Civista Bancshares, Inc. — Q3 2015 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2015; balance-sheet comparisons are to December 31, 2014. Civista is an Ohio-based community bank focused on commercial, real estate, residential mortgage and consumer lending. The company changed its name from First Citizens Banc Corp effective May 1, 2015.
Financial performance and condition
Amounts below are in millions except per-share data and ratios; figures may not sum due to rounding.
- Q3 earnings: Net income was $3.253 million, up 41% from $2.306 million. Net income available to common shareholders was $2.862 million versus $1.900 million. Basic and diluted EPS were $0.36 and $0.30, compared with $0.25 and $0.21.
- Nine-month earnings: Net income was $9.546 million, up 32% from $7.257 million. Common earnings were $8.360 million versus $5.790 million; basic and diluted EPS were $1.07 and $0.87, compared with $0.75 and $0.64.
- Interest income and margins: Q3 net interest income rose to $12.402 million from $10.684 million; net interest margin increased to 4.13% from 3.94%. For nine months, net interest income was $35.231 million versus $31.115 million and margin was 3.91% versus 3.73%. Management attributed the gains principally to higher average earning assets and lower funding costs.
- Other income and costs: Noninterest income was $3.076 million for Q3 and $11.132 million for nine months, versus $3.012 million and $11.016 million. Noninterest expense was $10.666 million for Q3, essentially unchanged, and $32.203 million year to date, up from $31.068 million. Year-to-date expense growth reflected higher compensation, data-processing and professional costs, partly offset by lower marketing and other costs.
- Credit costs and quality: Provision for loan losses was $0.400 million in Q3 versus none a year earlier; nine-month provision was $1.200 million versus $1.500 million. Net charge-offs declined to $0.708 million from $2.583 million. Nonaccrual loans were $10.545 million, down from $13.558 million at year-end; total past-due loans were $8.754 million. The allowance was $14.760 million, or 1.48% of loans, versus $14.268 million, or 1.56%.
- Balance sheet and funding: Assets were $1.313 billion, up 8.3% from year-end; total loans were $1.000 billion, up 9.3%, and deposits were $1.056 billion, up 9.0%. Cash and due from institutions totaled $33.619 million. The net loan-to-deposit ratio was 93.3%, versus 93.0% at year-end.
- Debt and capital: FHLB advances totaled $72.2 million, repurchase agreements $20.9 million and subordinated debentures $29.4 million. Shareholders’ equity was $123.3 million, or 9.4% of assets, compared with 9.6% at year-end. September regulatory capital ratios were 13.7% total risk-based, 12.5% Tier 1 risk-based, 7.3% CET1 and 9.7% leverage; each exceeded the stated “well-capitalized” thresholds.
- Cash flow and liquidity: Nine-month operating cash flow was $14.375 million, investing cash outflow $14.704 million and financing cash inflow $4.090 million; cash increased $3.761 million. Management described liquidity as conservative and reported $35 million in correspondent federal-funds lines and approximately $49 million of remaining FHLB borrowing capacity.
Material changes and notable items
- TCNB acquisition: Civista acquired TCNB Financial Corp. on March 6, 2015 for $17.226 million in cash. The acquired company contributed $76.4 million of loans and $86.9 million of deposits at acquisition; $5.375 million of goodwill was recorded. Its results are included from the acquisition date, so reported year-over-year comparisons include differing periods of acquired operations. Management cited market expansion and operating synergies as strategic benefits.
- Loan-loss methodology: In Q3, the company generally changed its loss-migration lookback from two years to three years, citing improved economic stability, seasoned lending-policy changes and regulatory guidance. Management said this shifted reserves from unallocated to portfolio segments; it considered the allowance adequate.
- Income and expense mix: Nine-month loan-sale gains increased to $0.888 million from $0.470 million, while tax-refund processing fees decreased to $2.000 million from $2.321 million following a change to a flat-fee arrangement. Trust fees declined. Higher acquisition-related staffing, technology, legal and audit costs contributed to expense growth.
- Unusual transaction: In Q3, the company sold $3.566 million of acquired manufactured-housing loans and recorded a $0.075 million loss.
- Share structure: During the first nine months, 928 Series B preferred shares converted into 118,678 common shares. At September 30, 24,072 preferred shares remained; the preferred stock is convertible and was included in diluted EPS calculations.
Outlook, risks and contingencies
- The filing provides no specific earnings, growth or margin guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Key stated risks include local and national economic conditions, real-estate market weakness, interest-rate volatility, credit quality and allowance estimates, regulatory or tax changes, deposit and funding conditions, information-system failures and litigation.
- Credit concentrations include lessors of nonresidential buildings and dwellings at 21.7% of total loans and lessors of residential buildings and dwellings at 13.6%. Management noted repayment depends partly on real-estate markets and local economic conditions.
- Civista Bank is defending a lawsuit alleging receipt of loan-collateral sale proceeds in which another bank claims a security interest. The plaintiff appears to seek up to $424,113.83, plus punitive damages and attorneys’ fees; Civista disputes the claims and intends to defend the action.
- Interest-rate modeling showed net portfolio value increasing 14% under a hypothetical +200-basis-point shock, 9% under +100 basis points and 3% under −100 basis points. These are modeled sensitivities, not forecasts.
Most important facts for investors to verify
- Separate the acquired TCNB contribution from underlying organic loan, deposit and earnings growth when comparing periods.
- Track credit performance, particularly commercial real-estate concentrations, criticized loans, nonaccruals and the impact of the revised allowance methodology.
- Assess whether acquisition-related operating costs and expected synergies develop as management anticipated.
- Monitor funding mix, FHLB borrowing, the 93.3% net loan-to-deposit ratio and the availability of contingent liquidity.
- Review potential dilution and preferred-stock distributions, and follow the outcome and potential exposure of the United Bank litigation.