Civista Bancshares(US:CIVB)2023-08-08 16:00PART I. Financial Information Item 1. Financial Statements This section presents Civista Bancshares' unaudited Consolidated Financial Statements for Q2 and H1 2023, including balance sheets, income statements, and cash flows Consolidated Balance Sheet Highlights (Unaudited) | Account | June 30, 2023 ($ in thousands) | December 31, 2022 ($ in thousands) | | :--- | :--- | :--- | | Total Assets | 3,615,980 | 3,537,830 | | Cash and due from financial institutions | 41,354 | 43,361 | | Securities available-for-sale | 617,298 | 615,402 | | Loans, net of allowance | 2,601,131 | 2,518,155 | | Goodwill | 125,078 | 125,695 | | Total Liabilities | 3,266,104 | 3,202,995 | | Total Deposits | 2,942,774 | 2,619,984 | | Short-term FHLB advances | 142,000 | 393,700 | | Total Shareholders' Equity | 349,876 | 334,835 | Consolidated Statements of Operations Highlights (Unaudited) | Metric ($ in thousands, except per share data) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 31,339 | 24,268 | 63,940 | 47,200 | | Provision for Credit Losses | 861 | 400 | 1,481 | 700 | | Noninterest Income | 9,149 | 5,635 | 20,217 | 13,278 | | Noninterest Expense | 27,913 | 20,379 | 55,546 | 40,637 | | Net Income | 10,034 | 7,701 | 22,922 | 16,167 | | Earnings per common share, basic | $0.64 | $0.53 | $1.45 | $1.10 | | Earnings per common share, diluted | $0.64 | $0.53 | $1.45 | $1.10 | Notes to Interim Consolidated Financial Statements (Unaudited) These notes detail accounting policies, the CECL standard's impact, and breakdowns of securities, loans, and credit loss allowances Note 1: Consolidated Financial Statements This note describes the Company's banking operations and consolidation principles, including its wholly-owned subsidiaries - The Company operates primarily in one reportable segment: banking4 - The consolidated financial statements include CBI and its wholly-owned subsidiaries: Civista Bank, Vision Financial Group, Inc. (VFG), First Citizens Insurance Agency, Inc. (FCIA), Water Street Properties, Inc., CIVB Risk Management, Inc. (CRMI), and First Citizens Investments, Inc. (FCI)81 Note 2: Significant Accounting Policies This note details significant accounting policies, focusing on the CECL adoption's impact on credit loss estimation and retained earnings - On January 1, 2023, the Company adopted the new credit loss methodology, Current Expected Credit Losses (CECL), which requires earlier recognition of credit losses based on lifetime expected loss estimates90 Day 1 Impact of CECL Adoption (January 1, 2023) | Impact Area | Amount ($ in thousands) | | :--- | :--- | | Increase to Allowance for Credit Losses (Loans) | 4,296 | | Increase to Reserve for Unfunded Commitments | 3,386 | | Reclassification of PCD Discount to ACL | 1,668 | | Total Pre-tax Impact on Retained Earnings | (7,682) | | Tax Effect | 1,613 | | Net Reduction to Retained Earnings | (6,069) | - The CECL methodology utilizes a discounted cash flow (DCF) model for pooled loans, incorporating a one-year reasonable and supportable forecast period with a one-year reversion to the long-term historical average101 Note 3: Securities This note details the securities portfolio, primarily AFS debt securities, showing unrealized losses due to higher interest rates Available-for-Sale Debt Securities Composition (June 30, 2023) | Security Type | Amortized Cost ($ in thousands) | Gross Unrealized Gains ($ in thousands) | Gross Unrealized Losses ($ in thousands) | Fair Value ($ in thousands) | | :--- | :--- | :--- | :--- | :--- | | U.S. Treasury & government agencies | 66,357 | 18 | (5,231) | 61,144 | | Obligations of states & political subdivisions | 358,564 | 922 | (29,331) | 330,155 | | Mortgage-backed securities (GSEs) | 256,457 | 11 | (30,469) | 225,999 | | Total Debt Securities | 681,378 | 951 | (65,031) | 617,298 | - At June 30, 2023, there were 478 securities with unrealized losses, primarily due to higher current market interest rates. Management has the intent and ability to hold these securities and