Civista Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons are with Q3 and the first nine months of 2018, or with December 31, 2018 for balance-sheet items. Unless noted, dollar amounts below are in millions and rounded from figures reported in thousands. Civista is a bank holding company operating primarily in Ohio, Indiana and Kentucky.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $20.4 | $15.8 | $63.9 | $45.4 |
| Provision for loan losses | $0.15 | $0.39 | $0.15 | $0.39 |
| Noninterest income | $5.4 | $3.3 | $16.8 | $13.3 |
| Noninterest expense | $16.7 | $22.2 | $49.8 | $50.3 |
| Net income (loss) | $7.7 | $(3.4) | $26.0 | $6.6 |
| Diluted EPS | $0.46 | $(0.31) | $1.54 | $0.51 |
- Margins: Fully tax-equivalent net interest margin was 4.12% in Q3 2019 versus 4.15% a year earlier; nine-month margin was 4.35% versus 4.14%. Q3 net interest income rose 29.0%; nine-month net interest income rose 40.8%.
- Balance sheet at September 30: Total assets were $2.269 billion, up 6.1% from year-end 2018. Loans were $1.649 billion, up 5.6%; deposits were $1.633 billion, up 3.3%. Shareholders’ equity was $329.3 million, or 14.5% of assets.
- Credit quality: Allowance for loan losses was $14.1 million, or 0.86% of loans, compared with 0.88% at year-end. The nine-month provision was $0.15 million, and net recoveries were $0.315 million. Nonaccrual loans were $5.6 million, versus $5.9 million at year-end; total loans past due were $4.2 million.
- Cash flow and liquidity: For the first nine months, operating cash flow was $22.5 million, investing cash outflow was $82.0 million and financing cash inflow was $78.9 million. Cash ended at $62.2 million. The net loan-to-deposit ratio was 100.1%, up from 98.0% at year-end. The filing reports approximately $298.6 million of remaining FHLB borrowing capacity and $42.5 million of federal-funds borrowing lines.
- Borrowings: Period-end short-term FHLB advances were $181.1 million; other borrowings were $55.0 million, including a $50.0 million FHLB advance made in May 2019, fixed at 2.05% and puttable after five years. Subordinated debentures were $29.4 million.
- Capital: At September 30, total risk-based capital was 16.3%, Tier 1 risk-based capital 15.5%, CET1 13.2% and leverage 12.4%; each exceeded the stated well-capitalized thresholds.
Changes and management commentary
- Compared with Q3 2018, the company moved from a $3.4 million net loss to $7.7 million net income. Management attributed the increase in net interest income mainly to higher average loan and securities balances and higher loan yields. The UCB acquisition contributed materially to the larger average balance sheet.
- Q3 noninterest expense fell 24.5%, primarily because Q3 2018 included UCB acquisition-related compensation, data-processing and professional-service costs. Nine-month expense was nearly flat year over year: lower prior-year acquisition costs offset costs associated with operating a larger company.
- Deposit interest expense increased as both average interest-bearing balances and rates paid rose. The company reported Q3 average rates of 0.33% on demand and savings deposits and 2.03% on time deposits, compared with 0.19% and 1.13%, respectively, a year earlier.
- Available-for-sale securities rose to $355.3 million. Accumulated other comprehensive income improved to $11.7 million, reflecting higher unrealized gains on securities, net of tax. The company said unrealized securities losses were primarily market-rate related and it intended and was able to hold the affected securities until recovery.
- During the first nine months, Civista repurchased 188,200 common shares for $3.9 million at an average $20.77 per share. Its authorization allowed repurchases of up to 470,000 shares through December 18, 2019; 281,800 remained at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific earnings, revenue or margin guidance. Management describes results as subject to economic, credit, interest-rate, real-estate, regulatory, tax, operational and litigation risks, and cautions that interim results are not necessarily indicative of full-year results.
- Credit exposure is concentrated in lessors of non-residential buildings and dwellings ($427.5 million, 25.8% of loans) and lessors of residential buildings and dwellings ($166.2 million, 10.0%). Management noted repayment depends in part on real-estate markets and regional economic conditions.
- The company’s interest-rate-risk model showed net portfolio value increasing 12% under a hypothetical +200 basis-point scenario and 1% under a −100-basis-point scenario at September 30, 2019. These are model estimates, not forecasts of earnings.
- The company discontinued FCRS operations on June 30, 2019, while stating that its participation in the tax-refund processing program would continue. Tax-refund processing fees were $2.75 million for the nine-month period, unchanged year over year, and are seasonal.
- Adoption of lease accounting added $2.4 million each of operating lease right-of-use assets and liabilities. The company was evaluating the future credit-loss standard; the filing noted a then-expected effective-date deferral for smaller reporting companies, with final FASB action pending.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much reported growth and earnings improvement reflects the 2018 UCB acquisition, versus organic growth and sustainable cost changes.
- Whether deposit repricing and funding costs continue to pressure margins, given higher interest expense and the 100.1% net loan-to-deposit ratio.
- Credit trends in the commercial real-estate concentrations, including past-due, nonaccrual and criticized loans, and whether the allowance remains adequate as the portfolio grows.
- The sustainability of earnings excluding securities valuation changes, seasonal tax-refund fees, loan-sale gains and other potentially variable income.
- The company’s remaining share-repurchase activity, capital position and implementation costs or effects from future credit-loss accounting requirements.