Civista Bancshares, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Civista is an Ohio-based bank holding company operating primarily through Civista Bank. Monetary amounts below are in millions unless stated otherwise; the interim financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $14.766 | $13.367 | $29.538 | $26.261 |
| Noninterest income | $4.390 | $4.101 | $10.006 | $9.237 |
| Noninterest expense | $15.928 | $12.549 | $28.133 | $24.051 |
| Net income | $3.014 | $3.596 | $10.003 | $8.231 |
| Diluted EPS | $0.24 | $0.29 | $0.79 | $0.68 |
| Net interest margin | 4.21% | 4.05% | 4.13% | 3.86% |
- Q2 net income declined about 16% year over year despite higher net interest income and noninterest income. Noninterest expense rose 27%, principally from merger-related data processing and professional fees.
- First-half net income increased about 22%. Higher loan yields and average earning assets supported net interest income growth; the effective tax rate fell to 12.3% from 28.1%, reflecting the lower federal corporate tax rate and tax-exempt income and credits.
- No provision for loan losses was recorded in either comparative period. First-half net charge-offs were $0.267 million versus $0.258 million a year earlier.
Financial position, liquidity and capital
- At June 30, assets were $1.548 billion, loans net of allowance were $1.167 billion, deposits were $1.146 billion, and shareholders’ equity was $189.8 million. Assets rose 1.5% from year-end 2017; net loans rose 1.4%.
- Deposits declined $58.8 million from year-end, including a reduction in interest-bearing deposits, while FHLB advances increased $84.3 million to $156.2 million. The net loan-to-deposit ratio was 101.8%, up from 95.6% at year-end.
- Management attributed a temporary $53.2 million increase in noninterest-bearing deposits to the tax-refund processing program and expected those balances to return toward year-end levels in the following quarter.
- For the first six months, operating cash flow was $5.3 million, investing cash outflow was $20.7 million, and financing cash inflow was $16.0 million. Cash ended at $41.2 million.
- Capital ratios exceeded stated well-capitalized thresholds: total risk-based 16.7%, Tier 1 risk-based 15.7%, CET1 12.3%, and leverage 13.0%.
Credit quality, risks and unusual items
- The allowance for loan losses was $12.9 million, or 1.09% of loans, versus 1.13% at year-end. Nonaccrual loans declined to $4.4 million from $6.1 million; management reported nonperforming loans down $1.7 million from year-end.
- Real estate lending is concentrated: lessors of nonresidential buildings represented 25.4% of loans and lessors of residential buildings 12.5%. The filing notes repayment depends in part on local real estate markets and economic conditions.
- Available-for-sale securities had $2.8 million of gross unrealized losses at June 30, largely attributed to higher market rates. Management said it had the intent and ability to hold affected securities and did not expect forced sales before recovery.
- Interest-rate sensitivity analysis estimated net portfolio value changes of +8% under a 100-basis-point rate increase, +11% under a 200-basis-point increase, and -7% under a 100-basis-point decrease. These are modeled scenarios, not forecasts.
- Civista agreed to acquire United Community Bancorp and United Community Bank, with approximately $546 million of assets, $296 million of loans, and $462 million of deposits at year-end 2017. Regulatory approval had been received; closing was anticipated in Q3 2018, subject to closing conditions. Consideration includes Civista shares and cash, with about $13.6 million of aggregate cash consideration for shares and option cash-outs.
- A putative shareholder class action in Indiana challenges United Community’s merger proxy disclosures and sale process and names Civista entities among defendants. Defendants said they believe the claims lack merit; the outcome and effect on the merger could not be predicted.
- The company adopted accounting standards for equity investments and customer-contract revenue in 2018; the filing reports no material revenue-recognition impact. It expects a one-time allowance adjustment when the new expected-credit-loss standard becomes effective, but could not yet estimate the amount.
Outlook and investor verification points
No earnings or revenue guidance is provided. Management’s stated near-term expectation was that tax-processing-related deposit balances would normalize, and that the United Community merger would close in Q3 2018 if conditions were satisfied. The filing identifies interest-rate movements, credit quality, real estate conditions, funding costs, regulatory changes, and information-system risks as factors that could affect results. Management concluded disclosure controls were effective as of June 30, 2018.
- Verify completion, final consideration, integration costs, and realized benefits of the United Community merger, including the effect of the shareholder litigation.
- Track whether deposits normalize as expected, the extent of brokered/time-deposit runoff, and reliance on FHLB borrowing given the 101.8% net loan-to-deposit ratio.
- Monitor expense levels after merger-related conversion and advisory costs, and whether margin growth offsets higher funding costs.
- Assess the real estate loan concentrations, migration in criticized or nonaccrual credits, and adequacy of the allowance despite zero reported provision.
- Review securities valuation and capital sensitivity if interest rates fall or rise differently from the filing’s modeled scenarios.