expects the fair value to recover as they approach maturity17 - The carrying value of securities pledged to secure public deposits and other liabilities was approximately $235.1 million as of June 30, 2023114 Note 4: Loans This note details the loan portfolio composition, with total loans at $2.64 billion and net loans at $2.60 billion as of June 30, 2023 Loan Portfolio Composition ($ in thousands) | Loan Category | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial & Agriculture | 292,091 | 278,595 | | Commercial Real Estate - Owner Occupied | 367,797 | 371,147 | | Commercial Real Estate - Non-Owner Occupied | 1,063,263 | 1,018,736 | | Residential Real Estate | 589,066 | 552,781 | | Real Estate Construction | 234,261 | 243,127 | | Farm Real Estate | 24,123 | 24,708 | | Lease Financing Receivable | 46,553 | 36,797 | | Consumer and Other | 19,126 | 20,775 | | Total Loans | 2,636,280 | 2,546,666 | | Allowance for credit losses | (35,149) | (28,511) | | Net Loans | 2,601,131 | 2,518,155 | Note 5: Allowance for Credit Losses This note analyzes the Allowance for Credit Losses (ACL), detailing changes, CECL adoption impact, and credit quality indicators - Upon adopting CECL on January 1, 2023, the Company recorded a $5.193 million increase to the ACL as a cumulative-effect adjustment38 Change in Allowance for Credit Losses (ACL) | Period | Provision for Credit Losses ($ in thousands) | Net Charge-offs / (Recoveries) ($ in thousands) | Ending ACL ($ in thousands) | | :--- | :--- | :--- | :--- | | Three Months Ended June 30, 2023 | 861 | (92) | 35,149 | | Three Months Ended June 30, 2022 | 400 | (2) | 27,435 | | Six Months Ended June 30, 2023 | 1,481 | 36 | 35,149 | | Six Months Ended June 30, 2022 | 700 | (94) | 27,435 | - Total nonaccrual loans were $8.0 million as of June 30, 2023, compared to $6.5 million as of December 31, 2022154128 Note 6: Accumulated Other Comprehensive Loss This note details changes in Accumulated Other Comprehensive Loss (AOCL), which improved to a $55.8 million loss due to increased fair value of securities Changes in Accumulated Other Comprehensive Loss (Net of Tax, $ in thousands) | Period | Beginning Balance | Net Current-Period OCI / (OCL) | Ending Balance | | :--- | :--- | :--- | :--- | | Three Months Ended June 30, 2023 | (49,910) | (5,860) | (55,770) | | Six Months Ended June 30, 2023 | (58,045) | 2,275 | (55,770) | Note 7: Goodwill and Intangible Assets This note details goodwill at $125.1 million and other intangible assets at $10.3 million as of June 30, 2023 - The carrying amount of goodwill decreased by $617 thousand since December 31, 2022, to a balance of $125.1 million at June 30, 2023, due to adjustments to estimated fair values of assets acquired172 Intangible Assets Summary (June 30, 2023) | Asset Type | Net Carrying Amount ($ in thousands) | | :--- | :--- | | Core deposit intangibles | 7,272 | | Mortgage servicing rights (MSRs) | 3,056 | | Total | 10,328 | Note 8: Short-Term and Other Borrowings This note details short-term borrowings, including $142.0 million in FHLB advances and $6.8 million in repurchase agreements Short-Term Borrowings Outstanding ($ in thousands) | Borrowing Type | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Short-term FHLB Borrowings | 142,000 | 393,700 | | Securities sold under agreements to repurchase | 6,788 | 25,143 | Note 9: Earnings per Common Share This note explains the calculation of basic and diluted earnings per common share (EPS) using the two-class method Earnings Per Share (EPS) | Period | Basic EPS | Diluted EPS | | :--- | :--- | :--- | | Three Months Ended June 30, 2023 | $0.64 | $0.64 | | Six Months Ended June 30, 2023 | $1.45 | $1.45 | Note 10: Commitments, Contingencies and Off-Balance Sheet Risk This note discloses off-balance sheet commitments to extend credit, totaling $777.3 million as of June 30, 2023 Commitments to Extend Credit (June 30, 2023) | Commitment Type | Amount ($ in thousands) | | :--- | :--- | | Fixed Rate | 66,569 | | Variable Rate | 710,729 | | Total | 777,298 | Note 