Civista Bancshares (CIVB), headquartered in Sandusky, Ohio, is the holding company for Civista Bank. Civista’s operating history traces all the way back to 1884 and it currently operates 35 Branches and 3 Loan Production facilities (primarily in Ohio, but footprint extends into Indiana and Kentucky).
Recent market weakness along with a negative reaction to Q3 2018 results has dropped CIVB shares nearly 35% since the end of September. After its earnings report on November 2nd, CIVB shares underperformed the BKX Index by ~10% as shares were under pressure due to some significant one-time expense items that weighed on earnings during the quarter. CIVB closed its purchase of Indiana-based United Community Bancorp in early September, and CIVB management decided to convert United Community’s systems and operations concurrent with the merger close (most banks wait a period of 6-12 months for conversion to smooth the expenses over multiple quarters). All told, CIVB reported $8.8 million of acquisition- and integration-related expenses during Q3 2018, or $0.63 per share. On its Q3 earnings call, management indicated Q4 noninterest-expense should return to a normalized ~$15mm run rate. I believe the earnings-related selloff provides a current buyer a nice ~10% discount on top of the ~25% revaluation the market slapped on just about every other bank stock in Q4.
Looking past the integration expenses and broad market selloff, there are many attractive components in Civista’s operational performance, balance sheet, and core deposit franchise. Since 2014, Civista has printed 1%+ ROAs and 9%+ ROEs for its shareholders and, after adjusting for acquisition expenses, the bank is printing a YTD ROA and ROE of 1.45% and 12.18%, respectively. A huge part of the attractive profitability metrics is the value of its deposit franchise; nearly 30% of the bank’s deposits are noninterest-bearing and only ~16% is higher-cost Time Deposits. Overall, Civista’s total cost of deposits is just 0.22%.
(Quick aside on stock structure – Civista currently has a convertible preferred (CIVBP) paying a 6.5% dividend. Unless the common price plummets in 2019, the company will likely call the preferred in December 2019, providing a small cost save).
The aggressive selloff provides a nice entry level to invest alongside a bank set up for strong performance over a full cycle and upside potential for a takeout. Primary drivers setting up CIVB shareholders for continued investment performance over the near- and longer-term:
- Compounding Earnings: Under the current regulatory environment, ROE should print a 10%+ rate and provide attractive growth and investment returns to shareholders.
- Dividend Income: CIVB pays a ~2.25% dividend yield (a very manageable 21% payout ratio).
- Potential M&A Upside: from an acquirer’s perspective, CIVB delivers a lot of value.
- Market Geography: nestled in all 5 of Ohio’s, plenty of buyers to consider as a fit.
- Deposit Funding: impressive, all around
- 30% of CIVB’s deposits are noninterest-bearing
- The cost of the interest-bearing deposits is 0.35%
- The total cost of funds on CIVB’s $1.6 Billion deposit book is 0.22%
- Capital Positions: Civista is well-capitalized when analyzing the as-reported capital ratios, or even after adjusting for its Trust Preferred borrowings (CIVB Tier 1 and Total Capital levels get the benefit of ~$29mm in qualifying Trust Preferred borrowings). If CIVB decided to call its TruPs, its capital levels would be closer to 13%, still very well-capitalized.
- Asset Quality: credit book looks to be in decent shape, CRE loan mix is a little high but its manageable. Management speaks to its confidence in its credit work and maintain a conservative level of reserves; current LLR/NPL ratio is ~125%.
Some concerns that could pressure earnings/profitability/growth to keep an eye on:
- CRE Mix – CIVBs loan mix is ~40% CRE and CRE as a % of Capital is ~270%, just shy of the 300% regulatory threshold/watch. I won’t waste the ink here given the amount of coverage CRE lending has received in the business press, but that concentration is worth monitoring.
- Economic Cycle – Hard to forecast how close we are to a turn in the credit cycle, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in local and national economies.
Bank Description & Geography
Civista Bank’s roots trace back to 1884, and the bank currently has a 35 branch network in spread across the five largest MSAs in Ohio as well as some spillover into Indiana and Kentucky.
Source: Civista Investor Presentation (SEC.gov link)
- Directors / Named Executives, as group – 4.1%
- RMB Capital – 5.4%
- BlackRock – 4.6%
- Vanguard – 3.7%
- Castine Capital – 2.7%
- Maltese Capital – ~2% (assuming preferred stake is converted into common)
- EJF Capital – ~1% (assuming preferred stake is converted into common)
- First Financial ($13.8B Assets / FFBC)
- WesBanco ($12.6B / WSBC)
- First Merchants ($11.1B / FRME)
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- First Commonwealth ($7.7B / FCF)
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- S&T Bancorp ($7.1B / STBA)
- FNB Corp ($32B / FNB)