Civista Bancshares
Annual Report 2015

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2022 Report
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Peers and competitors of Civista Bancshares:

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First Saving Bank
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Plain-text annual report

Five Year Condensed Consolidated Financial Summary Earnings Net Income (000) 2015 2014 2013 2012 2011 $12,745 $9,528 $6,179 $5,579 $3,958 Preferred stock dividends (000) $(1,577) $(1,873) $(1,159) $(1,193) $(1,176) Net Income available to common shareholders (000) $11,168 $7,655 $5,020 $4,386 $2,782 Per Common Share Earnings Before preferred dividends Basic Diluted Available to common shareholders Basic Diluted Book Value Dividends Paid Balances Assets (millions) Deposits (millions) Net Loans (millions) Shareholders’ Equity (millions) Performance Ratios Return on Average Assets Return on Average Equity Equity Capital Ratio Net Loans to Deposit Ratio Loss Allowance to Total Loans $1.63 $1.17 $1.43 $1.17 $13.12 $0.20 $1.24 $0.87 $0.99 $0.85 $0.80 $0.79 $0.65 $0.64 $0.72 $0.72 $0.57 $0.57 $0.51 $0.51 $0.36 $0.36 $12.04 $10.65 $10.48 $10.30 $0.19 $0.15 $0.12 $0.03 $1,315.0 $1,213.2 $1,167.5 $1,137.0 $1,113.0 $1,052.0 $987.2 $125.2 $968.9 $900.6 $115.9 $942.5 $844.7 $128.4 $926.4 $795.8 $104.0 $901.2 $764.0 $102.5 0.95% 10.59% 9.52% 0.77% 8.34% 9.55% 93.84% 92.95% 1.43% 1.56% 0.53% 5.97% 11.00% 89.63% 1.92% 0.49% 5.36% 9.15% 0.35% 3.96% 9.21% 85.90% 84.77% 2.42% 2.71% Dear Shareholders: 2015 was another successful year for your corporation. Net earnings (before preferred dividend) were $12,745,000. This was a 34% increase over 2014’s earnings of $9,528,000. This history of our continuing success from the depths of the recession is shown below in our earnings per share: Net earnings per share (basic) Net earnings per share (diluted) 2015 1.43 1.17 $ $ 2014 0.99 0.85 $ $ 2013 0.65 0.64 $ $ 2012 0.57 0.57 $ $ 2011 0.36 0.36 $ $ The underlying driver of this success has been discipline. We have been and continue to be disciplined in our commitment to grow the company, to increase the value to the shareholders, to our business model, to our lending culture, and to our customers and community. Growth will continue to come from new and existing markets and from acquisition. Contributing to our growth in 2015 was the successful completion of our Dayton acquisition and the opening of our loan production office in Mayfield Heights, Ohio. This follows our business model of supplementing our lending footprint with entry into active markets in Ohio where, with local skilled lenders, we can continue to add quality loans to our portfolio. The success can be seen in the total loan balances shown below: (In thousands) Gross Loans 2015 1,001,527 $ 2014 914,857 $ 2013 861,241 $ 2012 815,553 $ 2011 785,268 $ Since 2011 we have enjoyed net loan growth of over $216,000,000 or about 28% - keeping in mind that we receive on average $21,800,000 each month in payments which needs to be put back to work. In addition to loan growth reflected in our numbers, in 2015 we sold $48,457,000 in one-to-four family real estate mortgages. We sell these loans to limit interest rate risk to the company and generate fee income. To fund this loan growth we remain disciplined in our focus on low cost deposits. Our noninterest bearing deposits (checking accounts), have increased nicely to $300,615,000 or 28.6% of total deposits as of December 31, 2015. In addition, the majority of our $751,418,000 in interest bearing deposits are lower cost interest bearing checking and savings. Below is a recap of our deposit growth. (In thousands) Noninterest bearing deposits Interest bearing deposits $ 2015 300,615 751,418 $ 2014 250,701 718,217 $ 2013 234,976 707,499 $ 2012 202,416 723,973 $ 2011 189,382 711,864 Total $ 1,052,033 $ 968,918 $ 942,475 $ 926,389 $ 901,246 In addition to maintaining a loyal base of retail deposit customers, we have been successful in securing commercial deposits with our commercial loan transactions. These noninterest-bearing deposits also bring the opportunity to provide cash management services which contribute to fee income for the company. Our net interest income, shown below as a per share amount, is a result of taking deposits and making loans and investments. The numbers show the impact and necessity for growth. The increase of approximately 11.6% from 2014 to 2015 reflects the addition of the Dayton acquisition, the Mayfield Heights office, and organic growth in other offices. Reflected as a percentage, our interest margin was 3.96% for the year. At the end of September 2015, the interest margin of the average bank in the State of Ohio was 3.33%. Net interest income per share (basic) $ 6.06 $ 5.43 $ 5.19 $ 5.26 $ 5.37 2015 2014 2013 2012 2011 Our net interest income is supplemented with noninterest income. Noninterest income is comprised of a number of items, primarily service charges, wealth management fees, ATM fees, and tax refund processing. For 2015, we enjoyed a 1.7% increase in our noninterest income shown below as per share contribution. Fee income is harder to grow as consumers are very fee sensitive. Noninterest income per share (basic) 2015 1.83 $ 2014 1.80 $ 2013 1.56 $ 2012 1.45 $ 2011 1.29 $ From our total income consisting of net interest and noninterest income we pay the expense of operating the company. These noninterest expenses, as shown on a per share below basis, increased approximately 1.9% from 2014. Beginning in March 2015, expenses included the addition of the Dayton operation. Noninterest expense per share (basic) 2015 5.49 $ 2014 5.39 $ 2013 5.63 $ 2012 4.94 $ 2011 4.76 $ Our results can be readily seen in the growth in our net interest income per share from $5.43 to $6.06 (11.6%) compared to the growth in our expenses of $5.39 per share to $5.49 (1.9%) in 2015. As we discussed before, we have positioned the company to take advantage of the benefits of expanding with minimal impact to the expenses. A key measure of this in the banking industry is the efficiency ratio. In this ratio, the lower the number the better. Our number at the end of 2014 was 71.7%. At the end of 2015 it was 67.0%. The efficiency ratio of the average bank in the State of Ohio at the end of the third quarter 2015 was 72.7%. Again, growth of the company has generated both efficiency and profitability. An expense not included in the noninterest expense category is the provision for loan loss. For 2015, this amount was $1,200,000. You can see from the below chart the continued decrease in this expense (expressed per share) as we move further away from the recession. Loan loss provision per share (basic) 2015 0.15 $ 2014 0.19 $ 2013 0.14 $ 2012 0.83 $ 2011 1.27 $ Other accomplishments for the year were our rebranding of the company, the filing of a securities shelf offering, and the successful changes in our articles of incorporation. We completed the rebranding of the bank and holding company by last April. As you may recall, the United States and Ohio are prolific with Citizens banks. Adding to the confusion, our Urbana offices operated as Champaign Bank to avoid confusion with another Citizens in Urbana. Unifying our brand under the Civista name eliminated market confusion and brought consistency to our customers. This is important as we continue to grow our deposit and loan customer base. The shelf filing completed earlier in the year is a process of placing on file the necessary documents with the U. S. Securities and Exchange Commission to allow a securities offering. This will simply speed the process should an opportunity present itself in the future that requires us to issue additional capital. In November, we held our special shareholder meeting to consider two changes to the articles of incorporation – to eliminate preemptive rights and cumulative voting. The first issue received over 92% positive votes and the second issue over 88% positive votes. The board and management offer its sincere thank you for your support and trust shown by this turnout and vote. Looking at our common stock performance, we have enjoyed continued improvement. The closing price on the last business day of year was: 2015 2014 $ 12.83 $ 10.28 2013 $ 6.52 2012 $ 5.25 2011 $ 4.03 While we have seen steady increases in the market’s view of our value, we continue to trade below the average Ohio publicly traded bank. We are trading at about 9 times earnings and the average Ohio bank about 13 times earnings. We firmly believe this company is at least equal to or better than the average, but the markets understand that for us to materially grow we will need additional common capital (stock) which could temporarily depress the value because more shares would be outstanding. To reiterate earlier comments, we will consider adding to capital if it’s needed to support growth or to support an acquisition. We also don’t believe in growth for growth’s sake but in growth and acquisition that will show you a respectable return, both in dollars and time frame. Finally, when the time comes for increasing common equity, you, the existing shareholders, will be invited to participate. In spite of the erratic markets and contradicting business news articles, we are optimistic on 2016. We continue to see nice loan opportunities and have a solid loan pipeline as we enter the year. Competition is strong, but we remain disciplined in our lending standards and pricing. Any institution can gather deposits and make loans. The long term success comes from how well this is accomplished. I believe our track record speaks for itself. As always, please read your proxy and vote your shares in your company. I hope to see you at the annual meeting. Very truly yours, James O. Miller President & C.E.O. This page left blank intentionally. ANNUAL REPORT CONTENTS Five –Year Selected Consolidated Financial Data ......................................................................................... Common Stock and Shareholder Matters ...................................................................................................... General Development of Business ................................................................................................................... Management’s Discussion and Analysis of Financial Condition and Results of Operations ................. 1 3 3 4 Quantitative and Qualitative Disclosures about Market Risk ..................................................................... 21 Financial Statements Management’s Report on Internal Control over Financial Reporting ................................................. Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Statements ................................................................................................................................ Report of Independent Registered Public Accounting Firm on Financial Statements ...................... Consolidated Balance Sheets ..................................................................................................................... Consolidated Statements of Operations .................................................................................................. Consolidated Comprehensive Income Statements ................................................................................ Consolidated Statements of Changes in Shareholders’ Equity ............................................................ Consolidated Statements of Cash Flow ................................................................................................... Notes to Consolidated Financial Statements .......................................................................................... 24 25 26 27 28 29 30 31 33 Five-Year Selected Consolidated Financial Data (Amounts in thousands, except per share data) Statements of income: Total interest and dividend income Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Security gains/(losses) Other noninterest income Total noninterest income Total noninterest expense Income before federal income taxes Federal income tax expense 2015 Year ended December 31, 2013 2014 2012 2011 $ 50,701 3,309 47,392 1,200 $ 45,970 4,104 41,866 1,500 $ 44,881 4,907 39,974 1,100 $ 46,762 6,184 40,578 6,400 $ 48,861 7,500 41,361 9,800 46,192 (18) 14,296 14,278 42,944 17,526 4,781 40,366 113 13,761 13,874 41,550 12,690 3,162 38,874 204 11,858 12,062 43,384 7,552 1,373 34,178 40 11,160 11,200 38,074 7,304 1,725 31,561 (8) 9,979 9,971 36,727 4,805 847 Net income $ 12,745 $ 9,528 $ 6,179 $ 5,579 $ 3,958 Preferred stock dividends and discount accretion Net income available to common shareholders Per common share earnings: 1,577 1,873 1,159 1,193 1,176 $ 11,168 $ 7,655 $ 5,020 $ 4,386 $ 2,782 Before preferred dividends (basic) Before preferred dividends (diluted) Available to common shareholders (basic) Available to common shareholders (diluted) Dividends Book value $ 1.63 1.17 1.43 1.17 0.20 13.12 $ 1.24 0.87 0.99 0.85 0.19 12.04 $ 0.80 0.79 0.65 0.64 0.15 10.65 $ 0.72 0.72 0.57 0.57 0.12 10.48 $ 0.51 0.51 0.36 0.36 0.03 10.30 Average common shares outstanding: Basic Diluted Year-end balances: Loans, net Securities Total assets Deposits Borrowings Shareholders' equity Average balances: Loans, net Securities Total assets Deposits Borrowings Shareholders' equity 7,822,369 10,918,335 7,707,917 10,904,848 7,707,917 7,821,780 7,707,917 7,707,917 7,707,917 7,707,917 $ 987,166 209,701 1,315,041 1,052,033 125,667 125,173 $ 966,786 211,436 1,336,645 1,107,445 95,132 120,350 $ 900,589 210,491 1,213,191 968,918 116,240 115,909 $ 858,532 214,123 1,234,406 1,026,093 83,058 114,266 $ 844,713 215,037 1,167,546 942,475 87,206 128,376 $ 800,063 216,848 1,172,819 965,370 89,496 103,563 $ 795,811 219,528 1,136,971 926,389 92,907 103,980 $ 759,105 224,566 1,127,989 914,851 95,973 104,114 $ 764,011 220,021 1,112,977 901,246 98,751 102,528 $ 741,383 216,549 1,124,553 910,315 105,071 99,848 See accompanying notes to consolidated financial statements. 1 Five-Year Selected Ratios Net interest margin Return on average total assets Return on average shareholders' equity Average shareholders' equity as a percent of average total assets Net loan charge-offs as a percent of average total loans Allowance for loan losses as a percent of loans at year-end Shareholders' equity as a percent of total year-end assets Stockholder Return Performance 2015 3.96% 0.95 10.59 9.00 0.11 1.43 9.52 Year ended December 31, 2013 2012 2014 3.79% 0.77 8.34 9.26 0.43 1.56 9.55 3.79% 0.53 5.97 8.83 0.53 1.92 11.00 3.98% 0.49 5.36 9.23 1.01 2.42 9.15 2011 4.00% 0.35 3.96 8.88 1.35 2.71 9.21 Set forth below is a line graph comparing the five-year cumulative return of Civista Bancshares, Inc. (ticker symbol CIVB) common stock, based on an initial investment of $100 on December 31, 2010 and assuming reinvestment of dividends, with Standard & Poor’s 500 Index, the Nasdaq Bank Index and the SNL Bank Index. The comparative indices were obtained from SNL Securities. A copy of the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be furnished, free of charge, to shareholders, upon written request to the Secretary of Civista Bancshares, Inc., 100 East Water Street, Sandusky, Ohio 44870. See accompanying notes to consolidated financial statements. 2 Common Stock and Shareholder Matters The common shares of Civista Bancshares, Inc. (“CBI”) trade on The NASDAQ Capital Market under the symbol “CIVB”. As of February 19, 2016, there were 7,846,308 shares outstanding held by approximately 1,224 shareholders of record (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms). Information below is the range of sales prices of our common shares for each quarter for the last two years based upon the closing prices of CBI common shares as reported on The NASDAQ Capital Market. 2015 First Quarter Second Quarter Third Quarter Fourth Quarter $10.04 to $11.54 $10.11 to $11.47 $9.68 to $10.93 $9.81 to $13.65 First Quarter Second Quarter Third Quarter Fourth Quarter $6.52 to $9.70 $8.34 to $9.47 $8.70 to $10.00 $9.14 to $10.70 2014 Dividends per share declared on common shares by CBI were as follows: First quarter Second quarter Third quarter Fourth quarter 2015 2014 $ 0.05 0.05 0.05 $ 0.04 0.05 0.05 0.05 0.05 $ 0.20 $ 0.19 Information regarding potential restrictions on dividends paid can be found in Note 19 to the Consolidated Financial Statements. On December 19, 2013, CBI completed a public offering of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B (the “Series B Preferred Shares”), of CBI. The depositary shares trade on The NASDAQ Capital Market under the symbol “CIVBP.” The terms of the Series B Preferred Shares provide for the payment of quarterly dividends on the Series B Preferred Shares (and, therefore, the depositary shares) at the rate of 6.50% per annum of the liquidation preference of $1,000 per Series B Preferred Share (or $25.00 per depositary share). Dividends are noncumulative and are payable if, when and as declared by the board of directors. However, no dividends may be declared or paid on the common shares of CBI during any calendar quarter unless full dividends on the Series B Preferred Shares (and, therefore, the depositary shares) have been declared for that quarter and all dividends previously declared on the Series B Preferred Shares (and, therefore, the depositary shares) have been paid in full. General Development of Business (Amounts in thousands) CBI was organized under the laws of the State of Ohio on February 19, 1987 and is a registered financial holding company under the Gramm-Leach-Bliley Financial Modernization Act of 1999, as amended. CBI and its subsidiaries are sometimes referred to together as the Company. The Company’s office is located at 100 East Water Street, Sandusky, Ohio. The Company had total consolidated assets of $1,315,041 at December 31, 2015. See accompanying notes to consolidated financial statements. 3 CIVISTA BANK (“Civista”), owned by the Company since 1987, opened for business in 1884 as The Citizens National Bank. In 1898, Civista was reorganized under Ohio banking law and was known as The Citizens Bank and Trust Company. In 1908, Civista surrendered its trust charter and began operation as The Citizens Banking Company. The name Civista Bank was introduced during the first quarter of 2015 to solidify our dual Citizens/Champaign brand and distinguish ourselves from the many other Citizens’ Banks in existing and prospective markets. Civista maintains its main office at 100 East Water Street, Sandusky, Ohio and operates branch banking offices in the following Ohio communities: Sandusky (2), Norwalk (2), Berlin Heights, Huron, Port Clinton, Castalia, New Washington, Shelby (2), Willard, Greenwich, Plymouth, Shiloh, Akron, Dublin, Plain City, Russells Point, Urbana (2), West Liberty and Quincy. In January 2015, we added a loan production office in Mayfield Heights, Ohio and in March 2015 we acquired the three offices of TCNB Financial Corp. (“TCNB”) in Dayton, Ohio. Civista accounted for 99.8% of the Company’s consolidated assets at December 31, 2015. FIRST CITIZENS INSURANCE AGENCY INC. (“FCIA”) was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Assets of FCIA were less than one percent of the Company’s consolidated assets as of December 31, 2015. WATER STREET PROPERTIES, INC. (“WSP”) was formed to hold properties repossessed by CBI subsidiaries. WSP accounted for less than one percent of the Company’s consolidated assets as of December 31, 2015. FC REFUND SOLUTIONS, INC. (“FCRS”) was formed during 2012 and remained inactive for the periods presented. FIRST CITIZENS INVESTMENTS, INC. (“FCI”) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI are located in Wilmington, Delaware. FIRST CITIZENS CAPITAL LLC (“FCC”) is wholly-owned by Civista and holds inter-company debt that is eliminated in consolidation. The operations of FCC are located in Wilmington, Delaware. Management’s Discussion and Analysis of Financial Condition and Results of Operations - As of December 31, 2015 and December 31, 2014 and for the Years Ended December 31, 2015, 2014 and 2013 (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, 2015 and 2014, and during the three-year period ended December 31, 2015. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements, which are included elsewhere in this report. Forward-Looking Statements This report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), relating to such matters as financial condition, anticipated operating results, cash flows, business line results, credit quality expectations, prospects for new lines of business, economic trends (including interest rates) and similar matters. Forward-looking statements reflect our expectations, estimates or projections concerning future results or events. These statements are generally identified by the use of forward-looking words or phrases such as “believe,” “belief,” “expect,” See accompanying notes to consolidated financial statements. 4 “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 results discussed in the forward-looking statements include, but are not limited to, changes in financial markets or national or local economic conditions; 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 FDIC insurance premiums and assessments; changes in tax laws; failure of or breach in our information and data processing systems; unforeseen litigation; increased competition in our market area; failures to manage growth and/or effectively integrate acquisitions; and other risks identified from time-to-time in the Company’s other public documents on file with the Securities and Exchange Commission. The forward-looking statements included in this report are only made as of the date of this report, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements, and the purpose of this section is to secure the use of the safe harbor provisions. Financial Condition At December 31, 2015, the Company’s total assets were $1,315,041, compared to $1,213,191 at December 31, 2014. The increase in assets is primarily the result of the acquisition of the TCNB offices in March. Other factors contributing to the change in assets are discussed in the following sections. At $987,166, net loans increased from December 31, 2014 by 9.6%. The increase in net loans was spread across most segments and resulted primarily from the acquisition of net loans totaling $76,444 from TCNB. Real Estate Construction loans and Farm Real Estate loans declined in balance from December 31, 2014. Commercial & Agriculture loans increased $11,137, with a total of $13,799 of these loans being acquired as part of the TCNB acquisition. Commercial Real Estate – Owner Occupied loans increased $24,883, with a total of $23,029 of these loans being acquired as part of the TCNB acquisition. Commercial Real Estate - Non-Owner Occupied loans increased $39,773, with a total of $13,411 of these loans being acquired as part of the TCNB acquisition. Residential Real Estate loans increased $21,801, with a total of $17,541 of these loans being acquired as part of the TCNB acquisition. Real estate construction loans decreased $6,554, with a total of $3,863 of these loans being acquired as part of the TCNB acquisition. Farm Real Estate loans decreased $6,980, with a total of $397 of these loans being acquired as part of the TCNB acquisition. Consumer and other loans increased $2,610, with a total of $4,404 of these loans being acquired as part of the TCNB acquisition. Securities available for sale decreased by $1,656, or 0.8%, from $197,905 at December 31, 2014 to $196,249 at December 31, 2015. U.S. Treasury securities and obligations of U.S. government agencies decreased $1,965, from $42,902 at December 31, 2014 to $40,937 at December 31, 2015. Obligations of states and political subdivisions available for sale increased $4,131 from 2014 to 2015. Mortgage-backed securities decreased by $3,869 to total $62,573 at December 31, 2015. 