11: Pension Information This note details the frozen defined benefit pension plan, with a net periodic pension cost credit of $14 thousand for H1 2023 - The Company's defined benefit pension plan is frozen, with no new participants since 2006 and no benefit accruals since 2014193 - Net periodic pension cost was a credit of $14 thousand for the first six months of 2023, compared to a cost of $58 thousand for the same period in 2022. No contributions are expected in 2023194 Note 12: Equity Incentive Plan This note describes the 2014 Incentive Plan, with 47,536 restricted shares granted and $1.5 million unrecognized compensation cost - During the six months ended June 30, 2023, the Company granted 47,536 restricted shares and had 88,422 nonvested shares outstanding at period end198 - Total unrecognized compensation cost for unvested awards was $1.485 million at June 30, 2023, expected to be recognized over a weighted average period of 2.87 years201 Note 13: Fair Value Measurement This note explains the fair value hierarchy and provides measurements for assets and liabilities, primarily using Level 2 inputs for recurring items Assets Measured at Fair Value on a Recurring Basis (June 30, 2023) | Asset Type | Fair Value ($ in thousands) | Input Level | | :--- | :--- | :--- | | Securities available-for-sale | 617,298 | Level 2 | | Equity securities | 1,952 | Level 2 | | Swap asset | 16,432 | Level 2 | - Mortgage servicing rights, valued at $3.1 million, are classified as Level 3 due to the use of significant unobservable inputs like prepayment rates and discount rates in a discounted cash flow model207211 Note 14: Derivatives This note details the Company's use of interest rate swaps as an intermediary, with a notional amount of $209.2 million as of June 30, 2023 - The Company engages in interest rate swaps as an intermediary for customers, with offsetting positions that result in minimal impact on net income. None of the derivatives are designated as hedging instruments221 Derivative Positions (June 30, 2023) | Position | Notional Amount ($ in thousands) | Fair Value ($ in thousands) | | :--- | :--- | :--- | | Swap Assets | 216,130 | 16,432 | | Swap Liabilities | 202,288 | (16,432) | Note 15: Qualified Affordable Housing Project Investments This note details investments in qualified affordable housing projects, with a balance of $13.7 million as of June 30, 2023 - The balance of investments in qualified affordable housing projects was $13.7 million at June 30, 2023, with related unfunded commitments of $4.8 million227 Note 16: Revenue Recognition This note details revenue recognition policies, disaggregating noninterest income into in-scope and out-of-scope categories under ASC 606 Noninterest Income Breakdown (Six Months Ended June 30, 2023) | Revenue Category | Amount ($ in thousands) | | :--- | :--- | | In-scope of Topic 606 | 14,448 | | Service charges | 3,604 | | ATM/Interchange fees | 2,803 | | Wealth management fees | 2,373 | | Tax refund processing fees | 2,375 | | Other | 3,293 | | Out-of-scope of Topic 606 | 5,769 | | Total Noninterest Income | 20,217 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's analysis of financial condition and results for Q2 and H1 2023, focusing on balance sheet changes, income drivers, and capital Financial Condition Total assets grew to $3.62 billion (2.2%) driven by loan growth, with deposits increasing by $322.8 million and ACL rising to 1.33% - Total assets increased by $78.2 million (2.2%) to $3.62 billion at June 30, 2023, from December 31, 2022, primarily driven by loan growth247 Loan Portfolio Change (Dec 31, 2022 to June 30, 2023) | Loan Category | Change ($ in thousands) | % Change | | :--- | :--- | :--- | | Commercial Real Estate—Non-Owner Occupied | 44,527 | 4.4% | | Residential Real Estate | 36,285 | 6.6% | | Commercial & Agriculture | 13,496 | 4.8% | | Lease Financing Receivables | 9,756 | 26.5% | | Total Loans | 89,614 | 3.5% | Deposit Composition Change (Dec 31, 2022 to June 30, 2023) | Deposit Type | Change ($ in thousands) | % Change | | :--- | :--- | :--- | | Time deposits | 263,011 | 82.4% | | Noninterest-bearing demand | 106,128 | 11.8% | | Interest-bearing demand | (24,153) | -4.6% | | Savings and money market | (22,196) | -2.5% | | Total Deposits | 322,790 | 12.3% | Results of Operations Net income increased for Q2 and H1 2023, driven by higher net interest income and noninterest income, partially offset by increased expenses Q2 2023 vs Q2 2022 Performance | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $10.0M | $7.7M | +30.3% | | Diluted EPS | $0.64 | $0.53 | +20.8% | | Net Interest Margin (FTE) | 3.86% | 3.43% | +43 bps | H1 2023 vs H1 2022 Performance | Metric | H1 2023 | H1 2022 | Change | | :--- | :--- | :--- | :--- | | Net Income | $22.9M | $16.2M | +41.8% | | Diluted EPS | $1.45 | $1.10 | +31.8% | | Net Interest Margin (FTE) | 3.99% | 3.40% | +59 bps | - Noninterest income for Q2 2023 increased by 62.4% year-over-year, primarily due to $2.2 million in new lease revenue and residual income from the VFG acquisition287 - Noninterest expense for Q2 2023 rose 37.0% year-over-year, driven by higher compensation, occupancy, and equipment expenses related to the acquisitions of Comunibanc and VFG289 Capital Resources The Company maintains a strong capital position, with shareholders' equity at $349.9 million and all capital ratios exceeding 'well-capitalized' thresholds Regulatory Capital Ratios (June 30, 2023) | Ratio | Company Ratio | 'Well Capitalized' Minimum | | :--- | :--- | :--- | | Total Risk Based Capital | 14.8% | 10.0% | | Tier I Risk Based Capital | 10.9% | 8.0% | | CET1 Risk Based Capital | 9.9% | 6.5% | | Leverage Ratio | 8.9% | 5.0% | Liquidity The Company maintains a conservative liquidity position, with $700.8 million FHLB borrowing capacity and $44.4 million net cash from financing activities - As of June 30, 2023, Civista had a remaining borrowing capacity of approximately $700.8 million with the FHLB319 - For the six months ended June 30, 2023, net cash provided by operating activities was $39.1 million, net cash used in investing activities was $85.5 million (mainly for net loan growth), and net cash provided by financing activities was $44.4 million (mainly from deposit growth)318 Quantitative and Qualitative Disclosures About Market Risk This section discusses interest-rate risk management through asset/liability processes and NPV sensitivity to hypothetical rate changes Net Portfolio Value Sensitivity Analysis (June 30, 2023) | Change in Interest Rates | Dollar Change ($ in thousands) | Percent Change | | :--- | :--- | :--- | | +200 bp | 25,067 | 4% | | +100 bp | 15,840 | 3% | | Base | — | — | | -100 bp | (14,201) | (2)% | | -200 bp | (41,955) | (7)% | Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - Management concluded that disclosure controls and procedures were effective as of June 30, 2023335 - No material changes were made to the Company's internal control over financial reporting during the most recent fiscal quarter336 PART II. Other Information Legal Proceedings Management believes ongoing legal proceedings will not materially adversely affect the Company's financial position or operations - Management does not expect pending legal proceedings to have a material adverse effect on the Company's financial condition or results339 Risk Factors No new risk factors are disclosed beyond those in the 2022 Annual Report on Form 10-K and Q1 2023 Form 10-Q - The report refers to the risk factors disclosed in the 2022 Annual Report on Form 10-K and the Q1 2022 Form 10-Q, with no new additions in this filing340341 Other Items (Items 2, 3, 4, 5) This section confirms no unregistered equity sales, no senior security defaults, and no Rule 10b5-1 trading plan changes - No unregistered sales of equity securities or defaults upon senior securities occurred342345 - No directors or officers adopted or terminated a Rule 10b5-1 trading plan during the quarter ended June 30, 2023342 Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/PAO certifications and iXBRL financial data