Civista Bancshares(US:CIVB)2023-03-14 16:00Part I Business Civista Bancshares is a financial holding company focused on community banking, expanding through acquisitions in 2022 and emphasizing relationship banking and operational efficiency - Civista Bancshares, Inc. is a registered financial holding company with total consolidated assets of $3.54 billion as of December 31, 2022154 - In 2022, the company completed two key acquisitions: - Comunibanc Corp.: Acquired on July 1, 2022, for approximately $46.1 million in a stock and cash transaction, adding seven new offices and expanding presence in northwest Ohio160161 - Vision Financial Group, Inc. (VFG): Acquired on October 3, 2022, for approximately $46.5 million, now a wholly-owned subsidiary of Civista Bank providing equipment leasing and financing163 Loan Portfolio Composition (2020-2022) | Loan Category | 2022 % of Total | 2021 % of Total | 2020 % of Total | | :--- | :--- | :--- | :--- | | Commercial real estate | 55% | 56% | 48% | | Residential real estate | 22% | 22% | 22% | | Commercial and agriculture | 11% | 12% | 20% | - The company's business strategy is centered on expanding community relationships, growing core deposits, leveraging its mortgage banking infrastructure, improving operational efficiency, and maintaining robust capital and liquidity levels169171 - As a financial holding company, CBI is subject to extensive supervision and regulation by agencies including the Federal Reserve Board, the FDIC, and the State of Ohio Division of Financial Institutions (ODFI)196197 Risk Factors The company faces significant economic, real estate, interest rate, operational, regulatory, and acquisition integration risks that could materially impact its financial performance - Economic and Political Risks: Success is dependent on local and national economic conditions, where factors like inflation, recession, interest rate changes, and fiscal policy can adversely affect deposit levels, loan quality, and collateral values277278 - Real Estate Market Risk: A significant portion of the loan portfolio is comprised of residential (21.7%) and commercial (54.6%) real estate loans as of December 31, 2022, making the company vulnerable to a deterioration in real estate values that could increase delinquencies and non-performing assets280281 - Interest Rate Risk: Net interest income is sensitive to changes in interest rates, where a rapid rise in rates on deposits faster than on loans, or vice versa, could adversely affect earnings283284 - LIBOR Transition Risk: The company has approximately $274.0 million in exposure to LIBOR as of December 31, 2022, and the transition to alternative reference rates like SOFR could impact income, expenses, and the value of financial contracts291294 - Operational and Cybersecurity Risks: The company is exposed to operational risks from system failures, fraud, and human error, with unauthorized disclosure of client information or security breaches potentially harming the business, and reliance on third-party vendors introducing additional risk300306322 - Credit and Competition Risks: The allowance for loan losses may be insufficient to absorb future losses, especially with the upcoming transition to the CECL model, and the company faces strong competition in its market areas for both loans and deposits327325 - Acquisition Risk: The successful integration of the 2022 acquisitions of Comunibanc Corp. and VFG is subject to inherent uncertainties, including retaining customers and key employees and achieving projected operating efficiencies347348350 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities This section details common stock information, including shareholder count, dividend restrictions, and share repurchase activities under a $13.5 million program - As of February 21, 2023, there were approximately 1,767 shareholders of record for the company's common shares391 Common Share Repurchases (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share ($) | Value Remaining in Program ($) | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2022 | 7,205 | $21.40 | $6,055,711 | | Nov 1 - Nov 30, 2022 | — | — | — | | Dec 1 - Dec 31, 2022 | — | — | — | | Total Q4 | 7,205 | $21.40 | $6,055,711 | - On May 4, 2022, the company announced a new share repurchase program authorizing up to $13.5 million of its common shares through May 9, 2023, with $7.44 million repurchased under this program as of December 31, 2022393 Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results for 2022, highlighting asset growth to $3.54 billion driven by acquisitions, a slight net income decrease, and strong capital ratios Financial Condition Total assets grew to $3.54 billion in 2022, driven by acquisitions and a 27.7% increase in net loans, while shareholders' equity decreased due to unrealized losses on securities Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 (in thousands $) | Dec 31, 2021 (in thousands $) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $3,537,830 | $3,012,905 | 17.4% | | Net Loans | $2,518,155 | $1,971,238 | 27.7% | | Total Deposits | $2,619,984 | $2,416,701 | 8.4% | | Total Shareholders' Equity | $334,835 | $355,212 | (5.7%) | - The increase in net loans was broad-based, with significant contributions from the Comunibanc and VFG acquisitions, and Commercial Real Estate (Owner and Non-Owner Occupied) and Residential