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, 2015, the Company was in compliance with all pledging requirements. See accompanying notes to consolidated financial statements. 5 Mortgage-backed securities totaled $62,573 at December 31, 2015 and none were considered unusual or “high risk” securities as defined by regulatory authorities. Of this total, $50,599 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 $11,975 was collateralized by mortgage-backed securities issued or guaranteed by FNMA, FHLMC, or GNMA. The average interest rate of the mortgage-backed portfolio at December 31, 2015 was 2.9%. The average maturity at December 31, 2015 was approximately 3.8 years. The Company has not invested in any derivative securities. Securities available for sale had a fair value at December 31, 2015 of $196,249. This fair value includes unrealized gains of approximately $5,820 and unrealized losses of approximately $434. Net unrealized gains totaled $5,386 on December 31, 2015 compared to net unrealized gains of $5,653 on December 31, 2014. The change in unrealized gains is primarily due to changes in market interest rates. Note 3 to the Consolidated Financial Statements provides additional information on unrealized gains and losses. Premises and equipment, net of accumulated depreciation, increased $2,544 from December 31, 2014 to December 31, 2015. The increase is attributed to the acquisition of TCNB assets of $1,738, consisting of branch offices and equipment within those branches. The Company has purchased the land and has plans to build a new branch office in Sandusky, Ohio in 2016. At December 31, 2015, construction in progress totaled $644. The remaining difference is attributed to new purchases of $1,355, offset by depreciation of $1,193. Other assets increased $1,252 from December 31, 2014 to December 31, 2015. The increase is primarily the result of increases in the Company’s low income housing investment, bank owned life insurance, swap assets and deferred tax assets. Year-end deposit balances totaled $1,052,033 in 2015 compared to $968,918 in 2014, an increase of $83,115, or 8.6%. Overall, the increase in deposits at December 31, 2015 compared to December 31, 2014 included increases in noninterest bearing demand deposits of $49,914, or 19.9%, statement and passbook savings accounts of $45,207, or 14.2%, offset in part by declines in interest bearing demand accounts of $3,085, or 1.7% and certificate of deposit accounts of $8,862, or 4.6%. A primary factor of the increase in deposits can be attributed to the acquisition of TCNB, which added $18,263 of noninterest-bearing deposits and $68,606 of interest-bearing deposits. Average deposit balances for 2015 were $1,107,445 compared to $1,026,093 for 2014, an increase of 7.9%. Noninterest bearing deposits averaged $340,360 for 2015, compared to $297,003 for 2014, increasing $43,357, or 14.6%. Savings, NOW, and MMDA accounts averaged $543,986 for 2015 compared to $501,408 for 2014. Average certificates of deposit decreased $4,583 to total an average balance of $223,099 for 2015. Borrowings from the Federal Home Loan Bank (“FHLB”) of Cincinnati were $71,200 at December 31, 2015. The detail of these borrowings can be found in Note 10 and Note 11 to the Consolidated Financial Statements. The balance increased $6,000 from $65,200 at year-end 2014. The change in balance is mainly the result of a short term advance used as overnight funding to support loan growth offset by a matured advance. The advance matured on March 11, 2015, in the amount of $5,000. This advance had a term of eighty-four months with a fixed rate of 2.84%. The advance was not replaced. Civista offers repurchase agreements in the form of sweep accounts to commercial checking account customers. These repurchase agreements totaled $25,040 at December 31, 2015 compared to $21,613 at December 31, 2014. U.S. Treasury securities and obligations of U.S. government agencies maintained under Civista’s control are pledged as collateral for the repurchase agreements. The detail related to these repurchase agreements can be found in Note 12 to the Consolidated Financial Statements See accompanying notes to consolidated financial statements. 6 Total shareholders’ equity increased $9,264, or 8.0% during 2015 to $125,173. The change in shareholders’ equity resulted from net income of $12,745, offset by preferred dividends and common dividends of $1,577 and $1,562, respectively, and the decreased market value of securities available for sale, net of tax, of $176 and an increase in the Company’s pension liability, net of tax of $272. Additionally, $106 was recognized as stock-based compensation in connection with the grant of restricted common shares. For further explanation of these items, see Note 1, Note 15 and Note 16 to the Consolidated Financial Statements. The Company paid $0.20 per common share in dividends in 2015 compared to $0.19 per common share in dividends in 2014. Total outstanding common shares at December 31, 2015 were 7,843,578. Total outstanding common shares at December 31, 2014 were 7,707,917. The increase in common shares outstanding is the result of the conversion of 928 of the Company’s previously issued preferred shares into 118,678 common shares and the grant of 16,983 restricted common shares to certain officers under the Company’s 2014 Incentive Plan. The ratio of total shareholders’ equity to total assets was 9.5% and 9.6%, respectively, at December 31, 2015 and December 31, 2014. 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 income, noninterest expense and income taxes. Comparison of Results of Operations for the Years Ended December 31, 2015 and December 31, 2014 Net Income The Company’s net income for the year ended December 31, 2015 was $12,745, compared to $9,528 for the year ended December 31, 2014. The change in net income was the result of the items discussed in the following sections. Net Interest Income Net interest income for 2015 was $47,392, an increase of $5,526, or 13.2%, from 2014. Average earning assets increased 8.3% from 2014. Although market rates in 2015 remained at record lows, interest income increased $4,731, primarily due to increased loan volume. In addition, interest expense on interest- bearing liabilities decreased $795. 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. A change in the mix of deposits from certificates of deposit to non-maturing deposits also contributed to the decline in interest expense. Total interest income increased $4,731, or 10.3%, from 2014. The increase was mainly a result of an increase in loan volume. Average loans increased $107,043 from 2014 to 2015. The yield on the Company’s loan portfolio declined 1 basis points from 2014. While the average balance of the securities portfolio for 2015 compared to 2014 decreased $2,687, this was primarily due to the Company not See accompanying notes to consolidated financial statements. 7 replacing matured securities. Interest earned on the security portfolio, including bank stocks, decreased mainly due to decreases in yield. Average balances in interest-bearing deposits in other banks decreased in 2015 by $9,182. Total interest expense decreased $795, or 19.4%, for 2015 compared to 2014. The decrease in interest expense can be attributed to declines in market rates and the corresponding repricing of deposits and other sources of funding. The total average balance of interest-bearing liabilities increased $50,069 while the average rate decreased 13 basis points in 2015. Average interest-bearing deposits increased $37,995 from 2014 to 2015. While average balances in interest-bearing deposits increased, the average balance in time deposits declined $4,583 and the rate on time deposits declined approximately 9 basis points, which caused interest expense on deposits to decrease by $205. Interest expense on FHLB borrowings decreased $573 due to a decline in rate of 203 basis points. The average balance in FHLB borrowings increased. The increase in FHLB borrowings is due to an increase in overnight borrowings, which are paying a low interest rate. The average balance in subordinated debentures did not change from 2014 to 2015, but the rate on these securities decreased 6 basis points, resulting in a decrease in interest expense of $17. Repurchase agreements increased $327 in average balance from 2014 to 2015. 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 14 through 16 for further analysis of the impact of changes in interest- bearing assets and liabilities on the Company’s net interest income. Provision and Allowance for Loan Losses The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses as of and for each of the three years in the period ended December 31. As of and for year ended December 31, 2014 2013 2015 Net loan charge-offs Provision for loan losses charged to expense Net loan charge-offs as a percent of average outstanding loans Allowance for loan losses Allowance for loan losses as a percent of year-end outstanding loans Impaired loans Impaired loans as a percent of gross year-end loans (1) Nonaccrual and 90 days or more past due loans Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans (1) $ $ $ 1,107 1,200 0.11% 14,361 3,760 1,500 0.43% 14,268 4,314 1,100 0.53% 16,528 $ $ $ 1.43% 7,485 0.75% 9,890 $ $ 1.56% 11,149 1.22% 13,576 $ $ 1.92% 18,057 2.10% 20,459 $ $ 0.99% 1.48% 2.38% (1) Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered nonaccrual if it is maintained on a cash basis because of deterioration in the borrower’s financial condition, where payment in full of principal or interest is not expected and where the principal and interest have been in default for 90 days, unless the asset is both well-secured and in process of collection. A loan is considered impaired when it is probable that all of the interest and principal due will not be collected according to the terms of the original contractual agreement. See accompanying notes to consolidated financial statements. 8 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. The Company provides for loan losses through regular provisions to the allowance for loan losses. 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. Provisions for loan losses totaled $1,200, $1,500 and $1,100 in 2015, 2014 and 2013, respectively. Management believes the analysis of the allowance for loan losses supported a reserve of $14,361 at December 31, 2015. The Company’s provision for loan losses decreased $300 during 2015. The decrease in provision for loan losses is related to the decrease in the specific reserve required for loans and a decrease in net charge-offs compared to a year ago. 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. 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 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. In addition, loans held for sale and leases are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans or portions thereof, are charged-off when deemed uncollectible. Noninterest Income Noninterest income increased $404, or 2.9%, to $14,278 for the year ended December 31, 2015, from $13,874 for the comparable 2014 period. The increase was primarily due to increases in earnings on service charges of $451, gain on sale of loans of $447, ATM fees of $136 and gain on sale of other real estate owned of $155 which were partially offset by decreases in Trust fees of $307, tax refund processing fees of $324 and gain on sale of securities of $131. Service charges increased primarily due to increases in business service charges and overdraft fees. Gain on sale of loans increased due to an increase in volume of loans sold, as well as an increase in the premium earned. ATM fee income increased due to increased interchange fees. Sales of other real estate owned resulted in recognized gains of $199 on the sale of 17 properties in 2015 compared to gains of $44 on the sale of 16 properties in 2014. The decrease in trust fee income is related to a general decrease in brokerage transactions. Tax refund processing fees decreased due to new fee structure in place during 2015. The new fee calls for a flat processing fee, whereas in 2014, the Company received a per transaction fee. Gain on the sale of securities decreased compared to the same period of 2014. Management, from time to time, will reposition the investment portfolio to match liquidity needs of the Company. See accompanying notes to consolidated financial statements. 9 Noninterest Expense Noninterest expense increased $1,394 or 3.4%, to $42,944 for the year ended December 31, 2015, from $41,550 for the comparable 2014 period. The increase was primarily due to increases in salaries, wages and benefits of $1,337, contracted data processing of $261 and professional services of $606 which were partially offset by decreases in, ATM expense of $132, marketing expense of $565 and repossession expense of $165. Salaries, wages and benefits increased mainly due to an increase in salaries and 401(k) expenses. Salaries and related payroll taxes increased mainly due to annual pay increases and overtime related to the acquisition of TCNB, as well as the addition of TCNB employees. In 2015, the Company adopted a Safe Harbor 401(k) plan which increased the match paid to participants. Contracted data processing costs increased due to the cost of technology services and core processing costs related to the acquisition of TCNB. Professional services increased due to increased legal and audit fees relating to the acquisition of TCNB, increased recruiting expenses and increased legal expenses related to the Company’s filing of a Form S-3 shelf registration statement with the SEC and matters related to the Special Meeting of Shareholders held on November 4, 2015 for the purpose of voting to eliminate preemptive rights and cumulative voting in the election of directors, as well as the previously disclosed litigation related to a proposed sale of real estate that the Company owns near one of its branches. The decrease in ATM costs is due to vendor credits that began in the second quarter of 2015. Marketing costs decreased in 2015, as the Company incurred increased marketing expenses in 2014 as part of its rebranding effort. The decrease in repossession expense is the result of a general decrease in expenses related to repossessions. Income Tax Expense Federal income tax expense was $4,781 in 2015 compared to $3,162 in 2014. Federal income tax expense as a percentage of income was 27.3% in 2015 compared to 24.9% in 2014. A lower federal effective tax rate than the statutory rate of 34% is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits. Federal income tax expense increased in 2015 primarily due to an increase in pretax income, which also led to the increase in the effective tax rate in 2015. Comparison of Results of Operations for the Years Ended December 31, 2014 and December 31, 2013 Net Income The Company’s net income for the year ended December 31, 2014 was $9,528, compared to $6,179 for the year ended December 31, 2013. The change in net income was the result of the items discussed in the following sections. Net Interest Income Net interest income for 2014 was $41,866, an increase of $1,892, or 4.7%, from 2013. Average earning assets increased 4.7% from 2013. Although market rates in 2014 continued to decline, interest income increased $1,089, primarily due to increased loan volume. In addition, interest expense on interest- bearing liabilities decreased $803. 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. A change in the mix of deposits from certificates of deposit to non-maturing deposits also contributed to the decline in interest expense. See accompanying notes to consolidated financial statements. 10 Total interest income increased $1,089, or 2.4%, from 2013. The increase was mainly a result of an increase in loan volume. Average loans increased $55,280 from 2013 to 2014. The yield on the Company’s loan portfolio declined 16 basis points from 2013. While the average balance of the securities portfolio for 2014 compared to 2013 decreased $2,725, this was primarily due to the Company not replacing matured securities. Interest earned on the security portfolio, including bank stocks, decreased mainly due to decreases in yield. Average balances in interest-bearing deposits in other banks decreased in 2014 by $1,780. Total interest expense decreased $803, or 16.4%, for 2014 compared to 2013. The decrease in interest expense can be attributed to declines in market rates and the corresponding repricing of deposits and other sources of funding. The total average balance of interest-bearing liabilities decreased $9,126 while the average rate decreased 9 basis points in 2014. Average interest-bearing deposits decreased $2,688 from 2013 to 2014. The decrease in average interest-bearing deposits, mainly in time deposit accounts, coupled by a decline in rate on time deposits of approximately 13 basis points, caused interest expense on deposits to decrease by $496. Interest expense on FHLB borrowings decreased $343 due to a decrease in average balance of $5,462. The average balance in subordinated debentures did not change from 2013 to 2014, but the rate on these securities increased 13 basis points, resulting in an increase in interest expense of $37. Repurchase agreements decreased $990 in average balance from 2013 to 2014. 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 14 through 16 for further analysis of the impact of changes in interest- bearing assets and liabilities on the Company’s net interest income. Provision and Allowance for Loan Losses The following table contains information relating to the provision for loan losses, activity in and analysis of the allowance for loan losses as of and for each of the three years in the period ended December 31. Net loan charge-offs Provision for loan losses charged to expense Net loan charge-offs as a percent of average outstanding loans Allowance for loan losses Allowance for loan losses as a percent of year-end outstanding loans Impaired loans Impaired loans as a percent of gross year-end loans (1) Nonaccrual and 90 days or more past due loans Nonaccrual and 90 days or more past due loans as a percent of gross year-end loans (1) As of and for year ended December 31, 2013 2012 2014 $ 3,760 $ 4,314 $ 7,915 1,500 0.43% 1,100 0.53% 6,400 1.01% $ 14,268 $ 16,528 $ 19,742 1.56% 1.92% 2.42% $ 11,149 $ 18,057 $ 26,090 1.22% 2.10% 3.20% $ 13,576 $ 20,459 $ 29,935 1.48% 2.38% 3.67% (1) Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. A loan is considered nonaccrual if it is maintained on a cash basis because of deterioration in the borrower’s financial condition, where payment in full of principal or interest is not expected and where the principal and interest have been in default for 90 days, unless the asset is both well-secured and in process of collection. A loan is considered impaired when it is probable that all of the interest and principal due will not be collected according to the terms of the original contractual agreement. See accompanying notes to consolidated financial statements. 11 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. The Company provides for loan losses through regular provisions to the allowance for loan losses. 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. Provisions for loan losses totaled $1,500, $1,100 and $6,400 in 2014, 2013 and 2012, respectively. Management believes the analysis of the allowance for loan losses supported a reserve of $14,268 at December 31, 2014. The Company’s provision for loan losses increased $400 during 2014 to support the final resolutions in certain problem loans, coupled with solid loan growth of 6.2%. 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. 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 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. In addition, loans held for sale and leases are excluded from consideration as impaired. Loans are generally moved to nonaccrual status when 90 days or more past due. Impaired loans or portions thereof, are charged-off when deemed uncollectible. Noninterest Income Noninterest income increased $1,812, or 15.0%, to $13,874 for the year ended December 31, 2014, from $12,062 for the comparable 2013 period. The increase was primarily due to increases in earnings on trust fees of $503 and tax refund processing fees of $1,894 which were partially offset by decreases in service charge income of $200, gain on sale of securities of $91, income on Bank Owned Life Insurance (BOLI) of $63 and other income of $183. Trust fees increased due to both an increase in assets valuations as well as an increase in accounts. Tax refund processing fees primarily increased due to added volume from the addition of vendors to the tax processing program. The decrease in service charges was the result of a decrease in overdraft fees. The decrease in gain on sale of securities was due to a recovery of a security previously written off. This recovery was posted in 2013. The decrease in BOLI income is due to lower yields received in the current year. The decrease in other income was primarily the result of lower fees related to our customer derivative program and lower gains recognized on the sale of fixed assets. Sales of other real estate owned resulted in recognized gains of $44 on the sale of 16 properties in 2014 compared to gains of $120 on the sale of 25 properties in 2013. See accompanying notes to consolidated financial statements. 