Civista Bancshares Has An Attractive Dividend With Significant Upside

Civista Bancshares, Inc. (NASDAQ:CIVB), incorporated in 1987 and headquartered in Sandusky, Ohio, is a financial holding company that through its primary subsidiary, Civista Bank, provides banking services in Ohio.

There’s a very good chance that an investor’s yield on cost at the current price level of the shares will only get better in a relatively short period, and that value investors will get paid to wait for the market to assign a much higher premium to TBV that I think CIVB deserves. In this article, I will cover the current state of the company’s portfolio, past performance (both long and short term), capital position, dividend profile, and valuation to support why I think this would make a very good addition to both income and value portfolios.

Business & Portfolio

With total assets of $3.86 billion and $2.98 billion in deposits, this small regional bank’s market cap of $227.46 million significantly downplays the size of the business. And though the holding company was formed in 1987, Civista Bank, its primary subsidiary, was founded in 1884, making the micro-cap status deceiving.

The fact remains, however, that the bank’s market is entirely located in Ohio communities, making it not as diversified as investors may demand, keeping it out of many people’s radars. Still, the branch offices it operates through are located throughout the state (Sandusky, Norwalk, Berlin Heights, Huron, Port Clinton, Castalia, New Washington, Shelby, and many more).

In any case, the economy of Ohio has experienced a slower pace of growth lately. Based on a recent data brief by the Federal Reserve Bank of Cleveland, the state’s GDP growth was close to the median of all states during the period 2019:Q4 – 2021:Q4. However, Ohio’s GDP lagged afterward as it increased by ~0.5% during 2021:Q4 – 2023:Q3, while U.S. GDP grew by almost 3%, making Ohio rank 45th (down from the 31st place that it ranked in the previous period). A large contributor to the lagging observed here was the Finance, Insurance, and Real Estate industry (“FIRE”) for which GPD decreased by 1.9% while the U.S. experienced a 0.1% decline during the latter period.

Therefore, there is a good reason for the market to apply a discount to regional banks in Ohio. However, in the absence of an equally good reason for this trend to persist and the size of its impact on CIVB, I wouldn’t put that much weight on it. Further, as we will soon see, the discount is too large to justify it, and Civista too resilient to deserve it.

Unsurprisingly, due to its size and market concentration, the business doesn’t enjoy any particular kind of competitive advantage over other lenders. However, it is focused on an often underserved market, as it primarily lends to small- and medium-sized businesses. Of course, this focus generally presents a higher risk, as their credit profile can be worse than established and large borrowers. But as we’ll witness in a minute, this is not the case with Civista.

Now, the primary source of revenue for this business is the interest it earns on its loans, which brought 73.1% of total revenue in 2023 based on the last 10-K. More specifically, this is primarily interest earned on real estate loans, as they make up the majority of the portfolio:

Interestingly, almost all of the above loans have a variable rate and all of them mature in 5 years or less. And to keep things in perspective, only 5.2% of the portfolio are loans backed by office RE.

A few thoughts here before we look into the performance. First, with more than half the portfolio consisting of commercial RE, one might wonder what the credit quality is here. As far as I can see, there are absolutely zero signs of potential deterioration. Almost all the loans were rated as Pass in the last report except for 1.6% of RE construction loans that were rated as Special Mention (these accounted for only 0.14% of total loans); there were Special Mention loans in the other loan types but those represented insignificant amounts.

Moreover, during the last earnings call, it was revealed that only one loan relationship was non-performing. The amount was $3.5 million, or 0.12% of the loan portfolio. Also, the reserve coverage ratio was 1.3% at year-end 2023, up from 1.08% the year before. An acceleration, no doubt, but overall not indicative of an expectation for much more serious losses. That is also supported by the fact that there were net recoveries representing 0.04% of the portfolio in 2023, and the net charge-offs in 2022 and 2021 were insignificant at 0.01% and 0.04%, respectively.

All in all, the loans seem solid and that provides important context before we head to valuation.

Performance

If you take a look at the long-term operating results, the performance growth in the last 10 years has been quite impressive for a bank:

Moreover, tangible book value has been growing at a very fast pace over the last decade. This is interesting because this is not a new business. Also, the deposit base has been expanding quite fast as well over the years; here are the YoY changes in the last decade:

A similar unrelenting upward trend is observed in the growth of the loan portfolio as well:

The most recent results provide the most interesting thing about this business, however. While banks generally witnessed the yield on their loans increasing from 2022 to 2023, many experienced both their interest spreads and margins getting severely compressed. Civista, however, suffered a minor decrease in its interest spread and enjoyed a small increase in its NIM:

	2023	YoY Change
Loan Portfolio Yield	5.9%	118 bps
Net Interest Spread	2.97%	-40 bps
Net Interest Margin	3.7%	5 bps

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The boon that the generally low deposit costs coupled with the increased portfolio yield provided was also reflected in net interest income experiencing double-digit growth in 2023 and net income increasing during a period in which so many regional banks reported YoY declines:

	2023	YoY Change
Interest Revenue	$182,734,000	45%
Net Interest Income	$125,496,000	14%
Non-Interest Income	$37,163,000	28%
Net Income	$42,964,000	9%
EPS Diluted	$2.73	5%
Tangible Book Value	$13.92	22%

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Its tangible book value growth continues to be exceptional, by the way. Additionally, non-interest income is still quite a big source of the bank’s profits, so it’s worth noting it increased by 28% YoY.

