Civista Bancshares, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated statements; financial amounts below are in millions of dollars except per-share data and ratios. The company changed its name from First Citizens Banc Corp to Civista Bancshares, Inc. on May 1, 2015.
Business context and key financial results
Civista is an Ohio-based community bank focused on commercial, real estate, residential mortgage and consumer lending. Results include TCNB Financial Corp. from its March 6, 2015 acquisition.
- Q2 earnings: Net income was $3.122 million, up from $2.240 million a year earlier; net income available to common shareholders was $2.731 million. Basic and diluted EPS were $0.35 and $0.29, versus $0.24 and $0.21.
- First-half earnings: Net income was $6.292 million, up from $4.951 million; common-shareholder income was $5.497 million. Basic and diluted EPS were $0.71 and $0.58, versus $0.50 and $0.43.
- Interest income and margins: Q2 net interest income was $11.916 million, up 16.1%; net interest margin was 3.96%, compared with 3.76%. First-half net interest income was $22.831 million, up 11.7%; net interest margin was 3.81%, compared with 3.63%.
- Other income and expenses: Q2 noninterest income was $3.652 million, up 8.0%, and noninterest expense was $10.933 million, up 9.6%. First-half noninterest income was $8.053 million, up 0.6%; noninterest expense was $21.537 million, up 5.5%. Higher loan-sale gains contributed to income; personnel, data processing and professional-services costs increased, with acquisition-related costs among the drivers.
- Credit costs: Q2 provision for loan losses was $0.400 million versus $0.750 million; first-half provision was $0.800 million versus $1.500 million. First-half net charge-offs were $0.361 million, down from $2.633 million.
- Cash flow: First-half operating cash flow was $13.323 million, investing cash outflow was $12.483 million, and financing cash inflow was $4.394 million. Cash and due from financial institutions rose to $35.092 million from $29.858 million at year-end.
Financial position, liquidity and capital
- Total assets were $1,317.272 million at June 30, up 8.6% from year-end; total liabilities were $1,197.250 million, up 9.1%.
- Net loans were $988.210 million, up 9.7% from year-end. Total deposits were $1,075.806 million, up $106.888 million. The net loan-to-deposit ratio decreased to 91.9% from 93.0%.
- Borrowings declined: FHLB advances were $55.300 million, down $9.900 million, and repurchase-agreement balances were $17.460 million, down $4.153 million. Subordinated debentures remained $29.427 million. Management reported approximately $51.666 million of remaining FHLB borrowing capacity and $35 million in federal funds borrowing lines.
- Shareholders’ equity was $120.022 million, or 9.1% of assets, compared with $115.909 million, or 9.6%, at year-end. June 30 regulatory capital ratios were 13.5% total risk-based, 12.2% Tier 1 risk-based, 7.1% Common Equity Tier 1 and 9.4% leverage; each exceeded the stated well-capitalized thresholds.
- Available-for-sale securities were $197.429 million. Their net unrealized loss reduced accumulated other comprehensive income during the first half; management attributed losses primarily to higher market rates and said it did not expect to sell before recovery.
Material changes, risks and unusual items
- TCNB acquisition: Civista acquired TCNB in an all-cash transaction for $17.226 million. The acquired company contributed $76.830 million of loans and $86.869 million of deposits at acquisition, and $5.121 million of goodwill was recorded. TCNB contributed $0.416 million of net income in Q2 and $0.464 million from acquisition through June 30. Management cited market expansion and operating synergies as strategic benefits. Reported year-over-year growth reflects the acquisition; pro forma figures are provided in the filing but are not forecasts.
- Credit profile and concentration: Nonaccrual loans declined to $12.920 million from $13.558 million at year-end; loans 90 days or more past due were $3.324 million versus $5.321 million. The allowance was $14.707 million, or 1.47% of loans, compared with 1.56% at year-end. Loans to lessors of nonresidential buildings and dwellings were $214.304 million (21.4% of loans), and loans to lessors of residential buildings and dwellings were $137.004 million (13.7%). Management notes repayment depends in part on real-estate markets and local economic conditions.
- Costs and tax-refund processing: The company’s tax-refund processing fees fell 13.6% in the first half after a fee-structure change. A related clearing-account increase contributed to higher accrued expenses and other liabilities. Professional services also included higher acquisition-related legal and audit costs and legal expenses relating to a real-estate matter.
- Legal contingency: Civista Bank is defending a United Bank action alleging receipt of loan payments derived from collateral proceeds in which United claims a security interest. The demand appears to include $424,113.83, punitive damages and attorneys’ fees; the filing says claimed amounts overlap and are unclear. Civista disputes the claims and intends to defend the case.
- Outlook and risks: No quantified earnings or financial guidance was provided. Forward-looking statements are subject to economic and real-estate conditions, interest-rate movements, credit losses, regulation, deposit and funding conditions, operational and data-processing risks, and litigation. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate organic loan, deposit and earnings trends from the effect of the TCNB acquisition, including the realization of anticipated synergies and integration costs.
- Monitor commercial real-estate concentrations, criticized and impaired loans, delinquencies, charge-offs, and whether the allowance remains adequate as the portfolio grows.
- Review deposit mix and stability, liquidity sources and borrowing capacity, and the potential effect of changing rates on net interest margin and asset values.
- Track continued operating-cost growth, tax-refund processing economics, and the outcome and potential exposure of the United Bank litigation.
- Confirm future regulatory capital ratios, preferred-stock conversion and dividend effects, and the trend in accumulated other comprehensive income and securities valuations.