12 Noninterest Expense Noninterest expense decreased $1,834, or 4.2%, to $41,550 for the year ended December 31, 2014, from $43,384 for the comparable 2013 period. The decrease was primarily due to decreases in salaries, wages and benefits of $2,465, FDIC assessment of $103, state franchise tax of $242, amortization of intangible assets of $77 and repossession expense of $291 which were partially offset by increases in contracted data processing of $233, professional services of $178, equipment expense of $148, ATM expense of $156 and marketing expense of $549. Salaries, wages and benefits decreased primarily due to a decrease in pension costs. As of April 2014, the Company has frozen its pension plan. Several large pension disbursements were made in 2013, triggering settlement expense of $2,251. While the plan still exists, no new participants will be added and no additional benefits will accrue. FDIC assessments decreased due to a decrease in assessment rates. State franchise taxes decreased due to a change made by the State of Ohio. In 2014, the state replaced its corporate franchise tax with the financial institutions tax (FIT). The new tax is based on equity capital, whereas, the corporate franchise tax was based on net worth. In addition, the new law lowered tax rates. The decrease in amortization of intangible assets is the result of a decline in scheduled amortization of intangible assets associated with mergers. The decrease in repossession expense is the result of a general decrease in expenses related to repossessions. Contracted data processing increased due to increases in cost of technology services. Professional services increased primarily due to merger expenses and a general increase in consulting fees. Equipment expenses increased due to a change in the Company’s capitalization policy in 2014. ATM expense increased due to increased vendor charges. Marketing expenses increased as a result of our efforts to unify our marketing approach in order to improve the impact of marketing dollars spent. Income Tax Expense Federal income tax expense was $3,162 in 2014 compared to $1,373 in 2013. Federal income tax expense as a percentage of income was 24.9% in 2014 compared to 18.2% in 2013. A lower federal effective tax rate than the statutory rate of 34% is primarily due to tax-exempt interest income from state and municipal investments, municipal loans, income from BOLI and low income housing credits. Federal income tax expense increased in 2014 primarily due to an increase in pretax income, which also led to the increase in the effective tax rate in 2014. See accompanying notes to consolidated financial statements. 13 Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential The following table sets forth, for the years ended December 31, 2015, 2014 and 2013, the distribution of assets, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Amounts in thousands): 2015 2014 2013 Average balance Yield/ Interest rate Average balance Yield/ Interest rate Average balance Yield/ Interest rate Assets Interest-earning assets: Loans (1)(2)(3)(5) $ 981,475 $ 44,784 Taxable securities (4) 139,762 3,232 4.57% 2.31% $ 874,432 $ 40,032 150,510 3,443 4.58% 2.31% $ 819,152 $ 38,776 157,930 3,763 4.74% 2.42% Non-taxable securities (4)(5) Interest-bearing deposits 71,674 2,583 5.70% 63,613 2,356 5.80% 58,918 2,211 5.90% in other banks 44,647 102 0.23% 53,829 139 0.26% 55,609 131 0.24% Total interest income assets 1,237,558 50,701 4.23% 1,142,384 45,970 4.15% 1,091,609 44,881 4.24% Noninterest-earning assets: Cash and due from financial institutions Premises and equipment, net Accrued interest receivable Intangible assets Other assets Bank owned life insurance Less allowance for 34,616 16,081 4,476 28,568 10,181 19,854 35,784 15,262 4,242 24,122 9,133 19,379 25,203 16,862 4,288 24,464 10,626 18,856 loan losses Total (14,689) $ 1,336,645 (15,900) $ 1,234,406 (19,089) $ 1,172,819 (1) For purposes of these computations, the daily average loan amounts outstanding are net of unearned income and include loans held for sale. Included in loan interest income are loan fees of $542 in 2015, $387 in 2014 and $368 in 2013. (2) (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. Interest yield is calculated using the tax-equivalent adjustment. (5) See accompanying notes to consolidated financial statements. 14 Distribution of Assets, Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential (Continued) The following table sets forth, for the years ended December 31, 2015, 2014 and 2013, the distribution of liabilities and shareholders’ equity, including interest amounts and average rates of major categories of interest-earning assets and interest-bearing liabilities (Amounts in thousands): Liabilities and Shareholders' Equity Average balance Yield/ Interest rate Average balance Yield/ Interest rate Average balance Yield/ Interest rate 2015 2014 2013 Interest-bearing liabilities: Savings and interest- bearing demand accounts $ 543,986 $ 422 Certificates of deposit 223,099 1,665 0.08% 0.75% $ 501,408 $ 376 227,682 1,916 0.07% 0.84% $ 485,054 $ 401 246,724 2,387 0.08% 0.97% Federal Home Loan Bank advances Securities sold under repurchase agreements Federal funds purchased Subordinated debentures Total interest- 45,551 442 0.97% 33,831 1,015 3.00% 39,293 1,358 3.46% 20,086 68 29,427 20 - 760 0.10% 0.00% 2.58% 19,759 41 29,427 20 - 777 0.10% 0.00% 2.64% 20,749 27 29,427 21 - 740 0.10% 0.00% 2.51% bearing liabilities 862,217 3,309 0.38% 812,148 4,104 0.51% 821,274 4,907 0.60% Noninterest-bearing liabilities: Demand deposits Other liabilities Shareholders' equity 340,360 13,718 354,078 120,350 297,003 10,989 307,992 114,266 233,592 14,390 247,982 103,563 Total $ 1,336,645 $ 1,234,406 $ 1,172,819 Net interest income and interest rate spread (1) $ 47,392 3.84% $ 41,866 3.64% $ 39,974 3.64% Net interest margin (2) 3.96% 3.79% 3.79% (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. See accompanying notes to consolidated financial statements. 15 Changes in Interest Income and Interest Expense Resulting from Changes in Volume and Changes in Rate The following table sets forth, for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rate (Amounts in thousands): Increase (decrease) due to: Rate(1) Volume(1) Net 2015 compared to 2014 Interest income: Loans Taxable securities Nontaxable securities Interest-bearing deposits in other banks Total interest income Interest expense: Savings and interest-bearing demand accounts Certificates of deposit Federal Home Loan Bank advances Securities sold under repurchase agreements Subordinated debentures Total interest expense Net interest income 2014 compared to 2013 $ 4,885 (252) 304 $ (133) 41 (77) $ 4,752 (211) 227 (22) (15) (37) $ 4,915 $ (184) $ 4,731 $ 33 (38) 271 - $ 13 (213) (844) - $ 46 (251) (573) - - (17) (17) $ 266 $ (1,061) $ (795) $ 4,649 $ 877 $ 5,526 Interest income: Loans Taxable securities Nontaxable securities Interest-bearing deposits in other banks Total interest income Interest expense: Savings and interest-bearing demand accounts Certificates of deposit Federal Home Loan Bank advances Securities sold under repurchase agreements Subordinated debentures Total interest expense Net interest income $ 2,562 (176) 273 $ (1,306) (144) (128) $ 1,256 (320) 145 (4) 12 8 $ 2,655 $ (1,566) $ 1,089 $ 13 (175) (176) (1) $ (38) (296) (167) - $ (25) (471) (343) (1) - 37 37 $ (339) $ (464) $ (803) $ 2,994 $ (1,102) $ 1,892 (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. See accompanying notes to consolidated financial statements. 16 Liquidity and Capital Resources Civista maintains a conservative liquidity position. All securities are classified as available for sale. At December 31, 2015, securities with maturities of one year or less, totaled $5,078, or 2.6%, of the total security 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. Cash from operations for 2015 was $15,073. The primary additions to cash from operating activities are from changes in amortization of intangible assets, amortization of securities net of accretion, the provision for loan losses, depreciation and proceeds from sale of loans. The primary use of cash from operating activities is from loans originated for sale. Cash used for investing activities was $11,904 in 2015. Security and property and equipment purchases along with loans to customers and purchased loans were offset by security maturities. Cash from financing activities in 2015 totaled $2,534. A major source of cash for financing activities is short-term borrowings from the FHLB. In 2015, the Company borrowed additional funds from the FHLB in overnight funds of $11,000. The primary uses of cash in financing activities include payment of dividends, repayment of FHLB advances and a decrease in the net change in deposits. Cash and cash equivalents increased from $29,858 at December 31, 2014 to $35,561 at December 31, 2015. Future loan demand of Civista can be funded by increases in deposit accounts, proceeds from payments on existing loans, the maturity of securities, the issuances of trust preferred obligations, 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, 2015, Civista had total credit availability with the FHLB of $132,054 of which $71,200 was outstanding. On a separate entity basis, CBI’s primary source of funds is dividends paid primarily by Civista. Generally, subject to applicable minimum capital requirements, Civista may declare a dividend without the approval of the Federal Reserve Bank of Cleveland and the State of Ohio Department of Commerce, Division of Financial Institutions, provided the total dividends in a calendar year do not exceed the total of its profits for that year combined with its retained profits for the two preceding years. At December 31, 2015, Civista was able to pay dividends to CBI without obtaining regulatory approval. During 2015, Civista paid dividends totaling $14,226 to CBI. This represented approximately 97 percent of Civista’s earnings for the year. In addition to the restrictions placed on dividends by banking regulations, the Company is subject to restrictions on the payment of dividends as a result of the Company’s issuance of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a Series B Preferred Share, of the Company on December 19, 2013. Under the terms of the Series B Preferred Shares, no dividends may be declared or paid on the common shares of the Company during any calendar quarter unless full dividends on the Series B Preferred Shares (and, therefore, the depositary shares) have been declared for that quarter and all dividends previously declared on the Series B Preferred Shares (and, therefore, the depositary shares) have been paid in full. See accompanying notes to consolidated financial statements. 17 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 will affect the future liquidity and capital position of the Company. The ALCO also examines interest rate risk and the effect that changes in rates will have on the Company. For more information about interest rate risk, please refer to the “Quantitative and Qualitative Disclosures about Market Risk” section. Capital Adequacy Shareholders’ equity totaled $125,173 at December 31, 2015 compared to $115,909 at December 31, 2014. The increase in shareholders' equity resulted primarily from net income of $12,745, which was offset by dividends on preferred shares and common shares of $1,577 and $1,562, respectively. During the first quarter of 2015, the Company adopted the new BASEL III regulatory capital framework as approved by the federal banking agencies. In addition to the existing regulatory capital rules, the final BASEL III rules also require the Company to now maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) Capital to risk-weighted assets (as these terms are defined in the BASEL III rules). Under the BASEL III rules, the Company elected to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, the Company’s regulatory capital ratios were calculated under BASEL I rules because the BASEL III rules were not yet effective and, thus, the Common Equity Tier 1 Capital ratio was not required. All of the Company’s capital ratios exceeded the regulatory minimum guidelines as of December 31, 2015 and December 31, 2014 as identified in the following table: Company Ratios - December 31, 2015 Company Ratios - December 31, 2014 For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Total Risk Based Capital Tier I Risk Based Capital CET1 Risk Based Capital 14.0% 14.7% 8.0% 12.7% 13.4% 6.0% 7.6% N/A 4.5% Leverage Ratio 10.0% 10.3% 4.0% Corrective Action Provisions 10.0% 8.0% 6.5% 5.0% Common equity for the CET1 risk-based capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions. Tier 1 capital includes common equity as defined for the CET1 risk-based capital ratio, plus certain non- cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions. Tier 2 capital, which can be included in the total capital ratio, includes certain capital instruments (such as subordinated debt) and limited amounts of the allowance for loan and lease losses, subject to new eligibility criteria, less applicable deductions. The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of See accompanying notes to consolidated financial statements. 18 unconsolidated financial institutions (above certain levels). The deductions phase 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. Some of the risk weightings have been changed effective January 1, 2015. The new regulatory capital rules and regulations also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5 percent composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, at 0.625%. The implementation of Basel III is not expected to have a material impact on CBI’s or Civista’ capital ratios. Effects of Inflation The Company’s balance sheet is typical of financial institutions and reflects a net positive monetary position whereby monetary assets exceed monetary liabilities. Monetary assets and liabilities are those which can be converted to a fixed number of dollars and include cash assets, securities, loans, money market instruments, deposits and borrowed funds. During periods of inflation, a net positive monetary position may result in an overall decline in purchasing power of an entity. No clear evidence exists of a relationship between the purchasing power of an entity’s net positive monetary position and its future earnings. Moreover, the Company’s ability to preserve the purchasing power of its net positive monetary position will be partly influenced by the effectiveness of its asset/liability management program. As part of the asset/liability management process, management reviews and monitors information and projections on inflation as published by the Federal Reserve Board and other sources. This information speaks to inflation as determined by its impact on consumer prices and also the correlation of inflation and interest rates. This information is but one component in an asset/liability management process designed to limit the impact of inflation on the Company. Management does not believe that the effect of inflation on its nonmonetary assets (primarily bank premises and equipment) is material as such assets are not held for resale and significant disposals are not anticipated. Fair Value of Financial Instruments The Company has disclosed the fair value of its financial instruments at December 31, 2015 and 2014 in Note 17 to the Consolidated Financial Statements. The fair value of loans at December 31, 2015 was 100.0% of the carrying value compared to 100.8% at December 31, 2014. The fair value of deposits was 100.1% of the carrying value at December 31, 2015 and December 31, 2014. See accompanying notes to consolidated financial statements. 19 Contractual Obligations The following table represents significant fixed and determinable contractual obligations of the Company as of December 31, 2015. Contractual Obligations Deposits without a stated maturity Certificates of deposit and IRAs FHLB advances, securities sold under agreements to repurchase and U.S. Treasury interest- bearing demand note Subordinated debentures (1) Operating leases One year or less $ 840,984 124,120 One to three years - $ 67,610 Three to five years $ - 18,822 Over five years - $ 497 Total $ 840,984 211,049 78,740 - 529 12,500 - 799 5,000 - 311 - 29,427 - 96,240 29,427 1,639 (1) The subordinated debentures consist of $2,000, $2,500, $5,000, $7,500, and $12,500 debentures. The Company has retail repurchase agreements with clients within its local market areas. These borrowings are collateralized with securities owned by the Company. See Note 12 to the Consolidated Financial Statements for further detail. The Company also has a cash management advance line of credit and outstanding letters of credit with the FHLB. For further discussion, refer to Note 10 and Note 11 to the Consolidated Financial Statements. See accompanying notes to consolidated financial statements. 20 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. See accompanying notes to consolidated financial statements. 21 If, alternatively, more liabilities than assets will reprice, the institution is in a liability sensitive position. Accordingly, net interest income would decline when rates rose and increase when rates fell. Also, these examples assume that interest rate changes for assets and liabilities are of the same magnitude, whereas actual interest rate changes generally differ in magnitude for assets and liabilities. Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or securities. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor so that the debtor may refund its obligations at new, lower rates. The Company does not have significant derivative financial instruments and does not intend to purchase a significant amount of such instruments in the near future. Prepayments of assets carrying higher rates reduce the Company’s interest income and overall asset yields. A large portion of an institution’s liabilities may be short term or due on demand, while most of its assets may be invested in long term loans or securities. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Also, FHLB advances and wholesale borrowings may be used as important sources of liquidity for the Company. The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates as of December 31, 2015 and 2014, based on certain prepayment and account decay assumptions that management believes are reasonable. The Company had derivative financial instruments as of December 31, 2015 and 2014. The changes in fair value of the assets and liabilities of the underlying contracts offset each other. For more information about derivative financial instruments see Note 24 to the Consolidated Financial Statements. Expected maturity date values for interest-bearing core deposits were calculated based on estimates of the period over which the deposits would be outstanding. The Company’s borrowings were tabulated by contractual maturity dates and without regard to any conversion or repricing dates. Net Portfolio Value Change in Rates +200bp +100bp Base -100bp December 31, 2015 Dollar Change 25,222 $ 17,471 - 383 Dollar Amount 188,643 $ 180,892 163,421 163,804 Percent Change 15% 11% - 0% December 31, 2014 Dollar Change 14,829 $ 9,537 - 5,914 Dollar Amount 160,744 $ 155,452 145,915 151,829 Percent Change 10% 7% - 4% The change in net portfolio value from December 31, 2014 to December 31, 2015, can be attributed to three factors. The yield curve has seen a slight upward, nearly parallel, shift since the end of 2014. The Company also completed an acquisition in the first quarter of the year, which directly impacted the base level. Finally, both the mix of assets and funding sources has changed. The mix of assets has shifted toward loans and away from securities, which tends to reduce volatility. The funding mix shifted from CDs to deposits and borrowed money, which tends to increase volatility. The acquisition, along with the shifts in mixes, led to an increase in the base. Further, projected movements in rates up will lead to larger changes in market values, compared to a year ago. The change in the rates up scenarios for both the 100 and 200 basis point movements would lead to a faster decrease in the fair value of liabilities, compared to assets. Accordingly we would see an increase in the net portfolio value. A downward change in rates would lead to a small increase in the net portfolio value as the fair value of assets would increase more quickly than the fair value of liabilities. See accompanying notes to consolidated financial statements. 22 Critical Accounting Policies Allowance for Loan Losses: The allowance for loan losses is regularly reviewed by management to determine that the amount is considered adequate to absorb probable losses in the loan portfolio. If not, an additional provision is made to increase the allowance. This evaluation includes specific loss estimates on certain individually reviewed impaired loans, the pooling of commercial credits risk graded as special mention and substandard that are not individually analyzed, and general loss estimates that are based upon the size, quality, and concentration characteristics of the various loan portfolios, adverse situations that may affect a borrower’s ability to repay, and current economic and industry conditions, among other items. Those judgments and assumptions that are most critical to the application of this accounting policy are assessing the initial and on-going credit-worthiness of the borrower, the amount and timing of future cash flows of the borrower that are available for repayment of the loan, the sufficiency of underlying collateral, the enforceability of third-party guarantees, the frequency and subjectivity of loan reviews and risk ratings, emerging or changing trends that might not be fully captured in the historical loss experience, and charges against the allowance for actual losses that are greater than previously estimated. These judgments and assumptions are dependent upon or can be influenced by a variety of factors, including the breadth and depth of experience of lending officers, credit administration and the corporate loan review staff that periodically review the status of the loan, changing economic and industry conditions, changes in the financial condition of the borrower and changes in the value and availability of the underlying collateral and guarantees. Note 1 and Note 5 to the Consolidated Financial Statements provide additional information regarding Allowance for Loan Losses. Goodwill: The Company performs an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Management performed an evaluation of the Company’s goodwill during the fourth quarter of 2015. In performing its evaluation, management obtained several commonly used financial ratios from pending and completed purchase transactions for banks based in the Midwest. Management used these ratios to determine an implied fair value for the Company. The implied fair value exceeded the carrying value including goodwill. Therefore management concluded that goodwill was not impaired and made no adjustment in 2015. Other-Than-Temporary Impairment of Investment Securities: The Company performs a quarterly valuation to determine if a decline in the value of an investment security is other than temporary. Although the term “other than temporary” is not intended to indicate that the decline is permanent, it does indicate that the prospects for a near-term recovery of value are not necessarily favorable, or that there is lack of evidence to support fair values equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. Pension Benefits: Pension costs and liabilities are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, benefits earned, interest costs, expected return on plan assets, mortality rates, and other factors. In accordance with GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation of future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligations and future expense. Our pension benefits are described further in Note 15 of the “Notes to Consolidated Financial Statements.” See accompanying notes to consolidated financial statements. 