Civista Bancshares, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; financial statements are unaudited. Amounts below are in millions unless otherwise noted. Civista is an Ohio-based financial holding company operating primarily as a community bank in Ohio.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $12.940 | $11.916 | $25.175 | $22.831 |
| Noninterest income | $4.075 | $3.652 | $9.335 | $8.053 |
| Noninterest expense | $11.050 | $10.933 | $21.957 | $21.537 |
| Provision (credit) for loan losses | $(1.300) | $0.400 | $(1.300) | $0.800 |
| Net income | $5.181 | $3.122 | $9.906 | $6.292 |
| Basic / diluted EPS | $0.61 / $0.47 | $0.35 / $0.29 | $1.16 / $0.91 | $0.70 / $0.58 |
| Net interest margin | 4.13% | 3.96% | 3.81% | 3.81% |
For the six months, net interest income rose 10.3%; average earning assets increased 9.6%, while the net interest margin was unchanged. Q2 net interest margin improved 17 basis points year over year. Tax-refund processing fees, a seasonal source of income, were $2.750 for the first half, up 37.5% year over year. Salaries and benefits increased 8.3% for the first half, partly reflecting TCNB acquisition-related staffing and annual/incentive costs.
Financial position, cash flow and capital
- At June 30, total assets were $1,359.9, loans net of allowance $1,014.4, deposits $1,115.0, and shareholders’ equity $136.2. Since December 31, 2015, assets grew 3.4%, net loans 2.8%, deposits 6.0%, and equity 8.8%.
- Cash and due from financial institutions was $41.8. The net loan-to-deposit ratio was 91.0%, down from 93.8% at year-end; management attributed deposit and cash growth in part to temporary balances associated with tax-refund processing.
- Six-month cash flows: operating activities provided $7.9; investing activities used $31.8, including net loan originations of $23.9 and $3.9 of BOLI purchases; financing activities provided $30.2, chiefly from deposit growth of $63.0. Cash increased $6.2 to $41.8.
- FHLB advances were $47.3, down from $71.2 at year-end; repurchase-agreement liabilities were $17.7, down from $25.0; subordinated debentures were $29.4. The filing reports remaining FHLB borrowing capacity of approximately $73.8 and federal-funds borrowing lines totaling $42.5.
- Capital ratios at June 30 were 14.0% total risk-based, 12.8% Tier 1 risk-based, 7.9% CET1, and 9.9% leverage. The filing states all company capital ratios exceeded regulatory minimums.
Material changes, credit quality and unusual items
- Net income increased 66% in Q2 and 57% for the first half. A significant driver was a $1.3 credit to the loan-loss provision after repayment of a previously charged-down nonperforming loan, producing a recovery of approximately $1.303. The prior-year periods recorded provisions of $0.4 for Q2 and $0.8 for the first half.
- Total loans were $1,028.9 versus $1,001.5 at year-end. Commercial real estate, non-owner occupied loans increased to $369.9 from $348.4, and residential real estate loans increased to $245.9 from $236.3. Management disclosed concentrations in lessors of non-residential buildings and dwellings ($239.0, 23.3% of loans) and lessors of residential buildings and dwellings ($129.8, 12.7%); repayment depends in part on local real-estate and economic conditions.
- The allowance for loan losses was $14.5, or 1.41% of loans, versus $14.4, or 1.43%, at year-end. Six-month net recoveries were $1.486, primarily reflecting recovery on the charged-down commercial real estate loan. Nonaccrual loans totaled $8.7, down from $9.3 at year-end.
- Noninterest income growth also reflected higher service charges and loan-sale gains; trust fees declined. Tax-refund processing is seasonal, with most related fees earned in the first quarter, and the program creates temporary cash and deposit fluctuations.
- Available-for-sale securities were $200.6. Net unrealized gains contributed to a $2.4 increase in accumulated other comprehensive income for the first half. Management said the small unrealized losses were largely market-rate related and did not expect to sell affected securities before recovery.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management describes liquidity as conservative and identifies interest-rate risk and, to a lesser extent, liquidity risk as principal market risks. Forward-looking results may be affected by local or national economic conditions, real-estate weakness, interest-rate movements, credit quality and loan-loss estimates, regulation, FDIC assessments, tax law, information-system disruptions, and litigation. The filing reports no new material legal proceedings and no material changes to previously disclosed risk factors. Off-balance-sheet commitments to extend credit totaled approximately $230.5, including $222.2 variable-rate and $8.2 fixed-rate commitments; management did not anticipate material losses. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $1.3 loan recovery is nonrecurring and how earnings perform excluding its effect.
- How much deposit and cash growth from tax-refund processing is temporary, and the sustainability of related fee income.
- Credit trends in commercial real estate concentrations, including delinquencies, criticized loans, nonaccruals, and adequacy of the allowance.
- Future net interest margin and sensitivity to rate changes, particularly given the reported asset and funding mix.
- Preferred-share conversion and dilution effects: diluted EPS reflects assumed conversion of Series B preferred stock; confirm the implications for common shareholders.