Civista Bancshares, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are to December 31, 2018. Civista is an Ohio-based financial holding company operating primarily as a bank. Unless noted, amounts are in thousands of dollars. The third-quarter 2018 United Community Bancorp acquisition materially affects year-over-year comparisons.
Financial performance and position
- Profitability: Net income was $9,669, up $2,680 (38%) from $6,989. Net income available to common shareholders was $9,505. Basic EPS was $0.61 versus $0.65; diluted EPS was $0.57 versus $0.55. The differing EPS trends reflect, in part, the larger common-share base and the dilutive effect of convertible preferred shares.
- Net interest income and margin: Net interest income rose 47% to $21,719 from $14,772. Fully tax-equivalent net interest margin increased to 4.45% from 4.05%. Interest income grew $8,660 while interest expense rose $1,713; higher average loan balances and yields contributed to income growth.
- Noninterest income and expenses: Noninterest income increased 12% to $6,284, including $2,200 in seasonal tax-refund processing fees. Noninterest expense increased 35% to $16,449, primarily reflecting the larger company following the acquisition, compensation costs, and higher other operating expenses. Income tax expense was $1,885; the effective tax rate was 16.3% versus 14.6%.
- Assets and loans: Total assets were $2.278 billion, up 6.5% from year-end. Net loans rose 0.7% to $1.559 billion; total loans were $1.573 billion. The allowance for loan losses was $13,822, or 0.88% of loans, compared with $13,679 and 0.88% at year-end. No provision for loan losses was recorded in either Q1 2019 or Q1 2018.
- Credit quality: Nonperforming loans declined $847 from year-end to $5,022; nonaccrual loans were $5,012, and $10 was 90 days past due and accruing. Q1 2019 net recoveries were $143, compared with net charge-offs of $320 in Q1 2018. Two disclosed real-estate concentration categories were $410,192 (26.0% of loans) and $164,613 (10.5%); repayment remains exposed to local real-estate and economic conditions.
- Deposits, liquidity, and debt: Deposits increased $185,908 to $1.766 billion, principally due to $187,134 of temporary, noninterest-bearing tax-refund-program balances; management expected these balances to return toward year-end levels over the following two quarters. Cash and due from financial institutions rose to $164,094 from $42,779. The net loan-to-deposit ratio was 88.3%, versus 98.0%. FHLB advances declined $66,500 to $127,100; subordinated debentures were $29,427 and repurchase agreements were $21,970.
- Cash flow: Operating activities provided $12,905, investing activities used $9,201, and financing activities provided $117,611. The financing inflow principally reflected deposit growth, partly offset by lower FHLB advances. Cash increased $121,315 during the quarter.
- Capital: Shareholders’ equity was $312,057, or 13.7% of assets, compared with $298,898, or 14.0%, at year-end. The company reported total risk-based capital of 16.5%, Tier 1 risk-based capital of 15.6%, CET1 of 13.3%, and a leverage ratio of 11.6%; all exceeded stated regulatory minimums.
Material changes and notable items
- Year-over-year growth in average interest-earning assets, loans, deposits, and interest-bearing liabilities was substantially influenced by the UCB acquisition completed in Q3 2018.
- Deposit growth during Q1 included a seasonal tax-refund-processing buildup. The filing describes this component as temporary, so the quarter-end cash and deposit levels may not represent recurring funding.
- Available-for-sale securities increased to $349,934. Their unrealized losses were $776, down from $1,935 at year-end; management attributed losses mainly to market yields and stated it intended and was able to hold the securities for recovery.
- Adoption of the new lease standard resulted in recognition of operating lease assets and liabilities; the March 31 balances were each $2,133. The reported income-statement impact was immaterial.
Outlook, risks, and contingencies
The filing provides no specific earnings or financial guidance. Management cited interest-rate and liquidity risk, credit risk, local economic and real-estate conditions, regulatory and tax changes, and information-system failures as risks that could affect results. The modeled net portfolio value increased 10% under a 200-basis-point rate increase and 7% under a 100-basis-point increase, and declined 6% under a 100-basis-point decrease; these are modeled value sensitivities, not earnings guidance. Management was evaluating the expected-credit-loss standard (CECL), with the impact not yet quantified.
Off-balance-sheet commitments to extend credit totaled $423,830: $14,679 fixed-rate and $409,151 variable-rate. The company stated that material credit losses on these commitments were not anticipated. The filing reported no legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How quickly the temporary tax-refund deposits and related cash balances run off, and the effect on liquidity and funding costs.
- Whether loan growth, yields, deposit pricing, and net interest margin remain favorable as funding costs rise.
- Credit performance in the concentrated commercial real-estate portfolio, including delinquencies, nonaccruals, recoveries, and reserve adequacy.
- The expense trajectory after the UCB acquisition and the extent to which Q1 cost increases are recurring.
- The eventual CECL adoption impact and assumptions underlying interest-rate and net-portfolio-value sensitivity estimates.