23 Management’s Report on Internal Control over Financial Reporting We, as management of Civista Bancshares, Inc., are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. Management assessed the Company’s system of internal control over financial reporting as of December 31, 2015, in relation to criteria for effective internal control over financial reporting as described in “2013 Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concludes that, as of December 31, 2015, its system of internal control over financial reporting is effective and meets the criteria of the “2013 Internal Control – Integrated Framework”. S.R. Snodgrass, P.C., independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. Management is responsible for compliance with the federal and state laws and regulations concerning dividend restrictions and federal laws and regulations concerning loans to insiders designated by the FDIC as safety and soundness laws and regulations. Management has assessed compliance by the Company with the designated laws and regulations relating to safety and soundness. Based on the assessment, management believes that the Company complied, in all significant respects, with the designated laws and regulations related to safety and soundness for the year ended December 31, 2015. James O. Miller President, Chief Executive Officer, Chairman of the Board Sandusky, Ohio March 15, 2016 Todd A. Michel Senior Vice President, Controller See accompanying notes to consolidated financial statements. 24 Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting Board of Directors and Stockholders Civista Bancshares, Inc. Sandusky, Ohio We have audited Civista Bancshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Civista Bancshares, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded, as necessary, to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Civista Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control — Integrated Framework issued by COSO in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Civista Bancshares Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015, and our report dated March 15, 2016, expressed an unqualified opinion. Wexford, Pennsylvania March 15, 2016 See accompanying notes to consolidated financial statements. 25 Report of Independent Registered Public Accounting Firm on Financial Statements Board of Directors and Stockholders Civista Bancshares, Inc. Sandusky, Ohio We have audited the accompanying consolidated balance sheets of Civista Bancshares, Inc. and subsidiaries as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of Civista Bancshares, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Civista Bancshares, Inc. and subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Civista Bancshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 15, 2016, expressed an unqualified opinion on the effectiveness of Civista Bancshares, Inc.’s internal control over financial reporting. Wexford, Pennsylvania March 15, 2016 See accompanying notes to consolidated financial statements. 26 CIVISTA BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2015 and 2014 (Amounts in thousands, except share data) ASSETS Cash and due from financial institutions Securities available for sale Loans held for sale Loans, net of allowance of $14,361 and $14,268 Other securities Premises and equipment, net Accrued interest receivable Goodwill Other intangible assets Bank owned life insurance Other assets Total assets LIABILITIES Deposits Noninterest-bearing Interest-bearing Total deposits Federal Home Loan Bank advances Securities sold under agreements to repurchase Subordinated debentures Accrued expenses and other liabilities Total liabilities SHAREHOLDERS' EQUITY Preferred stock, no par value, 200,000 shares authorized Series B Preferred stock, $1,000 liquidation preference, 24,072 shares issued at December 31, 2015 and 25,000 shares issued at December 31, 2014, net of issuance costs Common stock, no par value, 20,000,000 shares authorized, 8,591,542 shares issued at December 31, 2015 and 8,455,881 shares issued at December 31, 2014 Accumulated earnings (deficit) Treasury stock, 747,964 shares at cost Accumulated other comprehensive loss Total shareholders' equity 2015 2014 $ 35,561 196,249 2,698 987,166 13,452 16,944 3,902 27,095 2,409 20,104 9,461 $ 29,858 197,905 2,410 900,589 12,586 14,400 3,852 21,720 2,025 19,637 8,209 $ 1,315,041 $ 1,213,191 $ 300,615 751,418 1,052,033 71,200 25,040 29,427 12,168 1,189,868 $ 250,701 718,217 968,918 65,200 21,613 29,427 12,124 1,097,282 22,273 23,132 115,330 5,300 (17,235) (495) 125,173 114,365 (4,306) (17,235) (47) 115,909 Total liabilities and shareholders' equity $ 1,315,041 $ 1,213,191 See accompanying notes to consolidated financial statements. 27 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) Interest and dividend income Loans, including fees Taxable securities Tax-exempt securities Federal funds sold and other Total interest and dividend income Interest expense Deposits Federal Home Loan Bank advances Subordinated debentures Securities sold under agreements to repurchase Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Service charges Net gain (loss) on sale of securities Net gain on sale of loans ATM fees Trust fees Bank owned life insurance Tax refund processing fees Computer center item processing fees Net gain on sale of other real estate owned Other Total noninterest income Noninterest expense Salaries, wages and benefits Net occupancy expense Equipment expense Contracted data processing FDIC Assessment State franchise tax Professional services Amortization of intangible assets ATM expense Marketing expense Repossession expense Other operating expenses Total noninterest expense Income before income taxes Income taxes Net income Preferred stock dividends 2015 2014 2013 $ 44,784 3,232 2,583 102 50,701 $ 40,032 3,443 2,356 139 45,970 $ 38,776 3,763 2,211 131 44,881 2,087 442 760 20 3,309 47,392 1,200 46,192 4,708 (18) 1,106 1,986 2,823 467 2,000 267 199 740 14,278 23,630 2,416 1,503 1,821 864 847 2,461 711 674 1,039 508 6,470 42,944 17,526 4,781 12,745 1,577 2,292 1,015 777 20 4,104 41,866 1,500 40,366 4,257 113 659 1,850 3,130 492 2,324 260 44 745 13,874 22,293 2,256 1,421 1,560 905 888 1,855 769 806 1,604 673 6,520 41,550 12,690 3,162 9,528 1,873 2,788 1,358 740 21 4,907 39,974 1,100 38,874 4,457 204 753 1,740 2,627 555 430 248 120 928 12,062 24,758 2,209 1,273 1,327 1,008 1,130 1,677 846 650 1,055 964 6,487 43,384 7,552 1,373 6,179 1,159 Net income available to common shareholders $ 11,168 $ 7,655 $ 5,020 Earnings per common share, basic $ 1.43 $ 0.99 $ 0.65 Earnings per common share, diluted $ 1.17 $ 0.85 $ 0.64 See accompanying notes to consolidated financial statements. 28 CIVISTA BANCSHARES, INC. CONSOLIDATED COMPREHENSIVE INCOME STATEMENTS Years ended December 31, 2015, 2014 and 2013 (Amounts in thousands) Net income Other comprehensive income (loss): Unrealized holding gains (loss) on available for sale securities Tax effect Pension liability adjustment Tax effect Total other comprehensive income (loss) 2015 12,745 $ 2014 2013 $ 9,528 $ 6,179 (267) 91 (412) 140 (448) 5,134 (1,745) 1,228 (417) 4,200 (8,344) 2,836 4,406 (1,498) (2,600) Comprehensive income $ 12,297 $ 13,728 $ 3,579 See accompanying notes to consolidated financial statements. 29 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Years ended December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) Preferred Stock Common Stock Shares Amount Shares Amount Accumulated (Deficit) Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Shareholders' Equity Balance, December 31, 2012 23,184 $ 23,184 7,707,917 $ 114,365 $ (14,687) $ (17,235) $ (1,647) $ 103,980 Net income Other comprehensive loss Cash dividends ($0.15 per share) Preferred stock dividends Issuance of Series B preferred shares, net of issuance costs Balance, December 31, 2013 Net income Other comprehensive income Redemption of Series A preferred stock Cash dividends ($0.19 per share) Preferred stock dividends 6,179 (1,156) (1,159) (2,600) 6,179 (2,600) (1,156) (1,159) 23,132 23,132 $ 46,316 7,707,917 $ 114,365 $ (10,823) $ (17,235) $ (4,247) $ 128,376 25,000 48,184 (23,184) (23,184) 9,528 327 (1,465) (1,873) 4,200 9,528 4,200 (22,857) (1,465) (1,873) Balance, December 31, 2014 25,000 $ 23,132 7,707,917 $ 114,365 $ (4,306) $ (17,235) $ (47) $ 115,909 Net income Other comprehensive loss Conversion of Series B preferred shares to common shares Stock-based compensation Cash dividends ($0.20 per share) Preferred stock dividends Balance, December 31, 2015 (928) (859) 118,678 16,983 859 106 12,745 (1,562) (1,577) (448) 12,745 (448) - 106 (1,562) (1,577) 24,072 $ 22,273 7,843,578 $ 115,330 $ 5,300 $ (17,235) $ (495) $ 125,173 See accompanying notes to consolidated financial statements. 30 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2015, 2014 and 2013 (Amounts in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash from operating activities 2015 2014 2013 $ 12,745 $ 9,528 $ 6,179 Security amortization, net Depreciation Amortization of intangible assets Accretion of net deferred loan fees Net (gain) loss on sale of securities Provision for loan losses Loans originated for sale Proceeds from sale of loans Net gain on sale of loans Net loss on sale of manufactured home loans Net gain on sale of other real estate owned Gain on sale of fixed assets Increase in cash surrender value of bank owned life insurance Decrease in prepaid FDIC Premium Share-based compensation Change in Accrued interest payable Accrued interest receivable Deferred taxes Other, net 1,410 1,193 711 (155) 18 1,200 (48,745) 49,637 (1,180) 74 (199) - (467) - 106 (11) 144 (410) (998) Net cash from operating activities 15,073 1,491 1,176 769 (123) (113) 1,500 (31,206) 29,893 (659) - (44) (60) (492) - - (30) 29 11 3,216 14,886 1,633 1,334 846 (112) (204) 1,100 (49,978) 52,166 (753) - (120) (107) (555) 1,775 - (29) (172) 1,362 (1,554) 12,811 Cash flows used for investing activities: Securities available for sale Maturities, prepayments and calls Sales Purchases Redemption of Federal Reserve stock Purchases of Federal Reserve stock Redemption of FHLB stock Net cash from acquisition Net loan originations Loans purchased, installment Proceeds from sale of manufactured homes Proceeds from sale of OREO properties Premises and equipment purchases Proceeds from sale of premises and equipment 29,733 - 45,743 18,088 50,184 8,686 (29,772) (58,367) (64,295) 138 (288) - 926 (10,225) (4,774) 3,492 865 (1,999) - - (171) 3,009 - (53,562) (4,382) - 349 (485) 1,282 143 - - - (48,272) (1,898) - 699 (1,155) 118 Net cash used for investing activities (11,904) (48,496) (55,790) See accompanying notes to consolidated financial statements. 31 CIVISTA BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Years ended December 31, 2015, 2014 and 2013 (Amounts in thousands) Cash flows from financing activities: Increase (decrease) in deposits Net change in short-term FHLB advances Repayment of long-term FHLB advances Proceeds from long-term FHLB advances Increase in securities sold under repurchase agreements Repayment of series A preferred stock Cash dividends paid Net proceeds from issuance of preferred stock Net cash from financing activities Increase (decrease) in cash and due from financial institutions Cash and due from financial institutions at beginning of year 2015 2014 2013 (3,754) 11,000 (5,000) - 3,427 - (3,139) - 2,534 5,703 29,858 26,443 42,700 (30,226) 15,000 1,560 (22,857) (3,338) - 29,282 (4,328) 34,186 16,086 - (2,535) - (3,166) - (2,315) 23,132 31,202 (11,777) 45,963 Cash and due from financial institutions at end of year $ 35,561 $ 29,858 $ 34,186 Supplemental disclosures of cash flow information: Interest paid Income taxes paid Transfer of loans from portfolio to other real estate owned Transfer of loans from portfolio to held for sale Conversion of preferred stock to common stock $ 3,315 3,650 222 - 859 $ 4,134 1,745 691 - - $ 4,936 1,010 280 4,756 - Acquisition of TCNB Financial Corp. Noncash assets acquired: Loans receivable Other securities Accrued interest receivable Premises and equipment, net Core deposit intangible Other assets Total non cash assets acquired Liabilities assumed: Deposits Other liabilities Total liabilities assumed $ 76,444 716 194 1,738 1,009 472 80,573 86,869 5 86,874 Net noncash liabilities acquired $ 6,301 See accompanying notes to consolidated financial statements. 32 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of the accounting policies adopted by Civista Bancshares, Inc., which have a significant effect on the financial statements. Nature of Operations and Principles of Consolidation: The Consolidated Financial Statements include the accounts of Civista Bancshares, Inc. (“CBI”) and its wholly-owned subsidiaries: Civista Bank (“Civista”), First Citizens Insurance Agency, Inc. (“FCIA”), Water Street Properties, Inc. (“WSP”) and FC Refund Solutions, Inc. (“FCRS”). First Citizens Capital LLC (“FCC”) is wholly-owned by Civista and holds inter-company debt. First Citizens Investments, Inc. (“FCI”) is wholly-owned by Civista and holds and manages its securities portfolio. The operations of FCI and FCC are located in Wilmington, Delaware. The above companies together are sometimes referred to as the Company. Intercompany balances and transactions are eliminated in consolidation. The Company provides financial services through its offices in the Ohio counties of Erie, Crawford, Champaign, Cuyahoga, Franklin, Logan, Summit, Huron, Ottawa, Madison, Montgomery and Richland. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, our customers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments that potentially represent concentrations of credit risk include deposit accounts in other financial institutions. FCIA was formed to allow the Company to participate in commission revenue generated through its third party insurance agreement. Insurance commission revenue was less than 1.0% of total revenue for the years ended December 31, 2015 and 2014. WSP was formed to hold repossessed assets of CBI’s subsidiaries. WSP revenue was less than 1% of total revenue for the years ended December 31, 2015 and 2014. FCRS was formed in 2012 and remained inactive for the periods presented. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, determination of goodwill impairment, fair values of financial instruments, valuation of deferred tax assets, pension obligations and other-than-temporary-impairment of securities are considered material estimates that are particularly susceptible to significant change in the near term. Cash Flows: Cash and cash equivalents include cash on hand and demand deposits with financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, federal funds purchased, short-term borrowings and repurchase agreements. (Continued) 33 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Securities: Debt securities are classified as available-for-sale when they might be sold before maturity. Equity securities with readily determinable fair values are also classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are based on the amortized cost of the security sold using the specific identification method. The recent guidance specifies that if (a) a company does not have the intent to sell a debt security prior to recovery and (b) it is more-likely-than-not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired unless there is a credit loss. When an entity does not intend to sell the security, and it is more-likely-than-not the entity will not have to sell the security before recovery of its cost basis, it will recognize the credit component of other-than- temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of other-than-temporary impairment recorded in other comprehensive income for the non-credit portion of a previous other-than-temporary impairment should be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For available-for-sale debt securities that management has no intent to sell and believes that it more- likely-than-not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the non-credit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. Other securities which include FHLB stock, Federal Reserve Bank (“FRB”) stock, Bankers’ Bancshares Inc. (“BB”) stock, and Norwalk Community Development Corp (“NCDC”) stock are carried at cost. Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market and loans that management no longer intends to hold for the foreseeable future, are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. (Continued) 34 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Interest income on consumer loans is discontinued when management determines future collection is unlikely. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not received, for loans placed on nonaccrual, is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Purchased Loans: The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses. Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s, or pool’s, contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected future cash flows is greater than the carrying amount, the excess is recognized as part of future interest income. Allowance for Loan Losses: The allowance for loan losses (allowance) is calculated with the objective of maintaining a reserve sufficient to absorb inherent loan losses in the loan portfolio. Management establishes the allowance for loan losses based upon its evaluation of the pertinent factors underlying the types and quality of loans in the portfolio. In determining the allowance and the related provision for loan losses, the Company considers three principal elements: (i) specific impairment reserve allocations (valuation allowances) based upon probable losses identified during the review of impaired loans in the Commercial loan portfolio, (ii) allocations established for adversely-rated loans in the Commercial loan portfolio and nonaccrual Real Estate Residential, Consumer installment and Home Equity loans, (iii) allocations on all other loans based principally on the use of a three-year period for loss migration analysis, except for the segment consisting of purchased automobile loans which is calculated over a two- year period. These allocations are adjusted for consideration of general economic and business conditions, credit quality and delinquency trends, collateral values, and recent loss experience for these similar pools of loans. The Company analyzes its loan portfolio each quarter to determine the appropriateness of its allowance for loan losses. (Continued) 35 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) All commercial, commercial real estate and farm real estate loans are monitored on a regular basis with a detailed loan review completed for all loan relationships greater than $500. All commercial, commercial real estate and farm real estate loans that are 90 days past due or in nonaccrual status, are analyzed to determine if they are “impaired”, which means that it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. All loans that are delinquent 90 days are classified as substandard and placed on nonaccrual status unless they are well-secured and in the process of collection. The remaining loans are evaluated and segmented with loans with similar risk characteristics. The Company allocates reserves based on risk categories and portfolio segments described below, which conform to the Company’s asset classification policy. In reviewing risk within Civista’s loan portfolio, management has identified specific segments to categorize loan portfolio risk: (i) Commercial & Agriculture loans; (ii) Commercial Real Estate – Owner Occupied loans; (iii) Commercial Real Estate – Non-Owner Occupied loans; (iv) Residential Real Estate loans; (v) Real Estate Construction loans; (vi) Farm Real Estate loans; and (vii) Consumer and Other loans. Additional information related to economic factors can be found in Note 5. Loan Charge-off Policies: All unsecured open- and closed-ended retail loans that become past due 90 days from the contractual due date are charged off in full. In lieu of charging off the entire loan balance, loans with non-real estate collateral may be written down to the net realizable value of the collateral, if repossession of collateral is assured and in process. For open- and closed-ended loans secured by residential real estate, a current assessment of value is made no later than 180 days past due. Any outstanding loan balance in excess of the net realizable value of the property is charged off. All other loans are generally charged down to the net realizable value when Civista recognizes the loan is permanently impaired, which is generally after the loan is 90 days past due. Troubled Debt Restructurings: In certain situations based on economic or legal reasons related to a borrower's financial difficulties, management may grant a concession for other than an insignificant period of time to the borrower that would not otherwise be considered. The related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted above for impaired loans. In addition to the allowance for the pooled portfolios, management has developed a separate reserve for loans that are identified as impaired through a TDR. These loans are excluded from pooled loss forecasts and a separate reserve is provided under the accounting guidance for loan impairment. Consumer loans whose terms have been modified in a TDR are also individually analyzed for estimated impairment. Other Real Estate: Other real estate acquired through or instead of loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis and any deficiency in the value is charged off through the allowance. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Other real estate owned included in other assets totaled approximately $116 at December 31, 2015 and $560 at December 31, 2014. (Continued) 36 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using both accelerated and straight-line methods over the estimated useful life of the asset, ranging from three to seven years for furniture and equipment and seven to fifty years for buildings and improvements. Federal Home Loan Bank Stock: Civista is a member of the FHLB of Cincinnati and as such, is required to maintain a minimum investment in stock of the FHLB that varies with the level of advances outstanding with the FHLB. The stock is bought from and sold to the FHLB based upon its $100 par value. The stock does not have a readily determinable fair value and as such is classified as restricted stock, carried at cost and evaluated for impairment by management. The stock’s value is determined by the ultimate recoverability of the par value rather than by recognizing temporary declines. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the FHLB as compared to the capital stock amount and the length of time this situation has persisted (b) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance (c) the impact of legislative and regulatory changes on the customer base of the FHLB and (d) the liquidity position of the FHLB. With consideration given to these factors, management concluded that the stock was not impaired at December 31, 2015 or 2014. Federal Reserve Bank Stock: Civista is a member of the Federal Reserve System. