Civista Bancshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Civista is a regional banking and financial-services company operating primarily in Ohio, Indiana, and Kentucky, with equipment leasing and finance through Civista Leasing and Finance (CLF). Unless noted otherwise, financial amounts below are in millions of dollars; the filing reports them in thousands.
Financial performance and position
- Third-quarter results: Net interest income was $31.5 million, up 3.5% from $30.4 million a year earlier. Net income was $10.4 million, down 6.5% from $11.1 million; diluted EPS was $0.66 versus $0.72. Noninterest income increased 41.7% to $8.1 million, while noninterest expense rose 18.6% to $26.8 million.
- Nine-month results: Net interest income rose 22.9% to $95.4 million; noninterest income increased 49.1% to $28.3 million. Net income was $33.3 million, up 22.1% from $27.3 million, and diluted EPS was $2.12 versus $1.82. Noninterest expense grew 30.2% to $82.3 million.
- Margins and funding costs: Fully tax-equivalent net interest margin was 3.69% in Q3, down from 4.03% in Q3 2022; for the first nine months it was 3.88%, up from 3.62%. Q3 interest expense increased to $14.3 million from $2.1 million, reflecting higher deposit and borrowing costs.
- Balance sheet: Total assets were $3.733 billion at September 30, up 5.5% from year-end 2022. Total loans were $2.755 billion, up 8.2%; net loans were $2.720 billion. Deposits totaled $2.796 billion, up 6.7%. Shareholders’ equity was $332.7 million, or 8.9% of assets, versus $334.8 million, or 9.5%, at year-end.
- Credit quality: The allowance for credit losses was $35.3 million, or 1.28% of loans, compared with $28.5 million, or 1.12%, at year-end. Nine-month net charge-offs were $0.5 million. Nonaccrual loans increased to $8.7 million from $6.5 million at year-end; loans 30 days or more past due totaled $8.2 million.
- Liquidity and debt: Cash and due from financial institutions was $50.3 million; available-for-sale securities were $593.5 million. The net loan-to-deposit ratio was 97.3%. Short-term FHLB advances were $431.5 million, long-term FHLB advances $2.6 million, subordinated debentures $103.9 million, and other borrowings $11.0 million. Management reported approximately $303.6 million of remaining FHLB borrowing capacity and $50 million of federal-funds borrowing lines.
- Cash flow: For the first nine months, operating activities provided $60.6 million, investing activities used $216.8 million, and financing activities provided $163.2 million. Cash increased $7.0 million to $50.3 million.
Material changes and notable items
- Loan growth was broad-based, led by commercial real estate and residential real estate. Commercial real estate—non-owner occupied was $1.103 billion, about 40% of total loans.
- Interest-bearing deposit costs and reliance on wholesale funding increased. Time deposits rose $336.6 million, including a $202.5 million increase in brokered time deposits; noninterest-bearing deposits fell $93.7 million.
- CLF, acquired as Vision Financial Group in October 2022 and merged into Civista in August 2023, contributed $6.2 million of nine-month lease revenue and residual income. The acquisition also contributed to higher compensation and equipment depreciation expenses.
- The company recorded a $1.5 million fee tied to renewal of its Mastercard contract. Tax-refund processing fees were $2.4 million for the nine-month period, unchanged year over year and seasonal in nature.
- Adoption of CECL on January 1, 2023 increased the allowance for loan credit losses and established a reserve for unfunded commitments; the after-tax cumulative reduction to retained earnings was $6.1 million. The company cautions that 2022 comparative credit-loss amounts use the prior accounting model and are not directly comparable.
- Available-for-sale securities had $94.4 million of gross unrealized losses at September 30, primarily attributed to higher market rates. Accumulated other comprehensive loss was $79.5 million. Management said it intended and expected to be able to hold the securities until recovery.
- Capital ratios exceeded regulatory minimums: total risk-based capital 14.5%, Tier 1 risk-based capital 10.7%, CET1 9.7%, and leverage 8.8%. The filing reports no material change in internal control over financial reporting; disclosure controls were considered effective.
Outlook, risks, and contingencies
The filing provides no specific earnings, margin, loan-growth, or other quantitative guidance. Management notes that loan growth and changing economic conditions may require revisions to CECL assumptions. Principal stated risks include inflation, recession and interest-rate changes; deposit competition and funding liquidity; real-estate values and borrower repayment capacity; cybersecurity, operational and vendor risks; regulation; and acquisition integration. The company identifies interest-rate risk as its primary market risk and liquidity risk as a secondary risk. It is evaluating the transition from LIBOR to alternative reference rates. Management believes pending legal matters will not materially affect financial position, results, or liquidity, but says outcomes cannot be predicted.
Important facts for investors to verify
- Whether deposit pricing, brokered-deposit levels, and FHLB borrowing remain sustainable as funding costs rise.
- Credit trends in the sizable commercial real estate portfolio, including non-owner-occupied exposure, delinquencies, nonaccrual loans, and charge-offs.
- The assumptions underlying CECL reserves, including the allowance for unfunded commitments and the effect of future economic forecasts.
- How unrealized securities losses and potential liquidity needs could affect capital if securities had to be sold before recovery.
- CLF’s contribution to recurring earnings and the continuing costs of its integration and equipment depreciation.
- Whether reported nine-month earnings growth translates into improved quarterly profitability, given Q3’s lower net income and net interest margin.