Civista Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Civista is an Ohio-based financial holding company operating primarily as a bank across Ohio, Indiana, and Kentucky. The 2018 comparison predates the third-quarter 2018 United Community Bancorp (UCB) acquisition, which materially increased the company’s scale.
Key financial metrics
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest and dividend income | $24.926 | $16.160 | $49.510 | $32.084 |
| Net interest income | $21.742 | $14.766 | $43.460 | $29.538 |
| Noninterest income | $5.104 | $4.390 | $11.388 | $10.006 |
| Noninterest expense | $16.639 | $15.928 | $33.088 | $28.133 |
| Net income | $8.661 | $3.014 | $18.330 | $10.003 |
| Diluted EPS | $0.51 | $0.24 | $1.08 | $0.79 |
| Net interest margin, fully tax-equivalent | 4.49% | 4.21% | 4.47% | 4.13% |
- Balance sheet at June 30: Total assets were $2.203 billion, up 3.0% from year-end. Net loans were $1.585 billion, up 2.4%; deposits were $1.633 billion, up 3.3%. Shareholders’ equity was $324.2 million, or 14.7% of assets, versus $298.9 million, or 14.0%, at year-end.
- Credit: The allowance for loan losses was $13.786 million, or 0.86% of loans, compared with 0.88% at year-end. No provision was recorded in either the first half of 2019 or the comparable 2018 period; the company reported $107,000 of net recoveries in first-half 2019 versus $267,000 of net charge-offs in 2018. Nonaccrual loans declined to $5.131 million from $5.869 million.
- Funding and debt: Interest-bearing deposits were $1.136 billion. Short-term FHLB advances were $121.3 million; other borrowings were $55.0 million; repurchase agreements were $15.6 million; and subordinated debentures were $29.4 million. A $50 million FHLB advance made in May has a 10-year term, is puttable after five years, and carries a fixed 2.05% rate.
- Cash flow and liquidity: First-half operating cash flow was $20.4 million, investing cash outflow $38.7 million, and financing cash inflow $25.4 million. Cash increased $7.1 million to $49.8 million. The net-loan-to-deposit ratio was 97.1%, versus 98.0% at year-end. The company reported approximately $355.4 million of remaining FHLB borrowing capacity and $42.5 million of federal funds borrowing lines.
- Capital: June 30 company ratios were 16.8% total risk-based capital, 15.9% Tier 1 risk-based capital, 13.6% CET1, and 12.4% leverage; each exceeded the stated “well capitalized” thresholds.
Material changes versus prior periods
- Q2 net income rose $5.6 million year over year; first-half net income rose $8.3 million. Net interest income increased 47% for both the quarter and first half, reflecting higher average loan balances and yields, alongside the larger post-UCB business.
- Interest expense increased 128% in Q2 and 138% in the first half, with higher interest-bearing deposit balances and rates contributing. Management reported higher loan yields and higher costs on demand, savings, and time deposits.
- First-half noninterest income increased 13.8%, led by service charges, ATM/interchange fees, and bank-owned life insurance income. Noninterest expense increased 17.6%; compensation was up $4.6 million, while lower acquisition-related data-processing and professional-services costs partly offset increases elsewhere.
- Accumulated other comprehensive income moved from a $1.5 million loss at year-end to $8.6 million income, largely reflecting a $9.8 million after-tax increase in the fair value of available-for-sale securities.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said the $29.5 million increase in noninterest-bearing deposits from tax-refund processing was temporary and expected to move back toward year-end levels over the next two quarters.
- Loan exposure is concentrated in lessors of non-residential buildings and dwellings (25.7% of loans) and lessors of residential buildings and dwellings (10.0%). Management cites real-estate market and local economic conditions as factors affecting borrowers’ ability to repay.
- Management identified interest-rate and liquidity risks, credit quality, real-estate conditions, regulatory and tax changes, and information-system failures among risks that could affect results. Its interest-rate sensitivity analysis showed net portfolio value increasing 12% under a 200-basis-point rate increase and decreasing 3% under a 100-basis-point decrease, based on stated assumptions.
- The company was evaluating adoption of the expected-credit-loss standard (CECL), effective for it in 2020, and had not yet quantified the effect. It planned parallel calculations before finalizing its methodology.
- First-half results include seasonal tax-refund processing fees of $2.75 million, the same amount as in first-half 2018. The quarter produced $5.1 million of noninterest income, including $550,000 of those fees.
- The filing reported no legal proceedings and no material changes to the risk factors in the 2018 Form 10-K. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- How much of the earnings and balance-sheet growth reflects the UCB acquisition versus ongoing organic performance, given the periods are not directly comparable.
- Whether deposit costs continue rising and whether the temporary tax-refund balances reverse as management expects.
- Trends in real-estate concentrations, delinquencies, nonaccrual loans, charge-offs, and allowance adequacy—particularly ahead of CECL adoption.
- The effect of interest-rate movements on net interest margin, funding costs, and securities values; the sensitivity analysis depends on management assumptions.
- Whether expense growth, including compensation and other operating costs, is contained as the acquired business is integrated.