities, which resulted in net cash provided of $164,303, $216,925, and $398,802 for 2022, 2021 and 2020, respectively.

Future loan demand of Civista can be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities and the sale of securities classified as available for sale. Additional sources of funds may also come from borrowing in the Federal Funds market and/or borrowing from the FHLB. As of December 31, 2022, Civista had total credit availability with the FHLB of $829,458, of which $454,788 was outstanding, including standby letters of credit of $57,510.

On a separate entity basis, CBI’s primary source of funds is dividends paid by its subsidiaries, primarily by Civista. Generally, subject to applicable minimum capital requirements, Civista may declare and pay a dividend without the approval of the Federal Reserve Bank of Cleveland (the “Federal Reserve Bank”) and the State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. At December 31, 2022, Civista was able to pay approximately $55,501 of dividends to CBI without obtaining regulatory approval. During 2022, Civista paid dividends totaling $26,300 to CBI. This represented approximately 61 percent of Civista’s earnings for the year.

The Company manages its liquidity and capital through quarterly Asset/Liability Management Committee (ALCO) meetings. The ALCO discusses issues like those in the above paragraphs as well as others that may affect the future liquidity and capital position of the Company. The ALCO also examines interest rate risk and the effect that changes in rates will have on the Company. For more information about interest rate risk, please refer to “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” section below.

Capital Adequacy

Shareholders’ equity totaled $334,835 at December 31, 2022 compared to $355,212 at December 31, 2021. The decrease in shareholders’ equity resulted primarily from a $581 net increase in the Company’s pension liability and a decrease in the fair value of securities available for sale, net of tax, of $67,446, together with dividends on common shares of $8,493 and repurchase of common shares totaling $16,887 during 2022 pursuant to the Company’s publicly-announced share purchase programs. The foregoing decreases to shareholders’ equity were partially offset by net income of $39,427.

During the first quarter of 2015, the Company adopted the new BASEL III regulatory capital framework as approved by the federal banking agencies. In addition to the other required capital ratios, the BASEL III rules also require the Company to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital to risk-weighted assets (as these terms are defined in the BASEL III rules). Under the BASEL III rules, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of December 31, 2022 and 2021 as identified in the following table:

[[GREPCENT_TABLE]]
[["","","Total Risk Based Capital","","","Tier I Risk Based Capital","","","CET1 Risk Based Capital","","","Leverage Ratio"],["Company Ratios\u2014December 31, 2022","","","14.5","%","","","10.8","%","","","9.7","%","","","8.9","%"],["Company Ratios\u2014December 31, 2021","","","19.2","%","","","14.3","%","","","12.9","%","","","10.2","%"],["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","%"]]
[[/GREPCENT_TABLE]]

49

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

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

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

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

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

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

Effects of Inflation

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

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

Fair Value of Financial Instruments

The Company has disclosed the fair value of its financial instruments at December 31, 2022 and 2021 in Note 17 to the Consolidated Financial Statements. The fair value of loans at December 31, 2022 was 85.8% of the carrying value compared to 98.7% at December 31, 2021. The fair value of deposits at December 31, 2022 was 100.0% of the carrying value compared to 100.0% at December 31, 2021. Changes in fair value were primarily due to changes in the discount values used to measure fair value.

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