CIVISTA BANCSHARES, INC. quarterly report, Q1 FY2018

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Civista Bancshares, Inc. — Q1 2018 Form 10-Q

Business context and reporting period. Civista is an Ohio-based financial holding company operating primarily as a community bank. This unaudited filing covers the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Unless otherwise noted, amounts are in millions of dollars.

Financial performance and condition

  • Profitability: Net income was $6.989 million, up 50.8% from $4.635 million in Q1 2017. Net income available to common shareholders was $6.686 million. Basic and diluted EPS were $0.65 and $0.55, versus $0.47 and $0.40.
  • Revenue and margins: Net interest income rose 14.6% to $14.772 million; net interest margin improved to 4.05% from 3.67%. Noninterest income increased 9.3% to $5.616 million. Tax refund processing fees were $2.2 million in both periods and are seasonal, with most received in Q1.
  • Expenses and taxes: Noninterest expense rose 6.1% to $12.205 million. The effective tax rate fell to 14.6% from 29.0%, primarily reflecting the federal corporate tax rate reduction to 21% and tax-exempt income and credits.
  • Cash flow: Operating cash flow was $6.613 million, compared with $8.999 million in Q1 2017. Investing activities provided $3.310 million, versus $46.851 million used; financing provided $68.528 million, versus $183.603 million. Cash increased $78.451 million to $118.970 million, substantially reflecting temporary tax-refund-program deposits.
  • Balance sheet and lending: Assets were $1.600 billion, up 4.9% from year-end; net loans were $1.141 billion, down 0.9%. Total deposits rose $85.748 million to $1.291 billion. The net loan-to-deposit ratio declined to 88.4% from 95.6%.
  • Funding and liquidity: FHLB advances totaled $60.0 million, down $11.9 million, including repayment of a $10 million advance at maturity. Repurchase-agreement funding was $17.452 million; subordinated debentures were $29.427 million. The company reported $278.569 million of remaining FHLB borrowing capacity after standby letters of credit, $42.5 million in correspondent-bank federal-funds lines, and a $7.5 million parent-company credit line.
  • Capital: Shareholders’ equity was $188.043 million, or 11.8% of assets. At March 31, total risk-based, Tier 1 risk-based, CET1, and leverage ratios were 16.9%, 15.9%, 12.1%, and 11.8%, respectively; each exceeded the stated well-capitalized threshold.
  • Credit quality: The allowance was $12.814 million, or 1.11% of loans, versus $13.134 million, or 1.13%, at year-end. No loan-loss provision was recorded in either Q1 comparison period. Net charge-offs were $320,000 versus $5,000; nonaccrual loans fell to $4.944 million from $6.132 million. Past-due loans totaled $4.793 million, down from $6.421 million.

Material changes versus comparable periods

  • Higher loan yields and average earning assets contributed to increased interest income; net interest income rose $1.880 million despite interest expense increasing $352,000.
  • Noninterest income growth included higher wealth-management fees, service charges, and loan-sale gains. Loan-sale volume increased 20.4% to $14.636 million.
  • Operating costs increased $703,000, led by compensation, occupancy/equipment, and professional services; lower intangible amortization partly offset increases.
  • Noninterest-bearing deposits increased $173.261 million from year-end, largely due to $195.926 million of temporary tax-refund-program balances. Management expected these balances to return toward year-end levels over the following two quarters.
  • Available-for-sale securities had a $3.214 million pretax unrealized holding loss in Q1, contributing to a $2.426 million comprehensive loss component and reducing accumulated other comprehensive equity. The filing attributes securities losses mainly to higher market yields and says the company intended and was able to hold the securities pending recovery.

Outlook, risks, and unusual items

  • Pending acquisition: Civista agreed to acquire United Community Bancorp and its bank. Consideration includes 1.027 Civista shares and $2.54 cash per UCB share, plus cash-out of options; aggregate cash consideration was estimated at approximately $13.6 million. Closing was anticipated in Q3 2018, subject to shareholder, regulatory, and other conditions. UCB reported year-end 2017 assets of $546 million, loans of $296 million, and deposits of $462 million.
  • Merger risks: The transaction may not close, integration may be difficult, and anticipated savings or synergies may not be realized. The agreement provides for a $3.5 million termination fee to Civista in specified circumstances.
  • Portfolio and market risks: Commercial property lessor concentrations were 25.8% of loans in nonresidential properties and 13.4% in residential properties. Repayment depends in part on local real-estate and economic conditions. Interest-rate risk, deposit and funding costs, credit quality, regulatory changes, and systems or litigation risks are also identified. A modeled 100-basis-point rate decline reduced net portfolio value 9% at March 31; a 200-basis-point increase raised it 13% under the company’s assumptions.
  • Accounting and other items: Adoption of ASU 2016-01 moved $278,000 from accumulated other comprehensive loss to retained earnings; the filing reports no prior-period net-income impact. Adoption of the revenue-recognition standard had no material impact. The company expects a one-time allowance adjustment when the expected-credit-loss standard becomes effective, but could not estimate its amount. No material legal proceedings were reported, and management concluded disclosure controls were effective.
  • The filing provides no numerical earnings or revenue guidance for future periods. Management cautions that Q1 results are not necessarily indicative of full-year performance.

Important facts for investors to verify

  1. Whether the United Community Bancorp transaction receives required approvals, closes on schedule, and delivers the expected integration benefits and costs.
  2. How quickly tax-refund-related deposits unwind and whether deposit growth, funding costs, and liquidity remain stable afterward.
  3. Trends in commercial real-estate concentrations, delinquencies, charge-offs, and allowance adequacy, particularly given the absence of a Q1 provision.
  4. Whether the improved margin and earnings persist as interest rates and deposit pricing change; review the assumptions behind the interest-rate sensitivity estimates.
  5. The realized effect of the lower tax rate, securities valuation changes, and the forthcoming expected-credit-loss accounting standard on earnings, equity, and capital.