Real Estate being the largest growth segments405 - Securities available for sale increased by 9.9% to $615.4 million, but the portfolio shifted from a net unrealized gain of $18.6 million in 2021 to a net unrealized loss of $66.9 million in 2022, primarily due to rising market interest rates416419 - Goodwill increased by $48.8 million to $125.7 million due to the goodwill created from the acquisitions of Comunibanc Corp. ($26.2 million) and VFG ($22.6 million)424104119 Results of Operations Net income for 2022 was $39.4 million, a slight decrease from 2021, as 15.5% growth in net interest income was offset by a 16.5% increase in noninterest expenses Income Statement Highlights (in thousands) | Account | 2022 (in thousands $) | 2021 (in thousands $) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $110,204 | $95,425 | 15.5% | | Provision for Loan Losses | $1,752 | $830 | 111.1% | | Noninterest Income | $29,076 | $31,452 | (7.6%) | | Noninterest Expense | $90,493 | $77,666 | 16.5% | | Net Income | $39,427 | $40,546 | (2.8%) | - The increase in net interest income was driven by a $172.2 million (8.5%) increase in the average balance of loans and a rise in the loan yield to 4.69% from 4.42% in 2021447 - The provision for loan losses increased by $0.9 million in 2022 primarily to support strong organic loan growth and to cover lease production from the newly acquired VFG subsidiary452 - Noninterest expense increased by $12.8 million, with notable increases in compensation ($6.4 million), professional services ($2.7 million, including $1.7 million in acquisition costs), and equipment expense ($3.2 million)457458 Liquidity and Capital Resources The company maintains a conservative liquidity position with $374.7 million FHLB borrowing capacity and strong capital ratios exceeding 'well-capitalized' thresholds - Primary sources of liquidity include cash flows from operations, deposit growth, and FHLB advances; at year-end 2022, the company had total FHLB credit availability of $829.5 million, with $454.8 million outstanding472 - On a parent company basis, the primary source of funds is dividends from Civista Bank, with approximately $55.5 million payable to the parent company at year-end 2022 without prior regulatory approval472 Regulatory Capital Ratios (Consolidated) as of Dec 31, 2022 | Ratio | Company Ratio (%) | Well-Capitalized Minimum (%) | | :--- | :--- | :--- | | Total Risk Based Capital | 14.5% | 10.0% | | Tier I Risk Based Capital | 10.8% | 8.0% | | CET1 Risk Based Capital | 9.7% | 6.5% | | Leverage Ratio | 8.9% | 5.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest-rate risk, managed by ALCO, with NPV sensitivity analysis showing a 3% increase for a +200bp rate change and a 5% decrease for a -200bp change - The company's primary market risk exposure is interest-rate risk, managed through active board and senior management oversight and a comprehensive risk-management process479 Net Portfolio Value Sensitivity Analysis (as of Dec 31, 2022) | Change in Rates | Dollar Amount (in thousands $) | Dollar Change (in thousands $) | Percent Change (%) | | :--- | :--- | :--- | :--- | | +200bp | $571,328 | $14,733 | 3% | | +100bp | $566,596 | $10,001 | 2% | | Base | $556,595 | — | — | | -100bp | $548,575 | ($8,020) | (1%) | | -200bp | $526,702 | ($29,893) | (5%) | - The change in net portfolio value sensitivity from 2021 to 2022 is attributed to the rise and inversion of the yield curve, as well as shifts in the volume and mix of assets (less cash, more loans) and funding sources483 Financial Statements and Supplementary Financial Data This section presents consolidated financial statements, management's report on internal controls, and the independent auditor's unqualified opinions for 2022, 2021, and 2020 Management's Report on Internal Control over Financial Reporting Management concluded its internal control over financial reporting was effective as of December 31, 2022, excluding recent acquisitions representing 10.17% of consolidated assets - Management concluded that as of December 31, 2022, its system of internal control over financial reporting is effective, based on the criteria in the "2013 Internal Control – Integrated Framework" by COSO9 - The scope of the assessment excluded the acquisitions of Comunibanc Corp. (acquired July 1, 2022) and Vision Financial Group (acquired October 3, 2022), as permitted by SEC guidance8 Report of Independent Registered Public Accounting Firm FORVIS, LLP issued unqualified opinions on the 2022 and 2021 financial statements and 2022 internal controls, identifying Allowance for Loan Losses and Mergers and Acquisitions as critical audit matters - The auditor expressed an unqualified opinion on the consolidated financial statements as of December 31, 2022 and 2021, and on the effectiveness of internal control over financial reporting as of December 31, 20221324 - Critical Audit Matters (CAMs) were identified for the current period audit: - Allowance for Loan Losses: Auditing this estimate involved significant judgment regarding economic conditions, impaired loan allowances, and loan grades - Mergers and Acquisitions: Auditing the fair value of acquired assets and assumed liabilities from the two 2022 acquisitions involved a high degree of subjectivity151619 Consolidated Financial Statements The consolidated financial statements show total assets of $3.54 billion