Civista Bank

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Wednesday June 1, 2016

As investors, we read reams and reams of management discussion and analysis documents, most of which is either dull as dishwater or painted in the florid colours of public relations. So it is always a pleasant break to receive a “Dear Shareholder” letter from Civista Bank, subsidiary of holding company Civista Bancshares Inc., based in Sandusky, Ohio.

These notes always start off the same way, with a reference to the enclosed dividend. An odd anachronism (surely everyone has direct deposit into their accounts), but it harks back to the days when shareholders were seen as integral partners in a business. Chief executive James Miller maintains a businesslike but folksy tone as he succinctly reviews operations. He closes with a reminder that he is just a phone call away, which Ben put to the test last week. The result was talking to the head honcho in less than a minute.

Civista is a relatively new moniker, as the organization started as First Citizens Bank way back in 1884. Several other small institutions were acquired between 1998 and 2015, with the company passing the $1 billion (US) asset mark toward the end of that period. Though we generally consider most corporate “rebranding” faddish, in this case — as there are scores of “Citizens” banks — changing to a unique identity that avoids confusion made a lot of sense.

In the past few quarters, the news from this small regional bank has been very encouraging. For 2015, net income was $12.7 million (US), a 33 percent jump from the previous year. Revenue has been increasing steadily while expenses are showing a slower rate of growth. Loan quality is good, accompanied by a modest decrease in non-performing loans and loan loss provisions. The current business model of generating a superior return on equity by collecting deposits from rural Ohio and deploying it in cities with a more vibrant economy is working well.

The stock price has been moving up in a lovely trend to its current $11.60, easily outperforming the broader market. However, the scale of this rise doesn’t mesh with just how much the fundamentals have improved. This conclusion is glaring when comparing Civista with Macatawa Bank, which we also own. Macatawa is headquartered in Holland, Mich., and last year had revenue of $67.1 million, net income of $12.8 million and a dividend yield of 1.7 percent, which matches very closely with Civista’s respective figures of $65 million, $12.7 million, and 1.7 percent. Yet, the market has somehow rewarded Macatawa with a capitalization of about $242 million, miles ahead of Civista’s $91.7 million.

So why is the market being so stingy in its valuation? Mr. Miller points a finger at a lack of intuitional ownership of the stock. “They tell me it’s too hard to fill a big order,” he laments. It’s a chicken-and-egg conundrum in which a lack of liquidity dissuades the players who would add to trading activity. Average daily trading volume is about 7,000 shares, whereas Macatawa trades about eight times that amount.

One thing that would increase interest from the financial community is the opportunity to earn some fees from a new capital raise or engineering more acquisitions. But Mr. Miller is adamant that any transaction must pass his exacting quality standards. Recent purchases have been integrated into Civista with precision and authority. He attributes this to his team understanding local targets thoroughly and he claims to have passed on a few deals that just didn’t hit the mark.

The view from here is that the best way to improve sentiment on the stock would be to raise the dividend. There is ample room to do so as the payout ratio is a paltry 17 percent. Back in 2003, when Civista crested the $30 mark, it paid out $1.30 in annual dividends out of earnings of $1.48 a share. Granted, that was pushing the envelope somewhat the other way, but raising the current rate of a 5 cents a quarter, in stages to 20 cents, would increase the bank’s visibility while still providing funds to build the business.

If, indeed, Civista is stubbornly undervalued, Mr. Miller seems more perplexed than frustrated about it. “All I can do is keep on doing what I’m doing,” he muses. Once this becomes better recognized, Civista’s current price-to-earnings ratio of nine ought to move in line with its peers. That would put the sell target of $24 to $26 in reach.