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Bank Owned Life Insurance (BOLI): Civista has purchased BOLI policies on certain key executives. BOLI is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Goodwill and Other Intangible Assets: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit intangibles arising from whole bank and branch acquisitions. These intangible assets are measured at fair value and then amortized on an accelerated method over their estimated useful lives, which range from five to twelve years. Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are initially recorded at fair value at the date of transfer. The valuation technique used is the present value of estimated future cash flows using current market discount rates. Servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and then, secondarily, prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon (Continued) 37 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance to the extent that fair value is less than the capitalized asset for the grouping. Long-term Assets: Premises and equipment, core deposit and other intangible assets, and other long- term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. The Company prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of the grant is used for restricted stock. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. (Continued) 38 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Retirement Plans: Pension expense is the net of service and interest cost, expected return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation allocates the benefits over the years of service. Earnings per Common Share: Basic earnings per share are net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable related to convertible preferred shares. Treasury shares are not deemed outstanding for earnings per share calculations. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the pension plan. Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe that any such loss contingencies currently exist that will have a material effect on the financial statements. Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. These balances do not earn interest. Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by Civista to CBI or by CBI to shareholders. Additional information related to dividend restrictions can be found in Note 19. Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates. Operating Segments: While the Company’s chief decision makers monitor the revenue streams of the Company’s various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment. Business Combinations: At the date of acquisition the Company records the assets and liabilities of the acquired companies on the Consolidated Balance Sheets at their estimated fair value. The results of operations for acquired companies are included in the Company’s Consolidated Statements of Operations beginning at the acquisition date. Expenses arising from acquisition activities are recorded in the Consolidated Statements of Operations during the period incurred. (Continued) 39 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. Derivative Instruments and Hedging Activities: The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. All derivatives are accounted for in accordance with ASC-815, Derivatives and Hedging. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s Consolidated Balance Sheets. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes because the Company does not currently intend to execute a setoff with its’ counterparties. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds. Effect of Newly Issued but Not Yet Effective Accounting Standards: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (a new revenue recognition standard). The Update’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this Update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This Update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is evaluating the effect of adopting this new accounting Update on the Company’s financial statements. In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments when the Terms of an Award Provide that a Performance Target Could Be Achieved After the Requisite Service Period. The amendments in this Update require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. (Continued) 40 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force). This Update clarifies how current U.S. GAAP should be interpreted in subjectively evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Public business entities are required to implement the new requirements in fiscal years and interim periods within those fiscal years beginning after December 15, 2015. This Update is not expected to have a significant impact on the Company’s financial statements. In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The amendments in this Update apply to the separate financial statements of an acquired entity and its subsidiaries that are a business or nonprofit activity (either public or nonpublic) upon the occurrence of an event in which an acquirer (an individual or an entity) obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity's most recent change-in-control event. The amendments in this Update are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. This Update is not expected to have a significant impact on the Company’s financial statements. In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810). The amendments in this Update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) eliminate the presumption that a general partner should consolidate a limited partnership; (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. This Update is not expected to have a significant impact on the Company’s financial statements. In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), as part of its initiative to reduce complexity in accounting standards. To simplify presentation of debt issuance costs, the amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, (Continued) 41 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. An entity should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. This Update is not expected to have a significant impact on the Company’s financial statements. In April 2015, the FASB issued ASU 2015-04, Compensation-Retirement Benefits (Topic 715), as part of its initiative to reduce complexity in accounting standards. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity's fiscal year-end and apply that practical expedient consistently from year to year. The practical expedient should be applied consistently to all plans if an entity has more than one plan. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements. In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The Update applies to reporting entities that elect to measure the fair value of an investment using the net asset value per share (or its equivalent) practical expedient. Under the amendments in this Update, investments for which fair value is measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at net asset value (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from net asset value. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity's financial statements. Earlier application is permitted. This Update is not expected to have a significant impact on the Company’s financial statements. (Continued) 42 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) In August 2015, the FASB issued ASU 2015-14, Revenue from Contract with Customers (Topic 606). The amendments in this Update defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is evaluating the effect of adopting this new accounting Update. In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805). The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period's financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This Update applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation, and disclosure of financial instruments. Among other things, this Update (a) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (c) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (d) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (e) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (f) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (g) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (h) clarifies that an entity should evaluate the need for a valuation allowance on a (Continued) 43 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. All entities that are not public business entities may adopt the amendments in this Update earlier as of the fiscal years beginning after December 15, 2017, 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 position or results of operations. NOTE 2 - MERGER On March 6, 2015, CBI completed the acquisition by merger of TCNB Financial Corp. (“TCNB”) in an all- cash transaction for aggregate consideration of $17,226, or $23.50 per share of TCNB stock. The Company and TCNB had first announced that they had entered into an agreement to merge in September of 2014. Immediately following the merger, TCNB’s banking subsidiary, The Citizens National Bank of Southwestern Ohio, was merged into CBI’s banking subsidiary, Civista Bank. At the time of the merger, TCNB had total assets of $97,479, including $76,771 in loans, and $86,708 in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of TCNB have been included in the Company’s Consolidated Financial Statements since the close of business on March 6, 2015. The aggregate of the purchase price over the fair value of the net assets acquired of approximately $5,375 was recorded as goodwill and will be evaluated for impairment on an annual basis. Merger related cost were $391 and $236, respectively as of December 31, 2015 and December 31, 2014. These cost were primarily included in salaries, wages and benefits, contracted data processing and professional services on the consolidated statements of operations. The following table presents financial information for the former TCNB included in the Consolidated Statements of Operations from the date of acquisition through December 31, 2015. Actual From Acquisition Date Through December 31, 2015 (in thousands) Net interest income after provision for loan losses Noninterest income Net income $ 3,155 138 1,282 (Continued) 44 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 2 – MERGER (Continued) The following table presents unaudited pro forma information for the periods ended December 31, 2015 and 2014 as if the acquisition of TCNB had occurred on January 1, 2014. This table has been prepared for comparative purposes only and is not indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Pro Formas (unaudited) Twelve months ended December 31, 2014 2013 2015 Net interest income after provision for loan losses Noninterest income Net income Pro forma earnings per share: Basic Diluted $ 46,852 14,699 11,931 $ 44,583 14,297 10,045 $ 43,197 12,486 7,024 $ $ 1.32 1.09 $ $ 1.06 0.90 $ $ 0.76 0.75 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for TCNB. Core deposit intangibles will be amortized over periods of between five and ten years using an accelerated method. Goodwill will not be amortized, but instead will be evaluated for impairment. Total purchase price $ 17,226 At March 6, 2015 Net assets acquired: Cash and short-term investments Loans, net Other securities Premises and equipment Accrued interest receivable Core deposit intangible Other assets Noninterest-bearing deposits Interest-bearing deposits Other liabilities Goodwill 18,152 76,444 716 1,738 194 1,009 472 (18,263) (68,606) (5) 11,851 5,375 $ (Continued) 45 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 2 – MERGER (Continued) The acquired assets and liabilities were measured at estimated fair values. Management made certain estimates and exercised judgment in accounting for the acquisition. The following is a description of the methods used to determine fair value of significant assets and liabilities at the acquisition date: Cash and short-term investments: The Company acquired $18.2 million in cash and short-term investments, which management deemed to reflect fair value based on the short term nature of the asset. Loans: The Company acquired $76.4 million in loans receivable with and without evidence of credit quality deterioration. The loans consisted of Commercial loans, Commercial Real Estate loans, and Residential Real Estate loans including home equity secured lines of credit, as well as Real Estate Construction, Farm Real Estate loans and Consumer and other loans. The fair value of the performing loan portfolio includes separate adjustments to reflect a credit risk and marketability component and a yield component reflecting the differential between portfolio and market yields. Additionally, certain loans were valued based on their observable sales price. Loans acquired with credit deterioration of $831 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. Deposits: The Company acquired $86.9 million in deposits. Savings and transaction accounts are variable, have no stated maturity and can be withdrawn on short notice with no penalty. Therefore, the fair value of such deposits is considered equal to the carrying value. The fair value of CD’s is determined by comparing the contractual cost of the CD’s to the market rates with corresponding maturities. The valuation adjustment reflects the present value of the difference between the cash flows attributable to the CD’s based on contractual and market rates. The core deposit intangible is determined by the present value difference of the net cost of the core deposit versus the same amount for an alternative funding source. This acquisition provided the Company with the strategic opportunity to expand into new markets that, while similar to existing markets, are projected to be more vibrant in population growth and business opportunity growth. Additionally, the acquisition provides the Company with additional exposure to suburbs of larger urban areas without the commitment of operating inside large metropolitan areas dominated by regional and national financial organizations. The acquisition also creates synergies on the operational side of the Company by allowing noninterest expenses to be spread over a larger operating base. (Continued) 46 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 3 - SECURITIES The amortized cost and fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive loss were as follows: 2015 U.S. Treasury securities and obligations of U.S. government agencies Obligations of states and political subdivisions Mortgage-back securities in government sponsored entities Total debt securities Equity securities in financial institutions Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 40,992 87,255 $ 74 4,959 $ (129) (62) $ 40,937 92,152 62,135 190,382 481 681 5,714 106 (243) (434) - 62,573 195,662 587 Total $ 190,863 $ 5,820 $ (434) $ 196,249 2014 U.S. Treasury securities and obligations of U.S. government agencies Obligations of states and political subdivisions Mortgage-back securities in government sponsored entities Total debt securities Equity securities in financial institutions Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 42,910 83,215 $ 115 5,112 $ (123) (306) $ 42,902 88,021 65,646 191,771 481 976 6,203 59 (180) (609) - 66,442 197,365 540 Total $ 192,252 $ 6,262 $ (609) $ 197,905 (Continued) 47 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) The amortized cost and fair value of securities at year end 2015 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately. Due in one year or less Due from one to five years Due from five to ten years Due after ten years Mortgage-backed securities in Available for sale Amortized Cost Fair Value $ 5,075 31,433 31,754 59,985 $ 5,078 31,442 33,606 62,963 government sponsored entities Equity securities in financial institutions Total 62,135 481 190,863 $ 62,573 587 196,249 $ Securities with a carrying value of $142,888 and $137,898 were pledged as of December 31, 2015 and 2014, respectively, to secure public deposits, other deposits and liabilities as required or permitted by law. Proceeds from sales of securities, gross realized gains and gross realized losses were as follows: Sale proceeds Gross realized gains Gross realized losses Gains (losses) from securities called or settled by the issuer - $ - - (18) $ 18,088 113 (1) 1 $ 8,686 144 (89) 149 2015 2014 2013 (Continued) 48 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) Debt securities with unrealized losses at year end 2015 and 2014 not recognized in income are as follows: 2015 12 Months or less More than 12 months Total Description of Securities U.S. Treasury securities and obligations of U.S. government agencies Obligations of states and political subdivisions Mortgage-backed securities in gov't sponsored entities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 25,464 $ (112) $ 1,132 $ (17) $ 26,596 $ (129) 2,932 (20) 1,469 (42) 4,401 27,263 (172) 5,041 (71) 32,304 (62) (243) Total temporarily impaired $ 55,659 $ (304) $ 7,642 $ (130) $ 63,301 $ (434) 2014 12 Months or less More than 12 months Total Description of Securities U.S. Treasury securities and obligations of U.S. government agencies Obligations of states and political subdivisions Mortgage-backed securities in gov't sponsored entities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss $ 7,664 $ (17) $ 11,888 $ (106) $ 19,552 $ (123) 853 (11) 5,647 (295) 6,500 12,289 (29) 11,492 (151) 23,781 (306) (180) Total temporarily impaired $ 20,806 $ (57) $ 29,027 $ (552) $ 49,833 $ (609) The Company periodically evaluates securities for other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in accumulated other comprehensive loss on the Consolidated Balance Sheet. (Continued) 49 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 3 – SECURITIES (Continued) The Company has assessed each available-for-sale security position for credit impairment. Factors considered in determining whether a loss is temporary include: • The length of time and the extent to which fair value has been below cost; • The severity of impairment; • The cause of the impairment and the financial condition and near-term prospects of the issuer; • • If the Company intends to sell the investment; If it’s more-likely-than-not the Company will be required to sell the investment before recovering its amortized cost basis; and If the Company does not expect to recover the investment’s entire amortized cost basis (even if the Company does not intend to sell the investment). • The Company’s review for impairment generally entails: Identification and evaluation of investments that have indications of impairment; • • Analysis of individual investments that have fair values less than amortized cost, including consideration of length of time each investment has been in unrealized loss position and the expected recovery period; • Evaluation of factors or triggers that could cause individual investments to qualify as having other-than-temporary impairment; and • Documentation of these analyses, as required by policy. At December 31, 2015, the Company owned 50 securities that were considered temporarily impaired. The unrealized losses on these securities have not been recognized into income because the issuers’ bonds are of high credit quality, management has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value is largely due to changes in market interest rates. The Company also considers sector specific credit rating changes in its analysis. The fair value is expected to recover as the securities approach their maturity date or reset date. The Company does not intend to sell until recovery and does not believe selling will be required before recovery. NOTE 4 - LOANS Loans at year-end were as follows: 2015 2014 Commercial and Agriculture Commercial Real Estate - owner occupied Commercial Real Estate - non-owner occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other $ 124,402 167,897 348,439 236,338 58,898 46,993 18,560 $ 113,265 143,014 308,666 214,537 65,452 53,973 15,950 Total Loans Allowance for loan losses Net loans 1,001,527 (14,361) 914,857 (14,268) $ 987,166 $ 900,589 (Continued) 50 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 4 – LOANS (Continued) Included in total loans above are deferred loan fees of $78 at December 31, 2015 and $237 at December 31, 2014. Included in the totals above are loans acquired from TCNB at the acquisition date, net of fair value adjustments, of: Commercial and Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other March 6, 2015 $ 13,799 23,029 13,411 17,541 3,863 397 4,404 Net loans $ 76,444 Loans to principal officers, directors, and their affiliates at year-end 2015 and 2014 were as follows: Balance - Beginning of year New loans and advances Repayments Effect of changes to related parties Balance - End of year 2015 2014 $ 7,031 2,147 (2,947) $ 9,294 2,700 (2,792) 8,916 (2,171) $ 15,147 $ 7,031 NOTE 5 - ALLOWANCE FOR LOAN LOSSES Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. For purposes of determining the allowance for loan losses, the Company has segmented certain loans in the portfolio by product type. Loans are segmented into the following pools: Commercial and Agriculture loans, Commercial Real Estate – Owner Occupied loans, Commercial Real Estate – Non-owner Occupied loans, Residential Real Estate loans, Real Estate Construction loans, Farm Real Estate loans and Consumer and Other loans. Loss migration rates for each risk category are calculated and used as the basis for calculating loan loss allowance allocations. Loss migration rates are calculated over a three-year period for all portfolio (Continued) 51 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) segments, except for the segment consisting of purchased automobile loans which is calculated over a two-year period. The use of a three-year period for loss migration analysis is a change in methodology. The Company began using the three-year period for loss migration during the third quarter of 2015. Previously, a two-year loss migration analysis had been used for the entire loan portfolio. With continued improvement and stability in economic conditions, regulatory guidance recommends a longer look-back period. In addition, Civista made significant changes to consumer and commercial lending policies in the first quarter of 2012. Combined, the stable economy and now seasoned policy changes indicate a three-year period is more reflective of future expectations. 