Civista Bancshares, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Amounts are in millions of dollars unless stated otherwise; financial statements are unaudited. Civista is an Ohio-based bank holding company, with banking as its primary business. Comparisons below are with Q3 or the first nine months of 2015, as applicable; balance-sheet comparisons are with December 31, 2015.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $12.526 | $12.402 | $37.701 | $35.231 |
| Noninterest income | $3.653 | $3.076 | $12.989 | $11.132 |
| Net income | $3.680 | $3.253 | $13.586 | $9.546 |
| Net income available to common shareholders | $3.306 | $2.862 | $12.430 | $8.360 |
| Basic / diluted EPS | $0.41 / $0.34 | $0.36 / $0.30 | $1.57 / $1.24 | $1.07 / $0.87 |
| Net interest margin | 4.06% | 4.13% | 3.89% | 3.91% |
- Combined net interest income and noninterest income was $16.179 million in Q3 and $50.690 million for the first nine months. Interest income and interest expense are disclosed separately; no consolidated revenue line is presented.
- Pre-tax income was $4.984 million in Q3 and $18.837 million year to date. Income tax expense was $1.304 million and $5.251 million, respectively.
- Noninterest expense rose 5.0% year over year to $11.195 million in Q3 and rose $0.950 million to $33.153 million year to date. Nine-month salaries and benefits increased $1.321 million, primarily reflecting TCNB acquisition-related staffing, pay increases, incentive costs, and employee insurance costs.
Financial position, funding, and capital
- Total assets were $1,372.280 million, up 4.4% from year-end 2015. Total loans were $1,046.967 million; net loans were $1,033.516 million, up 4.7%. Non-owner-occupied commercial real estate loans increased $37.424 million and residential real estate loans increased $10.836 million.
- Deposits grew $82.120 million to $1,134.153 million. Noninterest-bearing deposits rose $41.038 million. Management attributed deposit growth in part to business and public funds and temporary balances associated with tax-refund processing.
- Cash and due from financial institutions was $33.229 million. Available-for-sale securities were $200.967 million. Management described liquidity as conservative; available funding included $42.5 million of federal funds lines, approximately $89.6 million of remaining FHLB borrowing capacity, and a $7.5 million parent-company credit line.
- FHLB advances totaled $35.0 million, down $36.2 million from year-end; securities sold under repurchase agreements were $21.713 million, down $3.327 million. Subordinated debentures were $29.427 million. Total liabilities were $1,233.971 million.
- Shareholders’ equity was $138.309 million, or 10.1% of assets, versus $125.173 million, or 9.5%, at year-end. September 30 regulatory ratios were 14.1% total risk-based capital, 12.8% Tier 1 risk-based capital, 8.3% CET1, and 10.4% leverage; the filing says all capital ratios exceeded regulatory minimums.
- Operating cash flow was $11.318 million for the first nine months, compared with $14.375 million in 2015. Investing activities used $53.828 million, versus $14.704 million, mainly reflecting loan growth and investment activity. Financing provided $40.178 million, versus $4.090 million, principally reflecting deposit growth and lower FHLB advances. Cash declined $2.332 million to $33.229 million.
Material changes and credit quality
- Year-to-date net income increased $4.040 million, or about 42%, and Q3 net income increased $0.427 million, or about 13%. Year-to-date net interest income rose $2.470 million, while net interest margin edged down to 3.89% from 3.91%. Q3 margin fell to 4.06% from 4.13%; management cited lower loan and earning-asset yields.
- Noninterest income increased 16.7% year to date, led by tax-refund processing fees ($2.750 million, up $0.750 million), gains on loan sales ($1.341 million, up $0.453 million), and other income. Tax-refund fees are seasonal, with most earned in Q1. Loan sales totaled $52.572 million year to date, up 31.9%.
- The Q3 loan-loss provision was zero versus $0.400 million in Q3 2015. For the first nine months of 2016, the company recorded a $1.300 million credit to provision, versus a $1.200 million provision in 2015. Management linked the credit largely to recovery of approximately $1.303 million on a previously charged-down commercial real estate loan. Net recoveries were $0.390 million, compared with net charge-offs of $0.708 million a year earlier.
- The allowance for loan losses was $13.451 million, or 1.28% of total loans, versus $14.361 million, or 1.43%, at year-end. Nonperforming loans declined $1.089 million to approximately $8.170 million; nonaccrual loans were $8.137 million. Total past-due loans were $3.961 million, including $2.191 million 90 days or more past due. The filing reports $33,000 of such loans still accruing.
- Two real-estate lessor concentrations exceeded 10% of loans: nonresidential lessors, $239.878 million (22.9%), and residential lessors, $136.094 million (13.0%). Management noted repayment depends partly on local real-estate and economic conditions.
- During the first nine months, 2,698 Series B preferred shares converted into 345,060 common shares. Common dividends totaled $0.16 per share for the period; the company also paid 6.50% preferred dividends.
Outlook, risks, and contingencies
- The filing gives no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- Forward-looking risks include changes in financial markets and local or national economic conditions, real-estate weakness, interest-rate volatility, credit losses and allowance estimates, regulatory or tax changes, FDIC assessments, information-system failures, and litigation. Management identifies interest-rate risk as the principal market risk and liquidity risk as a lesser risk.
- Interest-rate sensitivity modeling showed estimated net portfolio value increases of 13% for a +100 basis-point shock, 20% for +200 basis points, and 4% for a -100 basis-point shock at September 30, 2016. These are model estimates based on management assumptions, not forecasts.
- Off-balance-sheet commitments included $232.277 million of commitments to extend credit and overdraft protection and letters of credit combined. Management said material losses were not anticipated. Affordable-housing investment commitments were $2.663 million.
- No new material legal proceedings or material changes to existing proceedings were reported; no material risk-factor changes were reported. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
- The company was evaluating the effects of several new accounting standards, including the expected-credit-loss standard (ASU 2016-13); the filing does not provide a quantified adoption impact.
Most important facts for investors to verify
- Whether earnings growth is sustainable after the $1.3 million loan-loss recovery and the seasonal tax-refund processing contribution.
- Whether loan growth, particularly in commercial real estate and the disclosed lessor concentrations, is accompanied by stable credit quality and an adequate allowance.
- How net interest margin responds to interest rates and funding mix, given the year-over-year margin decline and the company’s modeled rate sensitivity.
- Whether deposit growth and reported liquidity capacity remain dependable as temporary tax-processing balances fluctuate and lending grows.
- The effects of common-share issuance and preferred-share conversion on diluted earnings per share and future dividends; diluted EPS incorporates convertible preferred shares.