Civista Bancshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The Ohio-based financial holding company operates primarily in banking and also provides equipment leasing and financing through Vision Financial Group (VFG), acquired in October 2022. Results include the effects of the 2022 Comunibanc and VFG acquisitions. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $31.3 | $24.3 | $63.9 | $47.2 |
| Net income | $10.0 | $7.7 | $22.9 | $16.2 |
| Diluted EPS | $0.64 | $0.53 | $1.45 | $1.10 |
| Net interest margin, fully tax-equivalent | 3.86% | 3.43% | 3.99% | 3.40% |
| Provision for credit losses | $0.9 | $0.4 | $1.5 | $0.7 |
| Noninterest income | $9.1 | $5.6 | $20.2 | $13.3 |
| Noninterest expense | $27.9 | $20.4 | $55.5 | $40.6 |
- Growth and earnings: Q2 net income rose 30% year over year; six-month net income rose 42%. Q2 net interest income increased approximately 29%, as higher loan yields and earning-asset balances more than offset sharply higher funding costs.
- Costs and revenue mix: Q2 noninterest expense increased 37%, including higher compensation and equipment costs associated with acquisitions. Noninterest income increased 62%; VFG contributed $2.2 million of Q2 lease revenue and residual income. Six-month noninterest income also included a $1.5 million Mastercard contract-renewal fee.
- Balance sheet at June 30: Total assets were $3,616 million, up 2.2% from year-end 2022. Gross loans were $2,636 million, up 3.5%; net loans were $2,601 million. Total deposits were $2,943 million, up 12.3%. Shareholders’ equity was $349.9 million, or 9.7% of assets.
- Credit: Allowance for credit losses was $35.1 million, or 1.33% of loans, versus $28.5 million, or 1.12%, at year-end. Six-month net charge-offs were $36,000; nonaccrual loans were $8.0 million. Loans 90 or more days past due totaled $4.6 million, with none reported as still accruing.
- Cash flow and liquidity: For the first six months, operating activities provided $39.1 million, investing activities used $85.5 million, and financing activities provided $44.4 million. Cash and due from financial institutions was $41.4 million at quarter-end. The net loan-to-deposit ratio was 88.4%, down from 96.1% at year-end.
- Funding and debt: Short-term FHLB advances were $142.0 million, down from $393.7 million at year-end; subordinated debentures were $103.9 million. Interest-bearing funding costs rose materially. The filing reports approximately $700.8 million of remaining FHLB borrowing capacity and $30 million in correspondent-bank federal funds lines.
- Capital: Company total risk-based, Tier 1 risk-based, CET1, and leverage ratios were 14.8%, 10.9%, 9.9%, and 8.9%, respectively, above the stated well-capitalized thresholds.
Material changes, outlook, and risks
- Deposit growth included a temporary increase of $179.3 million in noninterest-bearing balances related to tax-refund processing; management expected these balances to return toward more typical levels over the following two quarters. Brokered time deposits increased $202.5 million from year-end.
- Available-for-sale securities had $65.0 million of gross unrealized losses at June 30, mainly attributed by management to higher market rates. The portfolio’s fair value was $617.3 million versus $681.4 million amortized cost; accumulated other comprehensive loss was $55.8 million. Management stated it did not intend, and did not expect to be required, to sell before recovery.
- CECL adoption on January 1, 2023 increased loan and unfunded-commitment credit reserves and reduced retained earnings by $6.1 million after tax. Prior-year comparative credit-loss information was not restated and is not directly comparable.
- Management provided no specific earnings or financial guidance. It cited economic and market uncertainty, inflation, recession risk, interest-rate movements, deposit competition and confidence, real-estate conditions, and the ability of borrowers to repay as risks. Cybersecurity, operational, regulatory, acquisition-integration, and LIBOR-transition risks were also identified.
- Rate sensitivity analysis showed estimated net portfolio value increasing 4% under a +200 basis-point shock and decreasing 7% under a -200 basis-point shock. Management said higher-rate scenarios benefited from a larger modeled decline in liability values; these estimates depend on assumptions and are not earnings forecasts.
- Management said disclosure controls were effective as of June 30, 2023, with no material quarterly change in internal control over financial reporting. Management believes pending and threatened ordinary-course legal proceedings will not have a material adverse effect, while noting outcomes cannot be predicted.
Important facts for investors to verify
- Whether tax-refund-related deposits decline as management expected, and how the deposit mix and funding costs evolve.
- Whether loan growth, credit grades, delinquencies, nonaccrual loans, charge-offs, and CECL reserves indicate changing credit risk, particularly in commercial real estate.
- How deposit pricing and borrowing needs affect net interest margin and earnings as rates and competition change.
- Whether unrealized securities losses recover, and the potential implications for liquidity and capital if securities need to be sold.
- How VFG and Comunibanc contribute to recurring revenue and expenses after acquisition-related costs and integration effects.
- That reported year-over-year credit-reserve comparisons reflect the January 2023 CECL adoption and are not on a fully comparable accounting basis.