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 Civista’s credit review system • Changes in the nature and volume of the loan portfolio • Changes in past due, classified and nonaccrual loans and TDRs • Changes in economic and business conditions • Changes in competition or legal and regulatory requirements • Changes in concentrations within the loan portfolio • Changes in the underlying collateral for collateral dependent loans The total allowance reflects management's estimate of loan losses inherent in the loan portfolio at the consolidated balance sheet date. The Company considers the allowance for loan losses of $14,361 adequate to cover loan losses inherent in the loan portfolio, at December 31, 2015. The following tables present, by portfolio segment, the changes in the allowance for loan losses, the ending allocation of the allowance for loan losses and the loan balances outstanding for the years ended December 31, 2015 and December 31, 2014. The changes can be impacted by overall loan volume, adversely graded loans, historical charge-offs and economic factors. (Continued) 52 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2015 Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Unallocated Total Beginning balance Charge-offs Recoveries Provision Ending Balance $ 1,819 $ (190) $ 182 $ (333) $ 1,478 2,221 4,334 3,747 428 822 200 697 (523) (81) (1,135) - - (120) - 187 115 331 5 76 46 - 582 289 1,143 (62) (360) 256 (315) 2,467 4,657 4,086 371 538 382 382 $ 14,268 $ (2,049) $ 942 $ 1,200 $ 14,361 For the year ended December 31, 2015, the allowance for Commercial and Agriculture loans was reduced due to decreases in specific reserves for impaired loans of $625. The decrease in specific reserves for impaired loans was primarily the result of the resolution of an impaired loan. The Company did not incur losses with this resolution. The result was represented as a decrease in the provision. The increase in the allowance for Commercial Real Estate - Owner Occupied loans was the result of an increase in loss migration rates, which is attributable to the change in the lookback period to a three-year period. The increase in the allowance for Commercial Real Estate – Non–Owner Occupied loans was the result of an increase in loss migration rates, which is attributable to the change in the lookback period to a three-year period. The ending reserve balance for Residential Real Estate loans increased from the end of the previous year due to an increase in loss migration rates, which is attributable to the change in the look- back period to a three-year period. The allowance for Real Estate Construction loans decreased as a result of decreasing loan balances. The allowance for Farm Real Estate loans decreased as a result of decreasing loan balances and loss rates offset by an increase in classified loans. The increase in the allowance for Consumer and other loans increased due to an increase in loss rates, which is attributable to the change in the look-back period. Unallocated reserves declined due to a change in the Company’s lookback period. As described above, the Company changed from a two-year lookback period to a three-year lookback period when calculating all but one segment’s loss migration rates during the third quarter of 2015. The change in methodology is reflected in a decline in the unallocated balance with corresponding increase in allocated balances within the reserve calculation. While loan balances are up, loss rates continue to trend downward, exclusive of the change in methodology, resulting in a lower allowance balance. While criticized loans have increased slightly, we have seen significant improvement in nonperforming loan balances resulting in a decline in specific reserves for impaired loans. 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. (Continued) 53 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2014 Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Unallocated Total Beginning balance Charge-offs Recoveries Provision Ending Balance $ 2,838 $ (338) $ 251 $ (932) $ 1,819 2,931 3,888 5,224 184 740 217 506 (1,661) (198) (2,449) - - (135) - 360 50 293 6 - 61 - 591 594 679 238 82 57 191 2,221 4,334 3,747 428 822 200 697 $ 16,528 $ (4,781) $ 1,021 $ 1,500 $ 14,268 For the year ended December 31, 2014, the allowance for Commercial and Agriculture loans was reduced not only by charge-offs, but also due to a decrease in both the loan balances outstanding and the specific reserve required for this type, which was driven by a decrease in the volume of impaired loans and classified loans. The net result of these changes was represented as a decrease in the provision. The decrease in the allowance for Commercial Real Estate - Owner Occupied loans was the result of eleven charge-offs, but also due to a decrease in loan balances outstanding and a decline in nonaccrual loans. The result of these changes was represented as a decrease in the allowance. The increase in the allowance for Commercial Real Estate - Non-Owner Occupied loans was the result of increasing loan balances and increased past-due balances. The allowance for Real Estate Construction loans increased as a result of a significant increase in loan balances. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs of loans that had a specific reserve previously applied. Additionally, a single relationship resulted in losses of $1,436 related to protecting the Company’s collateral. The net result of the changes was represented as a decrease in the allowance. The allowance for Consumer and Other loans decreased slightly during the year. While loan balances are up, loss rates continue to decrease resulting in the allowance being slightly lower. While we have seen improvement in asset quality, given the uncertainty in the economy, management determined that it was appropriate to maintain unallocated reserves at a slightly higher level at this time. (Continued) 54 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Allowance for loan losses: December 31, 2013 Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Unallocated Total Beginning balance Charge- offs Recoveries Provision Ending Balance $ 2,811 $ (483) $ 141 $ 369 $ 2,838 4,565 4,942 5,780 349 632 246 417 (989) (815) (2,800) (136) (107) (220) - 265 184 391 108 67 80 - (910) (423) 1,853 (137) 148 111 89 2,931 3,888 5,224 184 740 217 506 $ 19,742 $ (5,550) $ 1,236 $ 1,100 $ 16,528 For the year ended December 31, 2013, the allowance for Commercial Real Estate loans was reduced not only by charge-offs, but also due to the specific reserve required for impaired loans within this segment. The net result of these changes was represented as a decrease in the provision. The allowance for Real Estate Construction loans was reduced as a result of changes to specific reserves required for impaired loans and a reduction in the historical charge-offs for this segment. The result of these changes was represented as a decrease in the provision. The ending reserve balance for Residential Real Estate loans declined from the end of the previous year due to charge-offs during the period. Since these charged-off loans already had specific reserves assigned to them, we no longer need to carry as large a reserve for this segment. While we have seen improvement in asset quality, given the uncertainty in the economy, management determined that it was appropriate to maintain unallocated reserves at a higher level at this time. (Continued) 55 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2015 Allowance for loan losses: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Unallocated Total Outstanding loan balances: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total $ - $ 23 $ 1,455 $ 1,478 - - 123 - - - - 103 - 137 - - - - 2,364 4,657 3,826 371 538 382 382 2,467 4,657 4,086 371 538 382 382 $ 123 $ 263 $ 13,975 $ 14,361 $ 132 $ 873 $ 123,397 $ 124,402 - - 131 - - - 2,141 1,742 1,642 - 953 3 165,756 346,697 234,565 58,898 46,040 18,557 167,897 348,439 236,338 58,898 46,993 18,560 $ 263 $ 7,354 $ 993,910 $ 1,001,527 (Continued) 56 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2014 Allowance for loan losses: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Unallocated Total Outstanding loan balances: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total Loans acquired with credit deterioration Loans individually evaluated for impairment Loans collectively evaluated for impairment Total $ - $ 641 $ 1,178 $ 1,819 - - - - - - - 4 20 305 - 53 - - 2,217 4,314 3,442 428 769 200 697 2,221 4,334 3,747 428 822 200 697 $ - $ 1,023 $ 13,245 $ 14,268 $ - $ 2,304 $ 110,961 $ 113,265 - - - - - - 3,348 2,176 3,108 - 208 5 139,666 306,490 211,429 65,452 53,765 15,945 143,014 308,666 214,537 65,452 53,973 15,950 $ - $ 11,149 $ 903,708 $ 914,857 (Continued) 57 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables represent credit exposures by internally assigned risk ratings for the periods ended December 31, 2015 and 2014. The remaining loans in the Residential Real Estate, Real Estate Construction and Consumer and Other loan categories that are not assigned a risk grade are presented in a separate table below. The risk rating analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all. The Company's internal credit risk rating system is based on experiences with similarly graded loans. The Company's internally assigned grades are as follows: • • • Pass – loans which are protected by the current net worth and paying capacity of the obligor or by the value of the underlying collateral. Special Mention – loans where a potential weakness or risk exists, which could cause a more serious problem if not corrected. Substandard – loans that have a well-defined weakness based on objective evidence and are characterized by the distinct possibility that Civista will sustain some loss if the deficiencies are not corrected. • Doubtful – loans classified as doubtful have all the weaknesses inherent in a substandard asset. In addition, these weaknesses make collection or liquidation in full highly questionable and improbable, based on existing circumstances. Loss – loans classified as a loss are considered uncollectible, or of such value that continuance as an asset is not warranted. • • Unrated – Generally, consumer loans are not risk-graded, except when collateral is used for a business purpose. (Continued) 58 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) December 31, 2015 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total $ 117,739 $ 3,090 $ 3,573 $ - $ 124,402 156,622 339,734 62,147 52,399 39,787 1,987 5,571 6,100 1,671 216 4,024 3 5,704 2,605 7,435 29 3,182 111 - - - - - - 167,897 348,439 71,253 52,644 46,993 2,101 $ 770,415 $ 20,675 $ 22,639 $ - $ 813,729 December 31, 2014 Pass Special Mention Substandard Doubtful Ending Balance Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total $ 106,989 $ 3,446 $ 2,830 $ - $ 113,265 129,849 299,167 49,249 59,584 51,416 1,567 4,378 5,682 697 19 1,737 - 8,787 3,817 8,833 41 820 53 - - - - - - 143,014 308,666 58,779 59,644 53,973 1,620 $ 697,821 $ 15,959 $ 25,181 $ - $ 738,961 (Continued) 59 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables present performing and nonperforming loans based solely on payment activity for the years ended December 31, 2015 and December 31, 2014 that have not been assigned an internal risk grade. The types of loans presented here are not assigned a risk grade unless there is evidence of a problem. Payment activity is reviewed by management on a monthly basis to evaluate performance. Loans are considered to be nonperforming when they become 90 days past due or if management thinks that we may not collect all of our principal and interest. Nonperforming loans also include certain loans that have been modified in Troubled Debt Restructurings (TDRs) where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company's loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions due to economic status. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months. Residential Real Estate Real Estate Construction Consumer and Other Total December 31, 2015 Performing Nonperforming $ 165,048 37 $ 6,254 - $ 16,458 1 $ 187,760 38 Total $ 165,085 $ 6,254 $ 16,459 $ 187,798 Residential Real Estate Real Estate Construction Consumer and Other Total December 31, 2014 Performing Nonperforming $ 155,758 - $ 5,808 - $ 14,312 18 $ 175,878 18 Total $ 155,758 $ 5,808 $ 14,330 $ 175,896 (Continued) 60 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables include an aging analysis of the recorded investment of past due loans outstanding as of December 31, 2015 and 2014. December 31, 2015 Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Total Loans Past Due 90 Days and Accruing $ 9 $ 32 $ 37 $ 78 $ 124,324 $ 124,402 $ - 982 269 2,845 8 - 98 36 330 404 - - 68 284 123 1,725 - - 8 1,302 722 4,974 8 - 174 166,595 347,717 231,364 58,890 46,993 18,386 167,897 348,439 236,338 58,898 46,993 18,560 - - - - - - Total $ 4,211 $ 870 $ 2,177 $ 7,258 $ 994,269 $ 1,001,527 $ - December 31, 2014 30-59 Days Past Due 60-89 Days Past Due 90 Days or Greater Total Past Due Current Total Loans Past Due 90 Days and Accruing Commercial & Agriculture Commercial Real Estate: $ 58 622 $ - 251 $ 187 656 $ 245 1,529 $ 113,020 141,485 $ 113,265 143,014 $ - - Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other 520 1,923 33 - 131 5 721 - - 9 2,103 2,177 8 171 37 2,628 4,821 41 171 177 306,038 209,716 65,411 53,802 15,773 308,666 214,537 65,452 53,973 15,950 - - - - 18 Total $ 3,287 $ 986 $ 5,339 $ 9,612 $ 905,245 $ 914,857 $ 18 (Continued) 61 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following table presents loans on nonaccrual status as of December 31, 2015 and 2014. Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other 2015 2014 $ 1,185 $ 1,264 1,645 1,428 4,542 29 961 100 3,403 2,134 6,280 41 394 42 Total $ 9,890 $ 13,558 Nonaccrual Loans: Loans are considered for nonaccrual status upon reaching 90 days delinquency, unless the loan is well secured and in the process of collection, although the Company may be receiving partial payments of interest and partial repayments of principal on such loans. When a loan is placed on nonaccrual status, previously accrued but unpaid interest is deducted from interest income. A loan may be returned to accruing status only if one of three conditions are met: the loan is well-secured and none of the principal and interest has been past due for a minimum of 90 days; the loan is a TDR and the borrower has made a minimum of six months payments; or the principal and interest payments are reasonably assured and a sustained period of performance has occurred, generally six months. The gross interest income that would have been recorded on nonaccrual loans in 2015, 2014 and 2013 if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, was $1,761, $1,477 and $1,783, respectively. The amount of interest income on such loans actually included in net income was $766 in 2015, $719 in 2014 and $1,155 in 2013. Modifications: A modification of a loan constitutes a TDR when the Company for economic or legal reasons related to a borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial Real Estate loans modified in a TDR often involve reducing the interest rate lower than the current market rate for new debt with similar risk. Real Estate loans modified in a TDR were primarily comprised of interest rate reductions where monthly payments were lowered to accommodate the borrowers’ financial needs. Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired loans that have been modified in a TDR are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant (Continued) 62 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) judgment in developing these estimates. TDRs accounted for $286 of the allowance for loan losses for December 31, 2015, $895 as of December 31, 2014 and $750 as of December 31, 2013. Loan modifications that are considered TDRs completed during the twelve month periods ended December 31, 2015, 2014 and 2013 were as follows: For the Twelve Month Period Ended December 31, 2015 Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment $ - $ - - - - 41 - - - - - 41 - - $ 41 $ 41 Number of Contracts - - - - 1 - - 1 For the Twelve Month Period Ended December 31, 2014 Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment $ - $ - - - 619 35 - - - - 554 35 - - Number of Contracts - - - 9 1 - - Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total Loan Modifications Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total Loan Modifications 10 $ 654 $ 589 (Continued) 63 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) For the Twelve Month Period Ended December 31, 2013 Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment $ - $ - 547 - - - - - 547 - - - - - $ 547 $ 547 Number of Contracts - 2 - - - - - 2 Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total Loan Modifications Recidivism, or the borrower defaulting on its obligation pursuant to a modified loan, results in the loan once again becoming a non-accrual loan. Recidivism occurs at a notably higher rate than do defaults on new originations loans, so modified loans present a higher risk of loss than do new origination loans. During the twelve month period ended December 31, 2015, there was one default, totaling $107, on loans which were modified and considered TDRs during the previous twelve months. During the period ended December 31, 2014, there were no defaults on loans that were modified and considered TDRs during the previous twelve months. Impaired Loans: Larger (greater than $350) commercial loans and commercial real estate loans, all TDRs and residential real estate and consumer loans that are part of a larger relationship are tested for impairment. These loans are analyzed to determine if it is probable that all amounts will not be collected according to the contractual terms of the loan agreement. If management determines that the value of the impaired loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. (Continued) 64 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables include the recorded investment and unpaid principal balances for impaired financing receivables with the associated allowance amount, if applicable, as of December 31, 2015 and 2014. December 31, 2015 December 31, 2014 Recorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance $ 851 $ 1,034 $ 1,377 $ 1,504 With no related allowance recorded: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Farm Real Estate Consumer and Other Total With an allowance recorded: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Farm Real Estate 1,224 1,742 965 953 3 5,738 22 917 - 808 - Total 1,747 1,705 Total: Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Farm Real Estate Consumer and Other 873 2,141 1,742 1,773 953 3 1,057 2,342 1,826 2,274 1,026 3 1,343 1,826 1,591 1,026 3 6,823 2,961 92 1,893 - 5 3,327 140 3,487 - 5 6,328 8,463 23 $ 23 927 1,056 $ 641 999 - 683 - 103 - 260 - 386 23 103 - 260 - - 388 2,083 1,215 208 4,821 2,304 3,349 2,175 3,108 208 5 387 2,287 1,223 256 5,209 2,560 3,714 2,427 4,710 256 5 4 20 305 53 1,023 641 4 20 305 53 - Total $ 7,485 $ 8,528 $ 386 $ 11,149 $ 13,672 $ 1,023 (Continued) 65 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) Changes in the amortizable yield for purchased credit-impaired loans were as follows for the year ended December 31, 2015: Balance at beginning of period Acquisition of impaired loans Accretion Balance at end of period At December 31, 2015 (In Thousands) $ - 140 (60) $ 80 Loans acquired with credit deterioration and of $831 and accounted for in accordance with ASC 310-30 were individually evaluated to estimate credit losses and a net recovery amount for each loan. The net cash flows for each loan were then discounted to present value using a risk-adjusted market rate. The table below presents the components of the purchase accounting adjustments. Contractually required payments Non-accretable discount Expected cash flows Accretable discount Estimated fair value $ March 6, 2015 1,305 (691) 614 (140) $ 474 The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30: At March 6, 2015 At December 31, 2015 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 Carrying amount $ 1,305 $ 965 474 263 There has been $123 in allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of December 31, 2015. (Continued) 66 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 5 - ALLOWANCE FOR LOAN LOSSES (Continued) The following tables include the average recorded investment and interest income recognized for impaired financing receivables as of, and for the years ended, December 31, 2015, 2014 and 2013. For the year ended: December 31, 2015 December 31, 2014 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized $ 1,519 $ 72 $ 3,316 $ 104 2,738 1,946 2,544 16 653 4 139 32 152 - 56 - 5,720 2,767 3,291 - 219 6 200 40 207 - 19 - Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total $ 9,420 $ 451 $ 15,319 $ 570 For the year ended: December 31, 2013 Average Recorded Investment Interest Income Recognized $ 4,761 $ 186 6,065 5,855 4,792 302 246 30 417 85 282 - 19 - Commercial & Agriculture Commercial Real Estate: Owner Occupied Non-Owner Occupied Residential Real Estate Real Estate Construction Farm Real Estate Consumer and Other Total $ 22,051 $ 989 Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in other assets on the Consolidated Balance Sheet. As of December 31, 2015 and December 31, 2014, a total of $116 and $560, respectively of foreclosed assets were included with other assets. As of December 31, 2015, included within the foreclosed assets is $116 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2015, the Company had initiated formal foreclosure procedures on $340 of consumer residential mortgages. (Continued) 67 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 6 – OTHER COMPREHENSIVE INCOME (LOSS) The following table presents the changes in each component of accumulated other comprehensive loss, net of tax, as of December 31, 2015, 2014 and 2013. For the Year Ended December 31, 2015 For the Year Ended December 31, 2014 For the Year Ended December 31, 2013 Unrealized Gains and Losses on Available for Sale Securities Defined Benefit Pension Items Total Unrealized Gains and Losses on Available for Sale Securities Defined Benefit Pension Items Total Unrealized Gains and Losses on Available for Sale Securities Defined Benefit Pension Items Total $ 3,730 $ (3,777) $ (47) $ 341 $ (4,588) $ (4,247) $ 5,849 $ (7,496) $ (1,647) (188) (449) (637) 3,464 591 4,055 (5,373) - (5,373) 12 177 189 (75) 220 145 (135) 2,908 2,773 (176) (272) (448) 3,389 811 4,200 (5,508) 2,908 (2,600) Beginning balance Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive loss Net current-period other comprehensive income (loss) Ending balance $ 3,554 $ (4,049) $ (495) $ 3,730 $ (3,777) $ (47) $ 341 $ (4,588) $ (4,247) Amounts in parentheses indicate debits on the consolidated balance sheets. (Continued) 68 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 6 - OTHER COMPREHENSIVE INCOME (LOSS) (Continued) The following table presents the amounts reclassified out of each component of accumulated other comprehensive loss as of December 31, 2015, 2014 and 2013. Amout Reclassified from Accumulated Other Comprehensive Loss (a) For the year ended December 31, Details about Accumulated Other Comprehensive Loss Components Unrealized gains (losses) on available-for-sale securities Tax effect Amortization of defined benefit pension items Actuarial losses Tax effect 2015 2014 2013 Affected Line Item in the Statement Where Net Income is Presented $ (18) 6 (12) $ 113 (38) 75 $ 204 (69) 135 Net gain (loss) on sale of securities Income taxes (b) (270) 93 (177) (b) (334) 114 (220) (4,406) 1,498 (2,908) (b) Salaries, wages and benefits Income taxes Total reclassifications for the period $ (189) $ (145) $ (2,773) (a) Amounts in parentheses indicate expenses and other amounts indicate income. (b) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. NOTE 7 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows: Land and improvements Buildings and improvements Furniture and equipment Total Accumulated depreciation 2015 $ 4,225 20,856 15,996 2014 $ 3,770 17,373 13,942 41,077 (24,133) 35,085 (20,685) Premises and equipment, net $ 16,944 $ 14,400 Depreciation expense was $1,193, $1,176 and $1,334 for 2015, 2014 and 2013, respectively. (Continued) 69 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 7 - PREMISES AND EQUIPMENT (Continued) Rent expense was $506, $377 and $367 for 2015, 2014 and 2013, respectively. Rent commitments under non-cancelable operating leases at December 31, 2015 were as follows, before considering renewal options that generally are present. 