Civista Bancshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; financial statements are unaudited. Unless otherwise indicated, figures below are in millions of dollars. Comparisons are with Q3 or the first nine months of 2019, or with December 31, 2019 for balance-sheet items.
Business context
Civista is a bank holding company operating primarily in Ohio, Indiana and Kentucky. Banking is its principal reportable segment. The company participated in the Paycheck Protection Program (PPP), originated mortgage loans for sale, and reported substantial growth in deposits and loans during 2020.
Financial results and condition
| Metric | Q3 / September 2020 | Comparable period |
|---|---|---|
| Net interest income | $22.006 | Q3 2019: $20.418 |
| Noninterest income | $6.786 | Q3 2019: $5.429 |
| Net income | $7.682 | Q3 2019: $7.708 |
| Basic / diluted EPS | $0.48 / $0.48 | Q3 2019: $0.48 / $0.46 |
| Fully tax-equivalent net interest margin | 3.44% | Q3 2019: 4.12% |
- Nine-month performance: Net interest income was $66.196 million versus $63.878 million; noninterest income was $20.516 million versus $16.816 million. Net income declined to $22.019 million from $26.038 million; basic and diluted EPS were each $1.36, compared with $1.64 basic and $1.54 diluted. Nine-month net interest margin fell to 3.70% from 4.35%.
- Drivers and expenses: Q3 net interest income increased as interest expense fell, partly offset by lower asset yields. Q3 noninterest income benefited from loan-sale gains ($2.413 million versus $0.815 million). Nine-month loan-sale gains rose to $5.501 million from $1.701 million. Nine-month noninterest expense increased 7.8% to $53.697 million, including higher compensation and software costs.
- Balance sheet: Total assets were $2,817.993 million, up 22.0% from year-end 2019. Loans were $2,040.940 million, up 19.4%; deposits were $2,068.769 million, up 23.2%. Cash and due from financial institutions was $194.773 million.
- PPP and funding: PPP loans totaled $259.097 million. Other borrowings included $183.695 million drawn under the Federal Reserve’s Paycheck Protection Program Lending Facility (PPPLF), at a stated 0.35% rate. The company also had $125.000 million of long-term FHLB advances, $29.427 million of subordinated debentures and $25.813 million in repurchase agreements; short-term FHLB advances were zero at quarter-end.
- Credit quality: The allowance for loan losses was $22.637 million, or 1.11% of loans, versus $14.767 million, or 0.86%, at year-end. The nine-month provision was $7.862 million versus $0.150 million in 2019. Nonaccrual loans were $5.366 million versus $5.599 million at year-end; total past-due loans were $3.299 million versus $5.909 million. Special-mention loans rose to $117.876 million from $11.103 million at year-end, and substandard loans to $19.345 million from $14.726 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $25.301 million, investing cash flow was negative $340.281 million, and financing cash flow was positive $461.218 million; cash increased $146.238 million. The net loan-to-deposit ratio was 97.6%, down from 100.9%. Management reported approximately $472.547 million of remaining FHLB borrowing capacity, after standby letters of credit.
- Capital: Shareholders’ equity was $342.055 million, or 12.1% of assets, versus 14.3% at year-end. Regulatory ratios remained above stated minimums: total risk-based capital 15.9%, Tier 1 risk-based capital 14.7%, CET1 13.2%, and leverage 10.7%. The company repurchased $12.756 million of shares and paid $5.365 million in common dividends during the nine months.
Material changes, outlook and risks
- Management attributed the increased loan-loss provision to COVID-19-related uncertainty, including borrower revenue losses, supply-chain disruption, additional business costs, unemployment and requests for payment relief. Management expected commercial, commercial real estate and consumer portfolios to be most affected.
- During 2020, 813 loans totaling $431.283 million received modifications, primarily payment deferrals. As of September 30, 47 loans totaling $52.186 million remained under a CARES Act modification. The filing states these qualifying modifications were not classified as troubled debt restructurings.
- Commercial real estate exposure includes $498.819 million, or 24.3% of total loans, to lessors of non-residential buildings and dwellings, and $237.783 million, or 11.6%, to lessors of residential buildings and dwellings. Repayment depends in part on real estate markets and regional economic conditions.
- PPP loans are eligible for an SBA guarantee, but the filing cautions that the SBA may deny liability if it determines there was a deficiency in loan origination or funding. PPP-related legal or other risks are also identified as forward-looking risk factors.
- Management cited lower market rates, loan repricing and prepayments as risks to yields and margins, alongside credit, liquidity, economic and operational risks. The filing provides no specific earnings or financial guidance. Management said it was evaluating the future credit-loss accounting standard, then deferred for the company to fiscal years beginning after December 15, 2022.
- Management stated disclosure controls were effective and that there were no material changes to internal control over financial reporting. It reported no material changes to previously disclosed risk factors and believed ordinary-course legal proceedings would not materially affect the company.
Important facts for investors to verify
- How the sharply higher special-mention and substandard balances evolve, and whether the allowance remains adequate as loan modifications expire and economic conditions change.
- PPP loan forgiveness, repayment and SBA-guarantee outcomes, including compliance and any potential claims or litigation.
- Deposit stability and funding costs, use and maturity terms of PPPLF and other borrowings, and the company’s available liquidity under stress.
- Whether loan growth, mortgage-sale gains and lower funding costs can offset lower asset yields and the decline in net interest margin.
- Concentrations in commercial real estate and the effect of regional property and economic conditions on borrower repayment.