Civista Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Balance-sheet comparisons are against December 31, 2016. Civista is an Ohio-based financial holding company operating primarily through its community bank. Dollar figures below are in thousands unless stated otherwise; interim financial statements are unaudited.
Financial performance and condition
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $13,680 | $12,526 | $39,939 | $37,701 |
| Provision (credit) for loan losses | $0 | $0 | $0 | $(1,300) |
| Noninterest income | $3,465 | $3,653 | $12,704 | $12,989 |
| Noninterest expense | $12,167 | $11,195 | $36,217 | $33,153 |
| Net income | $3,660 | $3,680 | $11,892 | $13,586 |
| Net income available to common shareholders | $3,352 | $3,306 | $10,957 | $12,430 |
| Basic / diluted EPS | $0.33 / $0.29 | $0.41 / $0.34 | $1.12 / $0.97 | $1.57 / $1.24 |
| Net interest margin | 4.08% | 4.06% | 3.93% | 3.89% |
- Scale and lending: Assets were $1,496,088, up 8.6% from year-end 2016. Total loans were $1,141,992 and net loans were $1,129,046; net loans rose 8.3% year to date. The net loan-to-deposit ratio was 94.0%, versus 93.0% at year-end.
- Deposits and funding: Deposits totaled $1,201,289, up $80,186. Noninterest-bearing deposits were $357,539; interest-bearing deposits were $843,750. FHLB advances were $56,750, repurchase agreements were $15,148, and subordinated debentures were $29,427. Total liabilities were $1,314,107.
- Capital: Shareholders’ equity was $181,981, or 12.2% of assets, compared with $137,616, or 10.0%, at year-end. September 30 capital ratios were 16.6% total risk-based, 15.5% Tier 1 risk-based, 11.6% CET1, and 12.7% leverage; each exceeded the stated regulatory minimums.
- Cash flow: For the nine months, operating cash flow was $11,821, investing cash flow was $(119,937), and financing cash flow was $104,815. Cash and due from financial institutions declined $3,301 to $33,394. Investing outflows principally reflected net loan originations of $86,678 and securities purchases of $57,005.
- Credit quality: The allowance for loan losses was $12,946, or 1.13% of loans, versus $13,305, or 1.26%, at year-end. No provision was recorded in the first nine months of 2017; net charge-offs were $359, compared with net recoveries of $390 in 2016. Nonaccrual loans were $7,532, up from $6,943; total loans past due were $4,205, down from $6,111.
Material changes versus comparable periods
- Q3 net interest income increased $1,154 year over year, supported by higher average earning assets and a 2-basis-point increase in reported net interest margin. Interest expense increased $312.
- Q3 net income declined $20, while diluted EPS fell from $0.34 to $0.29. For the nine months, net income fell $1,694 and diluted EPS declined from $1.24 to $0.97. The 2016 year-to-date comparison included a $1,300 loan-loss provision credit following recovery of a previously charged-down loan.
- Year-to-date noninterest expense rose $3,064, including higher salaries and benefits (up $2,631), professional services (up $268), and ATM expense (up $321). Management attributed payroll growth partly to increased staffing; FTEs were 347 for the nine-month period versus the comparable prior period, and 353.7 in Q3 versus the prior-year quarter.
- Year-to-date noninterest income declined $285. Lower service charges, loan-sale gains, and other income were partly offset by higher wealth management fees. Tax refund processing fees were $2,750 in both nine-month periods and are seasonal.
- Common equity proceeds of $32,821 from a February 2017 public offering contributed to higher capital and securities balances. Common shares outstanding increased to 10,170,935 at September 30, from 8,343,509 at year-end. The offering and preferred-share conversions increased the share base, relevant to per-share comparisons.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management says the temporary increase in noninterest-bearing deposits associated with tax refund processing was expected to return toward year-end levels over the following quarter.
- Management identifies interest-rate and liquidity risk, credit risk, real estate market and local economic conditions, regulatory and tax changes, and information-system failures among factors that could affect results. Two loan concentrations were lessors of nonresidential buildings and dwellings ($284,218, or 24.8% of loans) and lessors of residential buildings and dwellings ($155,616, or 13.6%); repayment depends in part on real estate and local economic conditions.
- Interest-rate sensitivity modeling showed net portfolio value increasing 10% under a +100-basis-point shock and 15% under +200 basis points, while declining 1% under a -100-basis-point shock. These are model estimates, not forecasts.
- Available-for-sale securities totaled $229,419. Unrealized losses of $668 were attributed mainly to higher market yields; management said it intended and was able to hold affected securities and did not expect to sell them before recovery.
- Off-balance-sheet commitments included $304,258 of variable-rate and $8,672 of fixed-rate commitments to extend credit, including lines, construction loans, overdraft protection, and letters of credit. Management did not anticipate material losses, but commitments carry potential credit exposure.
- Available FHLB borrowing capacity was reported at approximately $279,017; the bank also had $42,500 in correspondent federal-funds lines and the holding company had a $7,500 credit line. The filing reports no new material legal proceedings, material changes to risk factors, or material changes in internal control during the quarter.
- Management expects the future credit-loss standard (CECL) to require a one-time cumulative adjustment to the allowance when adopted, but could not yet estimate its amount or overall impact. No goodwill impairment was reported; goodwill was $27,095.
Most important facts for investors to verify
- Whether loan growth and the 94.0% net loan-to-deposit ratio remain supported by stable deposit funding, particularly given the reported increase in brokered deposits and short-term tax-processing balances.
- Whether the allowance remains adequate as nonaccrual loans rose and the loan portfolio is concentrated in real estate-related lending; review subsequent delinquency, charge-off, and reserve trends.
- Whether expense growth—especially staffing, compensation, ATM, and professional-services costs—can be absorbed by recurring revenue and sustained net interest income.
- How the common-stock offering and preferred-share conversions affect future diluted EPS, capital ratios, and shareholder returns.
- The eventual CECL adoption impact and any changes to the value or liquidity of the securities portfolio under different interest-rate conditions.