in 2022, with net income of $39.4 million ($2.60 diluted EPS), reflecting impacts from 2022 acquisitions Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2022 (in thousands $) | Dec 31, 2021 (in thousands $) | | :--- | :--- | :--- | | Total Assets | $3,537,830 | $3,012,905 | | Loans, net | $2,518,155 | $1,971,238 | | Total Deposits | $2,619,984 | $2,416,701 | | Total Liabilities | $3,202,995 | $2,657,693 | Consolidated Statement of Operations Data (in thousands) | Account | 2022 (in thousands $) | 2021 (in thousands $) | 2020 (in thousands $) | | :--- | :--- | :--- | :--- | | Net Interest Income | $110,204 | $95,425 | $89,727 | | Provision for Loan Losses | $1,752 | $830 | $10,112 | | Noninterest Income | $29,076 | $31,452 | $28,182 | | Noninterest Expense | $90,493 | $77,666 | $70,665 | | Net Income | $39,427 | $40,546 | $32,192 | | Diluted EPS | $2.60 | $2.63 | $2.00 | Consolidated Statement of Cash Flows Data (in thousands) | Activity | 2022 (in thousands $) | 2021 (in thousands $) | 2020 (in thousands $) | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $25,183 | $40,761 | $32,654 | | Net Cash used for Investing Activities | ($410,364) | ($130,496) | ($340,982) | | Net Cash from Financing Activities | $164,303 | $216,925 | $398,802 | | Net Change in Cash | ($220,878) | $127,190 | $90,474 | Notes to Consolidated Financial Statements These notes detail accounting policies, 2022 acquisitions, loan portfolios, allowance for loan losses, goodwill, capital requirements, and retirement plans, crucial for understanding financial performance - Note 1: The company will adopt the new CECL accounting standard (ASU 2016-13) in the first quarter of 2023, estimating an increase of approximately $3.3 million in allowance for credit losses and $3.4 million for unfunded commitments upon adoption95 - Note 2: Details the acquisitions of Comunibanc Corp. and Vision Financial Group (VFG), where the Comunibanc acquisition resulted in $26.2 million of goodwill and $4.4 million of core deposit intangibles, and the VFG acquisition resulted in $22.6 million of goodwill104119 - Note 5: The allowance for loan losses was $28.5 million at year-end 2022, or 1.12% of total loans, compared to $26.6 million, or 1.33% of total loans, at year-end 2021, with the provision for loan losses in 2022 being $1.8 million541542 - Note 15: The company sponsors a frozen defined benefit pension plan, which had a funded status of $811 thousand at year-end 2022, an improvement from a deficit of $264 thousand at year-end 2021658662 - Note 19: Both the consolidated company and Civista Bank met all capital adequacy requirements and were categorized as 'well capitalized' under regulatory frameworks as of December 31, 2022715717 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reported no disagreements with its independent accountants regarding accounting principles, financial disclosure, or auditing scope - The Company has had no disagreements with its independent accountants on matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedure495 Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of December 31, 2022, with no material changes to internal control over financial reporting - Based on an evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022496 - No changes occurred in the company's internal control over financial reporting during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, these controls499 Part III Directors, Executive Officers, and Corporate Governance Information on directors, executive officers, corporate governance, and board committees is incorporated by reference from the 2023 Proxy Statement - Information regarding directors, executive officers, the audit committee, code of ethics, and nominating procedures is incorporated by reference from the 2023 Proxy Statement504 Executive Compensation Details on director and executive compensation are incorporated by reference from the company's 2023 Proxy Statement - Details on director and executive compensation are incorporated by reference from the 2023 Proxy Statement506 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on beneficial ownership is incorporated from the 2023 Proxy Statement, with 154,123 common shares available for future issuance under equity compensation plans - Information on security ownership is incorporated by reference from the 2023 Proxy Statement507 Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Shares to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Shares Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by Shareholders | — | — | 154,123 | | Not Approved by Shareholders | — | — | — | | Total | — | — | 154,123 | Certain Relationships and Related Transactions, and Director Independence Information on director independence and related party transactions is incorporated by reference from the 2023 Proxy Statement - Information regarding director independence and transactions with related persons is incorporated by reference from the 2023 Proxy Statement509 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement510 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report, with all financial statement schedules omitted as not applicable - This section lists all financial statements, schedules, and exhibits filed as part of the annual report, with all financial statement schedules omitted as they were not applicable752759