Banking On Diversity And Innovation Amid Rising Funding Costs And Shrinking Margins

Key Takeaways

• Shifting focus towards low-cost deposit attraction and exiting certain partnerships is aimed at improving financial health through better net interest margins.
  
• Diversification of revenue streams, through initiatives like leasing and wealth management, alongside maintaining regulatory capital standards, supports strategic growth and earnings.
  
• Civista Bancshares faces profitability risks due to higher funding costs, revenue gaps from exiting key partnerships, volatile loan income, and strategies that may limit financial maneuverability.

Catalysts

Operates as the financial holding company for Civista Bank that provides community banking services.

• Exiting the relationship with the income tax refund processor and focusing on initiatives to attract newer low-cost deposits are expected to reduce dependency on higher interest funding sources, potentially improving net interest margin and reducing overall funding costs.
  
• Strong loan demand and a disciplined approach to deposit pricing seem poised to support revenue growth and possibly expand net interest margins despite a challenging interest rate environment.
  
• The increase in noninterest income, particularly from leasing operations and wealth management fees, indicates diversified revenue streams that could bolster earnings.
  
• Ongoing efforts to secure additional deposits through new programs and services, such as the Ohio Homebuyers Plus program and the initiative to hold cash deposits for wealth management clients, aim to strengthen the deposit base, which may enhance funding costs and support future growth.
  
• The focus on organic growth and maintaining adequate capital for potential acquisitions while managing to remain well-capitalized under regulatory standards aligns with strategic growth objectives, possibly impacting earnings and shareholder value positively.

Assumptions

• Analysts are assuming Civista Bancshares's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 13.2% in 3 years time.
• Analysts expect earnings to reach $22.7 million (and earnings per share of $1.48) by about September 2027, down from $32.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.9x on those 2027 earnings, up from 8.7x today. This future PE is greater than the current PE for the US Banks industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Risks

• The higher cost of funding due to increased reliance on overnight borrowings and broker deposits puts pressure on the net interest margin, potentially impacting profitability.
  
• Exiting a key relationship with an income tax refund processor may lead to a revenue gap, imposing risks on overall earnings.
  
• A significant portion of the loan portfolio is in adjustable-rate and commercial real estate loans, which could be subject to interest rate risks and market volatility, affecting loan income stability.
  
• The increased allowance for credit losses, primarily due to strong loan growth and a notable charge-off from a client's fraud event, may lead to higher provisions in the future, impacting net income.
  
• The bank's strategy to rebuild its Tangible Common Equity (TCE) ratio while maintaining dividend payouts may limit its ability to maneuver financially, particularly in pursuing growth opportunities or facing unexpected economic downturns, affecting shareholder returns.

Valuation

• The analysts have a consensus price target of $19.17 for Civista Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $172.1 million, earnings will come to $22.7 million, and it would be trading on a PE ratio of 15.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $17.75, the analyst's price target of $19.17 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.