2016 2017 2018 2019 2020 Thereafter Total $ 529 492 307 263 48 - $ 1,639 The rent commitments listed above are primarily for the leasing of seven financial services branches. NOTE 8 – GOODWILL AND INTANGIBLE ASSETS The carrying amount of goodwill increased from $21,720 on December 31, 2014 to $27,095 on December 31, 2015. The increase was the result of the goodwill related to the merger with TCNB Financial Corp. of $5,375. Management performs an annual evaluation of goodwill for impairment, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Management performed an evaluation of the Company’s goodwill during the fourth quarter of 2015. In performing its evaluation, management obtained several commonly used financial ratios from pending and completed purchase transactions for banks based in the Midwest. Management used these ratios to determine an implied market value for the Company. The implied market value was then used to determine whether or not additional testing was required. Based on this test, management concluded that the Company’s goodwill was not impaired at December 31, 2015. Acquired intangible assets were as follows as of year end. 2015 2014 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Core deposit and other intangibles $ 7,697 $ 5,876 $ 6,688 $ 5,165 Aggregate amortization expense was $711, $769 and $846 for 2015, 2014 and 2013, respectively. (Continued) 70 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 8 – GOODWILL AND INTANGIBLE ASSETS (Continued) Estimated amortization expense for each of the next five years and thereafter is as follows: 2016 2017 2018 2019 2020 Thereafter $ 699 587 111 88 71 265 $ 1,821 NOTE 9 - INTEREST-BEARING DEPOSITS Interest-bearing deposits as of December 31, 2015 and 2014 were as follows: Demand Statement and Passbook Savings Certificates of Deposit: In excess of $100 Other Individual Retirement Accounts 2015 2014 $ 176,303 364,066 $ 179,388 318,859 53,499 130,840 26,710 53,669 139,531 26,770 Total $ 751,418 $ 718,217 Scheduled maturities of certificates of deposit, including IRA’s at December 31, 2015 were as follows: 2016 2017 2018 2019 2020 Thereafter Total $ 124,120 53,071 14,539 13,508 5,314 497 $ 211,049 Deposits from the Company’s principal officers, directors, and their affiliates at year-end 2015 and 2014 were $6,868 and $6,882, respectively. As of December 31, 2015, CDs and IRAs totaling $17,904 met or exceeded the FDIC’s insurance limit. (Continued) 71 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 10 – SHORT-TERM BORROWINGS Short-term borrowings, which consist of federal funds purchased and other short-term borrowings are summarized as follows: Outstanding balance at year end Maximum indebtedness during the year Average balance during the year Average rate paid during the year Interest rate on year end balance At December 31, 2015 Federal Funds Purchased $ - - 69 0.53% - Short-term Borrowings $ 53,700 64,700 26,880 0.20% 0.35% At December 31, 2014 Federal Funds Purchased $ - - 41 0.54% - Short-term Borrowings $ 42,700 42,700 1,951 0.19% 0.14% Outstanding balance at year end Maximum indebtedness during the year Average balance during the year Average rate paid during the year Interest rate on year end balance At December 31, 2013 Federal Funds Purchased $ - - 28 Short-term Borrowings $ - - - 0.53% - - - Outstanding during the year represent daily averages. Average interest rates represent interest expense divided by the related average balances. These borrowing transactions can range from overnight to six months in maturity. The average maturity was one day at both December 31, 2015 and December 31, 2014. (Continued) 72 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 11 - FEDERAL HOME LOAN BANK ADVANCES Long term advances from the FHLB were $17,500 at December 31, 2015 and $22,500 at December 31, 2014. Outstanding balances have maturity dates ranging from January 2017 to October 2019 and fixed rates ranging from 1.50% to 4.25%. The average rate on outstanding advances was 2.06%. Scheduled principal reductions of FHLB advances outstanding at December 31, 2015 were as follows: 2016 2017 2018 2019 Total - $ 2,500 10,000 5,000 $ 17,500 In addition to the borrowings, the Company had outstanding letters of credit with the FHLB totaling $21,200 at year-end 2015 and $22,700 at year-end 2014 used for pledging to secure public funds. FHLB borrowings and the letters of credit are collateralized by FHLB stock and by $138,600 and $131,850 of residential mortgage loans under a blanket lien arrangement at year-end 2015 and 2014, respectively. The Company had a FHLB maximum borrowing capacity of $132,054 as of December 31, 2015, with remaining borrowing capacity of approximately $39,654. The borrowing arrangement with the FHLB is subject to annual renewal. The maximum borrowing capacity is recalculated at least quarterly. NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 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. (Continued) 73 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 12 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued) The following table presents detail regarding the securities pledged as collateral under repurchase agreements as of December 31, 2015 and December 31, 2014. All of the repurchase agreements are overnight agreements. Securities pledged for repurchase agreements: U.S. Treasury securities Obligations of U.S. government agencies $ 894 24,146 $ 876 20,737 Total securities pledged $ 25,040 $ 21,613 December 31, 2015 December 31, 2014 Gross amount of recognized liabilities for repurchase agreements $ 25,040 $ 21,613 Amounts related to agreements not included in offsetting disclosures above $ - $ - Information concerning securities sold under agreements to repurchase was as follows: 2015 2014 2013 Outstanding balance at year end Average balance during the year Average interest rate during the year Maximum month-end balance during the year Weighted average interest rate at year end $ 25,040 20,086 0.10% $ 25,040 0.10% $ 21,613 19,759 0.10% $ 33,764 0.10% $ 20,053 20,749 0.10% $ 24,257 0.10% Securities underlying repurchase agreements had a fair value of $25,040 at December 31, 2015 and $21,613 at December 31, 2014. NOTE 13 – SUBORDINATED DEBENTURES Trusts formed by the Company issued floating rate trust preferred securities, in the amounts of $5,000 and $7,500, through special purpose entities as part of pooled offerings of such securities. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Company may redeem the subordinated debentures, in whole but not in part, at face value. In April 2007, the Company elected to redeem and refinance the $5,000 floating rate subordinated debenture. The refinancing was done at face value and resulted in a 2.00% reduction in the rate. The new subordinated debenture has a 30-year maturity and is redeemable, in whole or in part, anytime without penalty. The replacement subordinated debenture does not have any deferred issuance cost associated with it. The interest rate at December 31, 2015 on the $7,500 debenture was 3.48% and the $5,000 debenture was 1.94%. (Continued) 74 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 13 – SUBORDINATED DEBENTURES (Continued) Additionally, the Company formed an additional trust that issued $12,500 of 6.05% fixed rate trust preferred securities for five years, then becoming floating rate trust preferred securities, through a special purpose entity as part of a pooled offering of such securities. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole assets of the trusts. The Company may redeem the subordinated debentures at face value without penalty. The current rate on the $12,500 subordinated debenture is 2.60%. Finally, the Company acquired two additional trust preferred securities as part of its acquisition of Futura Banc Corp (Futura) in December 2007. Futura TPF Trust I and Futura TPF Trust II were formed in June of 2005 in the amounts of $2,500 and $1,927, respectively. Futura had issued subordinated debentures to the trusts in exchange for ownership of all of the common security of the trusts and the proceeds of the preferred securities sold by the trusts. The Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1,000, on or after June 15, 2010 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on June 15, 2035. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The current rate on the $2,500 subordinated debenture is variable at 2.00%. In June 2010, the rate on the $1,927 subordinated debenture switched from a fixed rate to a floating rate. The current rate on the $1,927 subordinated debenture is 2.00%. NOTE 14 – INCOME TAXES Income taxes were as follows: Current Deferred Income taxes 2015 $ 5,191 (410) $ 4,781 2014 $ 3,151 11 $ 3,162 2013 $ 11 1,362 $ 1,373 (Continued) 75 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 14 – INCOME TAXES (Continued) Effective tax rates differ from the statutory federal income tax rate of 34% due to the following: Income taxes computed at the statutory federal tax rate Add (subtract) tax effect of: Nontaxable interest income, net of nondeductible interest expense Low income housing tax credit Cash surrender value of BOLI Other Income tax expense 2015 2014 2013 $ 5,959 $ 4,315 $ 2,568 (900) (303) (159) 184 (824) (303) (167) 141 (781) (280) (189) 55 $ 4,781 $ 3,162 $ 1,373 There were no tax benefits attributable to security losses in 2015, 2014 and 2013, respectively. Year-end deferred tax assets and liabilities were due to the following: Deferred tax assets Allowance for loan losses Deferred compensation Intangible assets Pension costs Other Deferred tax asset Deferred tax liabilities Tax depreciation in excess of book depreciation Discount accretion on securities Purchase accounting adjustments FHLB stock dividends Unrealized gain on securities available for sale Other Deferred tax liability 2015 2014 $ 5,005 1,617 224 232 99 $ 4,851 1,386 - 198 122 7,177 6,557 (95) (59) (1,340) (1,705) (1,831) (200) (5,230) (351) (63) (1,189) (1,687) (1,922) (196) (5,408) Net deferred tax asset $ 1,947 $ 1,149 The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the State of Ohio for all affiliates other than Civista. Civista is subject to tax in Ohio based upon its net worth. There is currently no liability for uncertain tax positions and no known unrecognized tax benefits. The Company’s federal tax returns for taxable years through 2011 have been closed for purposes of examination by the Internal Revenue Service. (Continued) 76 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS The Company sponsors a savings and retirement 401(k) plan, which covers all employees who meet certain eligibility requirements and who choose to participate in the plan. The matching contribution to the 401(k) plan was $667, $394 and $204 in 2015, 2014 and 2013, respectively. In conjunction with freezing the pension plan, as discussed below, the Company changed the matching contribution calculation from twenty-five percent of the first six percent of an employee’s contribution to 100% of an employee’s first three percent contributed and 50% of the next two percent contributed. This change took place on July 1, 2014. The Company also sponsors a pension plan which is a noncontributory defined benefit retirement plan for all employees who have attained the age of 20½, completed six months of service and work 1,000 or more hours per year. Annual payments, subject to the maximum amount deductible for federal income tax purposes, are made to a pension trust fund. In 2006, the Company amended the pension plan to provide that no employee could be added as a participant to the pension plan after December 31, 2006. In April 2014, the Company amended the pension plan again to provide that no additional benefits would accrue beyond April 30, 2014. This curtailment resulted in a $4,039 reduction to the projected benefit obligation in 2014. Also, the curtailment resulted in an increase in accumulated other comprehensive loss of $2,666 in 2014. In October 2015, the Company, on behalf of it and its subsidiaries, entered into Pension Shortfall Agreements (the “Shortfall Agreements”) with ten other employees of the Bank. When the Company ceased accruals to its defined benefit pension plan on April 30, 2014, the circumstances of some participants with limited periods until their anticipated retirement dates would not permit them to use other available alternatives to make up for the shortfall in their expected pension. The Company calculated the total amount of the shortfall for each of the referenced individuals after considering its contributions to other retirement benefits. Pension shortfall expense was $380 in 2015. A total of $11 of interest expense was also recorded and credited to the accounts of the ten individuals covered by this plan. (Continued) 77 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) Information about the pension plan is as follows: Change in benefit obligation: Beginning benefit obligation Service cost Interest cost Curtailment gain Settlement loss Actuarial (gain)/loss Benefits paid Ending benefit obligation Change in plan assets, at fair value: Beginning plan assets Actual return Employer contribution Benefits paid Administrative expenses Ending plan assets 2015 2014 $ 16,953 - 604 - 117 (6) (1,340) $ 18,456 306 639 (4,039) 55 3,007 (1,471) 16,328 16,953 16,184 129 700 (1,340) (26) 15,647 15,466 703 1,515 (1,471) (29) 16,184 Funded status at end of year $ (681) $ (769) Amounts recognized in accumulated other comprehensive income at December 31, consist of unrecognized actuarial loss of $4,049, net of $2,086 tax in 2015 and $3,777, net of $1,946 tax in 2014. The accumulated benefit obligation for the defined benefit pension plan was $16,328 at December 31, 2015 and $16,953 at December 31, 2014. The components of net periodic pension expense were as follows: Service cost Interest cost Expected return on plan assets Net amortization and deferral Net periodic pension cost (benefit) 2015 - $ 604 (1,088) 270 (214) $ 2014 $ 2013 $ 306 639 (1,021) 334 258 1,204 884 (965) 698 1,821 $ $ Net loss (gain) recognized in other comprehensive loss 412 (1,228) (4,406) Total recognized in net periodic benefit cost and other comprehensive loss (before tax) $ 198 $ (970) $ (2,585) (Continued) 78 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $332. The weighted average assumptions used to determine benefit obligations at year-end were as follows: Discount rate on benefit obligation Long-term rate of return on plan assets Rate of compensation increase 2015 4.16% 7.00% 0.00% 2014 3.69% 7.00% 0.00% 2013 4.38% 7.00% 3.00% The weighted average assumptions used to determine net periodic pension cost were as follows: Discount rate on benefit obligation Long-term rate of return on plan assets Rate of compensation increase 2015 3.69% 7.00% 0.00% 2014 4.38% 7.00% 3.00% 2013 3.72% 7.00% 3.00% The Company uses long-term market rates to determine the discount rate on the benefit obligation. Declines in the discount rate lead to increases in the actuarial loss related to the benefit obligation. The expectation for long-term rate of return on the pension assets and the expected rate of compensation increases are reviewed periodically by management in consultation with outside actuaries and primary investment consultants. Factors considered in setting and adjusting these rates are historic and projected rates of return on the portfolio and historic and estimated rates of increases of compensation. Since the pension plan is frozen, the rate of compensation increase used to determine the benefit obligation for 2015 was zero. The Company’s pension plan asset allocation at year-end 2015 and 2014 and target allocation for 2016 by asset category are as follows: Asset Category Equity securities Debt securities Money market funds Total Target Allocation 2016 20-50% 30-60 20-30 Percentage of Plan Assets at Year-end 2015 2014 % 48.2 47.0 4.8 % 46.7 48.3 5.0 100.0 % 100.0 % The Company developed the pension plan investment policies and strategies for plan assets with its pension management firm. The assets are currently invested in four diversified investment funds, which (Continued) 79 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) include two equity funds, one money market fund and one bond fund. The long-term guidelines from above were created to maximize the return on portfolio assets while reducing the risk of the portfolio. The management firm may allocate assets among the separate accounts within the established long-term guidelines. Transfers among these accounts will be at the management firm’s discretion based on their investment outlook and the investment strategies that are outlined at periodic meetings with the Company. The expected long-term rate of return on the plan assets was 7.00% in 2015 and 2014. This return is based on the expected return for each of the asset categories, weighted based on the target allocation for each class. Although the plan is frozen, the Company expects to make a $500 contribution to its pension plan in 2016. Employer contributions totaled $700 in 2015. The decrease in the benefit obligation, contributions and the increase in plan assets led to a change in funded status from $(769) at December 31, 2014 to $(681) at December 31, 2015. The following tables set forth by level, within the fair value hierarchy, the pension plan’s assets at fair value as of December 31, 2015 and 2014: Assets: Money market funds Bond mutual funds Common/collective trust: Bonds Equities Equity market funds: International Large cap Mid cap Small cap December 31, 2015 Level 1 Level 2 Level 3 Total $ 94 23 - $ - - $ - $ 94 23 7,338 6,315 357 1,155 242 123 - - - - - - - - - - - - 7,338 6,315 357 1,155 242 123 Total assets at fair value $ 15,647 - $ $ - $ 15,647 (Continued) 80 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) Assets: Cash Money market funds Bond mutual funds Common/collective trust: Bonds Equities Equity market funds: Commodity mutual funds International Large cap Mid cap Small cap December 31, 2014 Level 1 Level 2 Level 3 Total $ 3 91 23 $ - - - $ - - - $ 3 91 23 7,802 6,383 19 342 1,150 253 118 - - - - - - - - - - - - - - 7,802 6,383 19 342 1,150 253 118 Total assets at fair value $ 16,184 $ - $ - $ 16,184 Investment in equity securities, debt securities, money market funds and mutual funds are valued at the closing price reported on the active market on which the individual securities are traded. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Pension Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. Expected benefit payments, which reflect expected future service, are as follows: 2016 2017 2018 2019 2020 2021 through 2025 $ 1,520 1,820 528 1,367 1,033 5,565 Total $ 11,833 Supplemental Retirement Plan Civista established a supplemental retirement plan (“SERP”) in 2013, which covers key members of management. Under the SERP, participants will receive annually, following retirement, a percentage of their base compensations at the time of their retirement for a maximum of ten years. The SERP liability (Continued) 81 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 15 - RETIREMENT PLANS (Continued) recorded at December 31, 2015, was $1,775, compared to $1,498 at December 31, 2014. The expense related to the SERP was $299, $398 and $412 for 2015, 2014 and 2013, respectively. Distributions to participants made in 2015 totaled $22. Distributions to participants made in 2014 totaled $11. NOTE 16 – EQUITY INCENTIVE PLAN At the Company’s 2014 annual meeting, the shareholders adopted the Company’s 2014 Incentive Plan (“2014 Incentive Plan”). The 2014 Incentive Plan authorizes the Company to grant options, stock awards, stock units and other awards for up to 375,000 common shares of the Company. There were 358,017 shares available for grants under this plan at December 31, 2015. Certain officers were granted an aggregate of 16,983 restricted shares on March 17, 2015. The 2015 restricted shares vest over a 3-year service period, with one third each vesting on January 2 of 2016, 2017 and 2018. The product of the number of restricted shares granted and the grant date market price of the Company’s common shares determines the fair value of restricted shares under the Company’s 2014 Incentive Plan. Management recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award. The Company classifies share-based compensation for employees with “Salaries, wages and benefits” in the consolidated statements of income. Additionally, generally accepted accounting principles require the Company to report: (1) the expense associated with the grants as an adjustment to operating cash flows, and (2) any benefits of realized tax deductions in excess of previously recognized tax benefits on compensation expense as a financing cash flow. No options had been granted under the 2014 Incentive Plan as of December 31, 2015 and 2014. During the year ended December 31, 2015, the Company recorded $106 of share-based compensation expense for restricted shares granted under the 2014 Incentive Plan. Expected future compensation expense relating to the 16,983 restricted shares at December 31, 2015, is $78 which will be recognized over the remaining vesting period of 2.00 years. (Continued) 82 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 16 – EQUITY INCENTIVE PLAN (Continued) The following is a summary of the status of the Company’s restricted shares as of December 31, 2015, and changes therein during the twelve months ended: December 31, 2015 Number of Restricted Shares - 16,983 - - 16,983 Weighted Average Grant Date Fair Value - $ 10.82 - - 10.82 Nonvested at beginning of period Granted Vested Forfeited Nonvested at December 31, 2015 NOTE 17 – FAIR VALUE MEASUREMENT U.S. generally accepted accounting principles establish a hierarchal disclosure framework associated with the level of observable pricing utilized in measuring assets and liabilities at fair value. The three broad levels defined by the hierarchy are as follows: Level 1: Quoted prices for identical assets in active markets