Solvency & Liquidity

Moving on to its capital position, all the relevant capital ratios were high enough to reflect adequate liquidity and moderate leverage at the end of 2023. Moreover, all of them were higher YoY, while greatly surpassing the minimum regulatory requirements for the company to be considered well-capitalized:

As for the cost of debt, the rate of total interest-bearing liabilities as of the year-end 2023 was only 2.38%, up from 0.79% in 2022 and 0.53% in 2021. And to put things into perspective, non-interest-bearing liabilities constituted 26% of total liabilities.

Last, while Civista’s LDR was 97.6% on December 31, 2023, non-interest-bearing deposits accounted for 34.86% of the deposit base, probably making the latter relatively stable. Also, its cash and equivalents and AFS accounted for 22.7% of its total deposits at year-end 2023, representing adequate liquidity.

Dividend & Valuation

Now, CIVB currently pays a quarterly dividend of $0.16 per share, resulting in a forward yield of 4.48%. This is good for two reasons. First, the payout ratio is 23% based on 2023 earnings, reflecting a wide margin of safety and great room for dividend and business growth.

Second, the distribution record is very promising, indicating a commitment to continually adjusting the portion the company shares with shareholders through dividend payments. More specifically, the dividend per share amount quadrupled in the last decade:

Given this context, I think the current yield reflects very good value. And so does the current price. On one hand, CIVB didn’t suffer as much selling pressure as other bank stocks after the Fed started raising the rate in 2022:

On the other hand, the forward earnings multiple is ridiculously low, if I may say so:

A P/E ratio of 7x is both low on an absolute basis and reflects a very good upside given the 5-year mean. Also, consider that the TTM P/E ratio of CIVB is much lower than the multiples of similar in size regional banks:

Moreover, the book value discount is also very large and well below the 5-year mean P/B:

Assuming a stable book value level, the price would need to increase by more than 50% to close the gap illustrated above. But why should it increase?

Consider that we are at what seems like an interest rate peak, more or less. Given that there is a ~60% chance of a Fed Funds rate cut now expected in September, it’s at least unlikely the Fed will raise the rate again after it held it steady for the past few months. I believe that this is enough to allow the company to continue decreasing its debt costs and increasing its portfolio yield; in other words, there’s a good chance that a net interest spread trough has already been reached and the starting of an expansion is unlikely to go unnoticed by the market (again, CIVB wasn’t punished as severely as other bank stocks as interest rates went higher, and it showed resilience during the last 2 years).

Still, a mean reversion will take time. I believe that the battle on inflation will drag out more than the market seems to expect, and that an interest rate cut may prove to be premature in 2024. This is not a short-term investment by any means, but the dividend can offset the potential opportunity cost here and help investors to be patient.

Now, though the discount to book value is significant, the stock is trading at a 2.65% premium to tangible book value, mainly underscoring the substantial goodwill. However, buying CIVB at such a slight premium is reflective of an opportunity, and I will explain why.

For context, I started covering banks I’m interested in relatively recently and some followers may have already understood I am very reluctant to buy banks not trading at a significant discount to TVB. That being said, it’s important to explain why so you can understand where I’m coming from. I generally like situations that involve risks justifiably identified, but unjustifiably quantified by the market. This can result in opportunities because the market often exaggerates the impact of the potential realization of such risks, allowing investors to buy assets discounted and with a margin of safety.

However, a margin of safety can also be established for banks that trade at a reasonable premium to tangible equity if the company has a strong capital position, a long track record of weathering various macro environments, and a high-growth pace. Civista has been around for a very long time and its solvency profile and liquidity are quite solid, while the growth has been substantial as we noticed above.

Thus, the weight of those factors represents a margin of safety that it would be unreasonable to assert that the 2.65% premium offsets.

At the same time, investors whose positions end up having a cost basis around $14 or below may develop a more concrete margin of safety in the medium to long term if tangible book value continues to increase at a similarly attractive pace as in the past. Meanwhile, they could enjoy the dividend and the peace of mind that the company’s capital position and profitability can provide.

Risks

That being said, there are risks that you should be aware of. First, the real estate exposure is so significant here that, coupled with the complete dependence on the state of Ohio, may result in a lot of price volatility during adverse real estate conditions in that state. Fortunately, investors can find profitable and undervalued banks that operate in different states to hedge this risk.

Other than this, you should be monitoring the credit quality of Civista’s portfolio to see if there’s any sign of deterioration, as credit risk is one of the most important ones that the market might react to here. The same goes for regulatory developments and changes in interest rates; shareholders will need to stay up to date to avoid being caught off guard.

Verdict

All in all, this is a good pick for both income and value portfolios, and I feel very bullish, so I am rating CIVB a strong buy. I believe that the market has appreciated the resilience of the business, as reflected in the more modest selloff that followed when interest rates started climbing higher. Still, the discount is large enough to make the stock undervalued, and as interest rates start falling, the market will probably show at least the same level of appreciation by pricing it as it did historically before the last QT cycle.

Regardless, I intend to monitor CIVB meanwhile, and adjust my thesis and rating as future events deem it necessary.

What are your thoughts? Do you own this bank or intend to? Also, did you find this article useful or at least interesting? Let me know in the comments! Thank you for reading.