Civista Bancshares, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated financial statements; amounts below are in millions unless stated otherwise.
Business context
Civista is a regional banking company operating primarily in Ohio, Indiana and Kentucky. On September 14, 2018, it completed its stock-and-cash acquisition of United Community Bancorp (UCB), issuing 4,277,430 common shares and paying approximately $12.7 million in cash to former UCB shareholders. UCB’s results are included only from the acquisition date. The filing says acquisition-date fair values are preliminary.
Financial performance and position
| Metric | Q3 2018 / Sep. 30, 2018 | Comparable period / prior date |
|---|---|---|
| Net interest income | $15.8 million for Q3; $45.4 million for nine months | $13.7 million and $39.9 million, respectively, in 2017 |
| Net interest margin | 4.15% Q3; 4.14% nine months | 4.08% Q3; 3.93% nine months in 2017 |
| Net income (loss) | $(3.4) million Q3; $6.6 million nine months | $3.7 million Q3; $11.9 million nine months in 2017 |
| Common EPS | $(0.31) basic and diluted Q3; $0.54 basic and $0.51 diluted nine months | $0.33 basic/$0.29 diluted Q3; $1.12 basic/$0.97 diluted nine months in 2017 |
| Total assets | $2,085.5 million | $1,525.9 million at Dec. 31, 2017 |
| Loans, net of allowance | $1,502.3 million | $1,151.5 million at Dec. 31, 2017 |
| Deposits | $1,577.8 million | $1,204.9 million at Dec. 31, 2017 |
| Cash and due from institutions | $64.8 million | $40.5 million at Dec. 31, 2017 |
| Shareholders’ equity | $289.4 million; 13.9% of assets | $184.5 million; 12.1% of assets at Dec. 31, 2017 |
| Cash flows, nine months | $19.5 million operating; $41.1 million investing; $(36.4) million financing | 2017: $11.8 million operating; $(119.9) million investing; $104.8 million financing |
Q3 interest expense rose to $2.1 million from $1.2 million in Q3 2017, while noninterest income was $3.3 million, down from $3.5 million. The loan-loss provision was $0.4 million in both Q3 and the nine-month period; no provision was recorded in the comparable 2017 periods.
Changes versus comparable periods
- Nine-month net income fell $5.3 million year over year, while Q3 shifted from net income to a $3.4 million loss. Management attributed the decline primarily to UCB acquisition and integration expenses: $8.8 million in Q3 and $12.0 million for the first nine months.
- Nine-month net interest income increased $5.4 million, reflecting higher average earning assets and yields; higher funding costs partially offset the increase. The nine-month net interest margin rose 21 basis points.
- Noninterest expense increased $14.1 million for the first nine months, including merger-related compensation, data-processing conversion, legal and consulting costs. Noninterest income rose $0.6 million for the period, but Q3 declined $0.2 million, partly due to a $0.4 million securities-sale loss.
- Assets increased 36.7% from year-end, substantially reflecting the UCB acquisition. Net loans grew 30.5%; the net loan-to-deposit ratio was 95.2%, versus 95.6% at year-end.
Credit, debt, liquidity and capital
- The allowance for loan losses was $13.3 million, or 0.88% of total loans, versus 1.13% at year-end. Nine-month net charge-offs were $0.2 million, compared with $0.4 million in 2017. Nonaccrual loans were $5.7 million, down from $6.1 million at year-end.
- Loan exposure is concentrated in lessors of nonresidential buildings (25.3% of loans) and residential buildings (10.2%); management notes repayment depends in part on real-estate markets and local economic conditions.
- Funding included $145.1 million of FHLB advances, $18.5 million of repurchase-agreement borrowings and $29.4 million of subordinated debentures. FHLB advances increased $73.2 million from year-end, mainly due to higher overnight funding.
- Management described liquidity as conservative. It reported $42.5 million of federal-funds borrowing lines and approximately $230.4 million of remaining FHLB borrowing capacity after standby letters of credit. Securities available for sale totaled $317.0 million.
- Regulatory capital ratios at September 30 were 16.3% total risk-based, 15.4% Tier 1 risk-based, 12.9% CET1 and 15.4% leverage; each exceeded the filing’s stated well-capitalized thresholds.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management cited expected strategic benefits from the UCB acquisition, including expansion into new markets and operating efficiencies, but pro forma results exclude estimated revenue opportunities and anticipated cost savings. Acquisition accounting remains preliminary.
Key disclosed risks include interest-rate and liquidity exposure, credit quality, local real-estate and economic conditions, regulatory or tax changes, and information-system failures. The filing reports no material change to previously disclosed risk factors, no legal proceedings, and effective disclosure controls. Management’s interest-rate model showed net portfolio value increasing 6% under a 100-basis-point rate rise and decreasing 7% under a 100-basis-point decline at September 30.
The filing also reports $3.8 million of nine-month after-tax other comprehensive loss, principally from lower available-for-sale securities values. Management attributed unrealized securities losses mainly to higher market yields and said it intended and was able to hold the securities for recovery. The adoption of ASU 2016-01 resulted in a $0.3 million reclassification between retained earnings and accumulated other comprehensive loss, with no effect on net income.
Important facts for investors to verify
- Reconcile acquisition-related expenses, integration progress and the eventual realization of stated UCB synergies.
- Track deposit retention, funding mix and cost, FHLB borrowing levels, and the high net loan-to-deposit ratio.
- Monitor credit quality and allowance adequacy as the acquired loan portfolio seasons, including the real-estate concentrations.
- Review the preliminary UCB purchase-price allocation, including $49.2 million of acquisition goodwill and $7.5 million of core deposit intangibles.
- Reconcile a filing inconsistency: the balance sheet reports total assets of $2,085.535 million and equity of $289.388 million, while portions of MD&A state $2,085.385 million and $289.238 million, respectively.