that are identifiable on the measurement date; Level 2: Significant other observable inputs, such as quoted prices for similar assets, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data; Level 3: Significant unobservable inputs that reflect the Company’s own view about the assumptions that market participants would use in pricing an asset. Securities: The fair values of securities available for sale are determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Equity securities: The Company’s equity securities are not actively traded in an open market. The fair values of these equity securities available for sale are determined by using market data inputs for similar securities that are observable. (Level 2 inputs). Fair value swap asset/liability: The fair value of the swap asset and liability is based on an external derivative model using data inputs as of the valuation date and classified Level 2. Impaired loans: The Company has measured impairment on impaired loans generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties. In some cases, management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the (Continued) 83 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 17 – FAIR VALUE MEASUREMENT (Continued) appraisal was completed. Additionally, management makes estimates about expected costs to sell the property which are also included in the net realizable value. If the fair value of the collateral dependent loan is less than the carrying amount of the loan, a specific reserve for the loan is made in the allowance for loan losses or a charge-off is taken to reduce the loan to the fair value of the collateral (less estimated selling costs) and the loan is included in the table above as a Level 3 measurement. Other real estate owned: OREO is carried at the lower of cost or fair value, which is measured at the date foreclosure. If the fair value of the collateral exceeds the carrying amount of the loan, no charge-off or adjustment is necessary, the loan is not considered to be carried at fair value, and is therefore not included in the table below. If the fair value of the collateral is less than the carrying amount of the loan, management will charge the loan down to its estimated realizable value. Management may adjust the appraised value due to the age of the appraisal, changes in market conditions, or observable deterioration of the property since the appraisal was completed. In these cases, the properties are categorized in the below table as Level 3 measurements since these adjustments are considered to be unobservable inputs. Income and expenses from operations are included in other operating expenses. Further declines in the fair value of the collateral subsequent to foreclosure are included in net gain on sale of other real estate owned. Assets measured at fair value are summarized below. Fair Value Measurements at December 31, 2015 Using: (Level 1) (Level 2) (Level 3) Assets measured at fair value on a recurring basis: U.S. Treasury securities and obligations of U.S. Government agencies Obligations of states and political subdivisions Mortgage-backed securities in government sponsored entities Equity securities in financial institutions Fair value swap asset Liabilities: Fair value swap liability - $ $ 40,937 $ - - - - - - 92,152 62,573 587 1,962 1,962 - - - - - Assets measured at fair value on a nonrecurring basis: Impaired Loans Other Real Estate Owned - $ - - $ - $ 759 109 (Continued) 84 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 17 – FAIR VALUE MEASUREMENT (Continued) Fair Value Measurements at December 31, 2014 Using: (Level 1) (Level 2) (Level 3) Assets measured at fair value on a recurring basis: U.S. Treasury securities and obligations of U.S. Government agencies Obligations of states and political subdivisions Mortgage-backed securities in government sponsored entities Equity securities in financial institutions Fair value swap asset Liabilities: Fair value swap liability $ - $ 42,902 - $ - - - - - 88,021 66,442 540 1,721 1,721 - - - - - Assets measured at fair value on a nonrecurring basis: Impaired Loans Other Real Estate Owned - $ - - $ - $ 2,690 550 The following tables presents quantitative information about the Level 3 significant unobservable inputs for assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2015 and 2014. December 31, 2015 Fair Value Valuation Technique Unobservable Input Range Weighted Average Quantitative Information about Level 3 Fair Value Measurements Impaired loans $ 759 Appraisal of collateral Appraisal 10% - 30% 10% adjustments Liquidation expense 0% - 10% 10% Holding period 0 - 30 months 17 months Other real estate owned $ 109 Appraisal of collateral Appraisal 10% - 30% 10% adjustments Liquidation expense 0% - 10% 10% (Continued) 85 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 17 – FAIR VALUE MEASUREMENT (Continued) December 31, 2014 Fair Value Valuation Technique Unobservable Input Range Weighted Average Quantitative Information about Level 3 Fair Value Measurements Impaired loans $ 2,690 Appraisal of collateral Appraisal 10% - 30% 10% adjustments Liquidation expense 0% - 10% 10% Holding period 0 - 30 months 16 months Other real estate owned $ 550 Appraisal of collateral Appraisal 10% - 30% 10% adjustments Liquidation expense 0% - 10% 10% The carrying amount and fair value of financial instruments were as follows: December 31, 2015 Financial Assets: Cash and due from financial institutions Securities available for sale Loans, held for sale Loans, net of allowance for loan losses Other securities Bank owned life insurance Accrued interest receivable Swap asset Financial Liabilities: Nonmaturing deposits Time deposits Short-term FHLB advances Long-term FHLB advances Securities sold under agreement to repurchase Subordinated debentures Accrued interest payable Swap liability Carrying Amount Total Fair Value Level 1 Level 2 Level 3 $ 35,561 196,249 2,698 $ 35,561 196,249 2,698 $ 35,561 - 2,698 $ - 196,249 - $ - - - 987,166 13,452 20,104 3,902 1,962 840,984 211,049 53,700 17,500 25,040 29,427 120 1,962 986,848 13,452 20,104 3,902 1,962 840,984 212,006 52,906 17,687 25,040 25,572 120 1,962 - 13,452 20,104 3,902 - 840,984 - 52,906 - 25,040 - 120 - - - - - 1,962 - - - - - - - 1,962 986,848 - - - - - 212,006 - 17,687 - 25,572 - - (Continued) 86 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 17 – FAIR VALUE MEASUREMENT (Continued) December 31, 2014 Financial Assets: Cash and due from financial institutions Securities available for sale Loans, held for sale Loans, net of allowance for loan losses Other securities Bank owned life insurance Accrued interest receivable Swap asset Financial Liabilities: Nonmaturing deposits Time deposits Short-term FHLB advances Long-term FHLB advances Securities sold under agreement to repurchase Subordinated debentures Accrued interest payable Swap liability Carrying Amount Total Fair Value Level 1 Level 2 Level 3 $ 29,858 197,905 2,410 $ 29,858 197,905 2,410 $ 29,858 - 2,410 $ - 197,905 - - $ - - 900,589 12,586 19,637 3,852 1,721 748,948 219,970 42,700 22,500 21,613 29,427 126 1,721 908,118 12,586 19,637 3,852 1,721 748,948 221,263 42,700 22,699 21,613 24,688 126 1,721 - 12,586 19,637 3,852 - 748,948 - 42,700 - 21,613 - 126 - - - - - 1,721 - - - - - - - 1,721 908,118 - - - - - 221,263 - 22,699 - 24,688 - - The estimated fair value approximates carrying amount for all items except those described below. Estimated fair value for securities is based on quoted market values for the individual securities or for equivalent securities. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements and are considered nominal. For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. (Continued) 87 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 18 - COMMITMENTS, CONTINGENCIES AND OFF-BALANCE-SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amount of financial instruments with off-balance-sheet risk was as follows at year-end. Commitments to extend credit: Lines of credit and construction loans Overdraft protection Letters of credit 2015 Fixed Rate Variable Rate 2014 Fixed Rate Variable Rate $ 9,416 5 200 $ 195,732 22,119 750 $ 9,405 4 200 $ 160,718 22,122 1,007 $ 9,621 $ 218,601 $ 9,609 $ 183,847 Commitments to make loans are generally made for a period of one year or less. Fixed-rate loan commitments included above had interest rates ranging from 3.25% to 8.75% at December 31, 2015 and 3.05% to 8.75% at December 31, 2014, respectively. Maturities extend up to 30 years. Civista is required to maintain certain reserve balances on hand in accordance with the Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was $2,448 on December 31, 2015 and $3,259 on December 31, 2014. (Continued) 88 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 19 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS The Company and Civista (“Companies”) are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary-actions by regulators that, if undertaken, could have a direct material effect on the Companies’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Companies must meet specific capital guidelines that involve quantitative measures of the Companies’ assets, liabilities, and certain off-balance- sheet items as calculated under U.S. GAAP, regulatory reporting requirements, and regulatory capital standards. The Companies’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factor. Quantitative measures established by regulatory capital standards to ensure capital adequacy require the Companies to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2015, that the Companies meet all capital adequacy requirements to which it is subject. As of December 31, 2015, and December 31, 2014, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Companies must maintain minimum total risk-based capital, Tier 1 risk-based capital, common equity Tier 1 risk-based capital, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. (Continued) 89 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 19 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued) The Company’s and Civista’s actual capital levels and minimum required levels at December 31, 2015 and 2014 were as follows: Actual Amount Ratio For Capital Adequacy Purposes Amount Ratio To Be Well Capitalized Under Prompt Corrective Action Purposes Amount Ratio $ 140,088 126,795 14.0 % 12.7 $ 80,050 79,871 8.0 % 8.0 n/a 99,839 $ n/a 10.0 % 127,519 113,883 75,819 102,755 127,519 113,883 12.7 11.4 7.6 10.1 10.0 8.9 60,245 59,938 44,893 45,782 51,008 51,183 6.0 6.0 4.5 4.5 4.0 4.0 n/a 79,918 n/a 66,129 n/a 63,979 n/a 8.0 n/a 6.5 n/a 5.0 2015 Total Risk Based Capital Consolidated Civista Tier I Risk Based Capital Consolidated Civista CET1 Risk Based Capital Consolidated Civista Leverage Consolidated Civista 2014 Total Risk Based Capital Consolidated Civista $ 131,581 111,470 14.7 % 12.5 $ 71,609 71,341 8.0 % 8.0 n/a 89,176 $ n/a 10.0 % Tier I Risk Based Capital Consolidated Civista CET1 Risk Based Capital Consolidated Civista Leverage Consolidated Civista 120,334 100,259 13.4 11.2 35,921 35,807 4.0 4.0 n/a 53,710 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 120,334 100,259 10.3 8.6 46,732 46,632 4.0 4.0 n/a 58,290 n/a 6.0 n/a n/a n/a 5.0 (Continued) 90 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 19 – CAPITAL REQUIREMENTS AND RESTRICTION ON RETAINED EARNINGS (Continued) The Company’s primary source of funds for paying dividends to its shareholders and for operating expense is the cash accumulated from dividends received from Civista. Payment of dividends by Civista to the Company is subject to restrictions by Civista’s regulatory agencies. These restrictions generally limit dividends to the current and prior two years retained earnings as defined by the regulations. In addition, dividends may not reduce capital levels below minimum regulatory requirements. At December 31, 2015, Civista had $6,863 net profits available to pay dividends to CBI. NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial information of CBI follows: Condensed Balance Sheets Assets: Cash Securities available for sale Investment in bank subsidiary Investment in nonbank subsidiaries Other assets Total assets Liabilities: Deferred income taxes and other liabilities Subordinated debentures Total liabilities Shareholders’ Equity: Preferred stock Common stock Accumulated earnings (deficit) Treasury Stock Accumulated other comprehensive loss Total shareholders’ equity December 31, 2015 2014 $ 7,493 587 133,959 12,615 2,204 $ 13,663 540 117,364 12,605 3,003 $ 156,858 $ 147,175 $ 2,258 29,427 $ 1,839 29,427 31,685 31,266 22,273 115,330 5,300 (17,235) (495) 23,132 114,365 (4,306) (17,235) (47) 125,173 115,909 Total liabilities and shareholders’ equity $ 156,858 $ 147,175 (Continued) 91 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 20 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued) Condensed Statements of Operations Dividends from bank subsidiaries Interest expense Pension expense Other expense, net Income before equity in undistributed net earnings of subsidiaries Income tax benefit Equity in undistributed net earnings of subsidiaries Net income Comprehensive income For the years ended December 31, 2014 2015 2013 $ 14,226 (760) (388) (1,755) $ 7,339 (777) (397) (1,150) $ 7,888 (740) (4,072) (952) 11,323 959 5,015 763 2,124 1,960 463 3,750 2,095 $ 12,745 $ 9,528 $ 6,179 $ 12,297 $ 13,728 $ 3,579 For the years ended December 31, Condensed Statements of Cash Flows 2015 2014 2013 Operating activities: Net income Adjustment to reconcile net income to net cash from operating activities: Change in other assets and other liabilities Equity in undistributed net earnings of subsidiaries $ 12,745 $ 9,528 $ 6,179 1,324 1,508 (1,620) (463) (3,750) (2,095) Net cash from operating activities 13,606 7,286 2,464 Investing activities: Acquisition and additional capitalization of subsidiary, net of cash acquired (16,637) - - Net cash used for investing activities (16,637) - - Financing activities: Payment to repurchase preferred stock Proceeds from issuance of preferred stock Cash dividends paid - - (3,139) (22,857) - (3,338) - 23,132 (2,315) Net cash (used for) from financing activities (3,139) (26,195) 20,817 Net change in cash and cash equivalents (6,170) (18,909) 23,281 Cash and cash equivalents at beginning of year 13,663 32,572 9,291 Cash and cash equivalents at end of year $ 7,493 $ 13,663 $ 32,572 (Continued) 92 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 21 – PREFERRED SHARES On December 19, 2013, the Company completed the sale of 1,000,000 depositary shares, each representing a 1/40th ownership interest in a 6.50% Noncumulative Redeemable Convertible Perpetual Preferred Share, Series B, of the Company, with a liquidation preference of $1,000 per share (equivalent to $25.00 per depositary share). The Company sold the maximum of 1,000,000 depositary shares in the offering, resulting in gross proceeds to the Company of $25,000. Using proceeds from the sale of the depositary shares, the Company redeemed all of its outstanding Series A Preferred Shares for an aggregate purchase price of $22,857, which redemption was completed as of February 15, 2014. NOTE 22 – EARNINGS PER COMMON SHARE The factors used in the earnings per share computation follow. 2015 2014 2013 Basic Net income Preferred stock dividends Net income available to common shareholders - basic Weighted average common shares outstanding - basic Basic earnings per share Diluted Net income available to common shareholders - basic Preferred stock dividends on convertible preferred stock Net income available to common shareholders - diluted Weighted average common shares outstanding $ $ $ $ $ $ $ $ $ 12,745 1,577 11,168 7,822,369 1.43 $ $ 11,168 1,577 12,745 9,528 1,873 7,655 7,707,917 0.99 7,655 1,606 9,261 $ $ $ $ 6,179 1,159 5,020 7,707,917 0.65 5,020 - 5,020 for earnings per common share basic Add: dilutive effects of convertible preferred shares 7,822,369 3,095,966 7,707,917 3,196,931 7,707,917 113,863 Average shares and dilutive potential common shares outstanding - diluted 10,918,335 10,904,848 7,821,780 Diluted earnings per share $ 1.17 $ 0.85 $ 0.64 Basic earnings per common share are calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under the equity incentive plan, computed using the treasury stock method, and the impact of the Company’s convertible preferred shares using the “if converted” method. (Continued) 93 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 23 – QUARTERLY FINANCIAL DATA (UNAUDITED) 2015 First quarter (1)(2)(3) Second quarter (1)(2) Third quarter (2)(4) Fourth quarter (2)(5) 2014 First quarter (2)(3) Second quarter (1)(2) Third quarter (1)(2) Fourth quarter (1)(2) Interest Income Net Interest Income Net Income $ 11,762 12,740 13,223 12,976 $ 10,915 11,916 12,402 12,159 $ 11,315 11,365 11,667 11,623 $ 10,165 10,266 10,684 10,751 $ 3,171 3,122 3,253 3,199 $ 2,712 2,240 2,306 2,270 Basic Earnings per Common Share $ 0.36 0.35 0.36 0.36 $ 0.27 0.24 0.25 0.23 Diluted Earnings per Common Share $ 0.29 0.29 0.30 0.29 $ 0.22 0.21 0.21 0.21 (1) (2) (3) (4) (5) Interest income and net interest income increased due to loan volume. Net interest income increased due to interest expense decreasing as deposits repriced downward and the deposit mix shifted toward cheaper funding sources. Net income increased due to fees on tax refund processing program. Net income increased due to increased loan volume, offset by a decrease in fees on the tax refund processing program. Interest income, net interest income and net income decreased due to decreased loan volume. NOTE 24 - DERIVATIVE HEDGING INSTRUMENTS To accommodate customer need and to support the Company's asset/liability positioning, on occasion we enter into interest rate swaps with a customer and a bank counterparty. The 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. (Continued) 94 CIVISTA BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015, 2014 and 2013 (Amounts in thousands, except share data) NOTE 24 - DERIVATIVE HEDGING INSTRUMENTS (Continued) The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of December 31, 2015. Notional Amount Derivative Assets Derivative Liabilities Net Exposure $ 35,534 (35,534) $ - Weighted Average Rate Received/(Paid) 5.31% -5.31% Impact of a 1 basis point change in interest rates $ 20 (20) $ - Repricing Frequency Monthly Monthly The following table summarizes the Company’s interest rate swap positions and the impact of a 1 basis point change in interest rates as of December 31, 2014. Notional Amount Derivative Assets Derivative Liabilities Net Exposure $ 29,060 (29,060) $ - Weighted Average Rate Received/(Paid) 5.47% -5.47% Impact of a 1 basis point change in interest rates $ 19 (19) $ - Repricing Frequency Monthly Monthly The Company monitors and controls all derivative products with a comprehensive Board of Director approved commercial loan swap policy. All hedge transactions must be approved in advance by the Lenders Loan Committee or the Directors Loan Committee of the Board of Directors. NOTE 25 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS The Company invests in qualified affordable housing projects. At December 31, 2015 and 2014, the balance of the investment for qualified affordable housing projects was $2,177 and $1,839. 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 $2,195 and $1,772 at December 31, 2015 and 2014, respectively. During the year ended December 31, 2015 and 2014, the Company recognized amortization expense with respect to its investments in qualified affordable housing projects of $240 and $202, respectively, which was included within pretax income on the consolidated statements of operations. Additionally, during the years ended December 31, 2015 and 2014, the Company recognized tax credits and other benefits from its investment in affordable housing tax credits of $168 and $141, respectively. During the years ended December 31, 2015 and 2014, the Company did not incur impairment losses related to its investment in qualified affordable housing projects. 95 Civista Bancshares, Inc. Directors Thomas A. Depler Attorney, Poland, Depler & Shepherd Co., LPA Allen R. Maurice Attorney, Wagner, Maurice & Davidson Co., LPA James O. Miller Chairman of the Board, President & CEO, Civista Bancshares, Inc. Chairman of the Board & CEO, Civista Bank Dennis E. Murray, Jr. Lead Director Attorney, Murray & Murray Co., LPA Allen R. Nickles, CPA, CFE, FCPA, CFF, CICA Partner, Payne, Nickles & Company J. William Springer President & CEO, Industrial Nut Corp. David A. Voight Former Chairman of the Board, Civista Bancshares, Inc. Daniel J. White International Business Consultant Officers James O. Miller Chairman of the Board, President & CEO, Civista Bancshares, Inc. Chairman of the Board & CEO, Civista Bank James E. McGookey Senior Vice President, General Counsel and Corporate Secretary Dennis G. Shaffer Executive Vice President John A. Betts Senior Vice President Richard J. Dutton Senior Vice President Todd A. Michel Senior Vice President Paul J. Stark Senior Vice President Civista Bank Directors John O. Bacon President & CEO, The Mack Iron Works Company Barry W. Boerger Self-Employed Farmer Thomas A. Depler Attorney, Poland, Depler & Shepherd Co., LPA Blythe A. Friedley Owner/President, Friedley & Co. Agency, Inc. Allen R. Maurice Attorney, Wagner, Maurice & Davidson Co., LPA James O. Miller Chairman of the Board & CEO, Civista Bank Chairman of the Board, President & CEO, Civista Bancshares, Inc. Dennis E. Murray, Jr. Attorney, Murray & Murray Co., LPA Allen R. Nickles, CPA, CFE, FCPA, CFF, CICA Partner, Payne, Nickles & Company Dennis G. Shaffer President, Civista Bank Harry Singer President & CEO, Sandusco, Inc. and ICM Distributing Company, Inc. Daniel J. White International Business Consultant Gerald B. Wurm President, Wurm’s Woodworking Co. Directors Emeritus - Civista Bancshares, Inc. and Civista Bank James D. Heckelman Founder, Dan-Mar Co., Inc. Shareholder Information Annual Meeting of the Civista Bancshares, Inc. Shareholders Tuesday, April 19, 2016 at 10:00 a.m. Bowling Green State University, Firelands College, Huron, OH Civista Bancshares, Inc. 100 East Water Street Sandusky, OH 44870 Tel: Toll Free: Fax: www.civb.com (419) 625-4121 (888) 645-4121 (419) 627-3359 As a Civista Bancshares, Inc. shareholder, we encourage you to access your account(s) online at www.amstock.com. Here you can easily initiate a number of transactions and inquiries as well as access important details about your portfolio and general stock transfer information. • Update your mailing address • Access statement information • Print a duplicate 1099 tax form • Consolidate accounts • Enroll in our Direct Stock Purchase Plan • Request a replacement dividend check • Download stock transfer forms • And more You may also access this information via the Interactive Voice Response (IVR) system by calling (800) 937-5449. Outside of the US, dial (718) 921-8124. By mail, contact our Transfer Agent at the below address: Civista Bancshares, Inc. c/o American Stock Transfer & Trust Company, LLC 6201 15th Avenue Brooklyn, NY 11219

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