Civista Bancshares Inc (CIVB) 2024 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and Welcome to the Civista Bancshares Inc third quarter, 2024 earnings call. At this time all lines are in a listen-only mode before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of the Civista Bancshares Inc that involve risks and uncertainties.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call.

Additionally, management may refer to non-GAAP measures which are intended to supplement but not substitute the most directly comparable GAAP measures. The press release also available on the company's website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

This call will be recorded and made available on Civista Bancshares website at www.civb.com at the conclusion of Mr Shaffer's remarks, he and the Civista management team will take any questions you may have. Now, I will turn the call over to Mr Shaffer.

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares and I would like to thank you for joining us for our third quarter, 2024 earnings call. I'm joined today by Rich Dutton SVP of the company and Chief Operating Officer of the bank, Charles Parcher SVP of the company and Chief Lending Officer of the bank, Ian Whinnem SVP of the company and Chief Financial Officer of the bank and other members of our executive team.

This morning, we reported net income for the third quarter of $8.4 million, or $0.53 per diluted share, which represents a $1.3 million or 18% increase over the late quarter and a $2 million decline from our third quarter in 2023.

We are pleased with our results as I mentioned during previous calls, this is a year of transition for Civista as we look to replace the revenue from the exited relationship with our income tax refund processor as well as changes in the way we process and charge for overdraft items. In addition, we had to replace the non-interest-bearing funding.

That was a byproduct of our relationship with our former tax refund processing customer exiting this relationship coupled with strong loan growth and flat deposit growth over the last several years has resulted in a greater reliance on wholesale funding.

This reliance has put pressure on our net interest margin which we are taking steps to address. While loan demand continues to be strong in each of our markets. We are taking a disciplined approach in our loan and lease pricing which has had the intended impact of slowing our loan and lease growth. Our loan and lease portfolio growth slowed to an annualized rate of 4% during the quarter which when combined with our efforts to gather core funding lowered our loan to deposit ratio to 95% at September 30th compared to 102% at June 30.

We discussed a number of our deposit initiatives during our last call, and I would like to provide an update on two successful outcomes during the quarter through the state of Ohio's home buyer plus program. We were successful in opening 1,000 new deposit accounts aimed at helping Ohio residents save for the purchase of a new home.

In addition to a $10.5 million in customer deposits as a result of this program, of which 35% were new to the bank. We received $100 million in deposits from the state of Ohio at a cost of 89 basis points. We were also successful in moving approximately $87 million in cash balances of our wealth management clients that were formally held outside the bank into a money market account with the Civista.

In addition to the deposits raised from these two initiatives, we had $49 million of organic growth during the quarter. Currently, we have a number of other deposit initiatives underway, and I continue to be encouraged by our ability to remain disciplined in pricing both our loans and deposits through this entire interest rate cycle.

We reported net interest income for the quarter of $29.2 million which represents an increase of $1.5 million or 5.3% compared to our late quarter. While our overall cost of funding was unchanged at 2.61%. Our yield on earning assets increased by 7 basis points to 5.65%. This resulted in our margin expanding by 7 basis points to 3.16% compared to our Late quarter.

Well, one quarter is not a trend. We do believe that our margin trough during the second quarter and will continue to expand over the next few quarters. I will also point out that we had approximately $200 million in brokered CDs that matured in the last half of October that carried a rate of 5.58%. We were able to replace them with CDs laddered over the next 12 months at a blended rate of 4.32% with a savings of 126 basis points.

We also have another $150 million of brokerage CDs at a rate of 5.08% that will mature at the end of the fourth quarter, that we anticipate replacing at a lower cost. Earlier this month Many of you noticed that we filed a $200 million shelf offering while we have no immediate plans to use the offering. Our preceding shelf offering expired yesterday and we believe it is prudent to maintain the flexibility that having a shelf offering in place affords us as we manage the company.

We also recently announced the closure of our Perry Street branch located in Napoleon in Ohio which is scheduled to close in early December. We expect this closure to result in savings of $234,000 annually beginning in 2025. Given the proximity of our other two Napoleon branch locations, we do not anticipate losing any deposit.

Last Friday, we announced a quarterly dividend of $0.16 per share which is no change from the prior quarter. Based on our October 25, share price of $17.84. This represents a 3.59% yield and a dividend payout ratio of 30.1% for the third quarter, during the quarter non-interest income decreased $857,000 or 8.1% from the linked quarter and increased $1.5 million or 19.2% from the third quarter of 2023.

The primary driver of the decline from our link quarter was a $1.1 million decline in lease revenue and residual fees as we are learning leasing fees, particularly residual income is less predictable than more traditional banking fees. This decline was partially offset by a $539,000 increase in gain on sale of mortgage loans and leases and the receipt of a $319,000 death benefit on a life insurance policy held with a former employee during the quarter.

The primary drivers for the increase from the prior year's third quarter were a $640,000 increase in gains from the sale of mortgage loans and leases, a $515,000 increase in lease revenue and residual income and the receipt of a $319,000 death benefit of the life insurance policy held on a former employee.

We are particularly proud of the fact that our year-to-date non-interest income increased $391,000 or 1.4% in comparison to the prior year. This is particularly impressive given the reduction in fee income related to overdraft, the elimination of the tax processing relationship and the onetime bonus we received in 2023 for entering a new debit brand agreement this year.

We managed to replace nearly $5.7 million and lost fee revenue by adding new deposit customers, increasing service charges, increasing gains on the sale of mortgage loans and leases and through increased lease revenue and residual income non-interest expense for the quarter of $28 million represents an 8.1% decline from our linked quarter as our continued focus on expense control yield an improvement in nearly every category of non-interest expense.

We are in the process of converting our lease accounting and servicing systems. Not only will this consolidate a number of systems we are currently using. It will introduce automation to a number of tasks currently being manually performed. As part of the conversion process, we identified a reconciling item that we are still investigating.

Although we continue to gather information, we believe it prudent to establish an $800,000 reserve against a suspense account which is included in other non-interest expense. We expect the conversion to be completed during the fourth quarter. Year-to-date our non-interest expense increased $2.5 million or 3.1% over the prior year.

Our compensation expense increased $2.8 million over the prior year due to merit increases, insurance and other payroll related expenses. And software maintenance expense was up $540,000 due to new software contracts aimed at improving our ability to detect fraud and mitigate fraud losses, as well as increases in costs associated with existing software contracts.

These increases were partially offset by a $795,000 decline in depreciation related to equipment we own, related to operating lease contracts which is included in equipment maintenance and depreciation. We have been originating fewer operating leases and purchasing residual value insurance on those operating leases that we do not originate with a goal of reducing and eventually eliminating depreciation expense related to operating leases.

Our efficiency ratio for the quarter was 70.2% which is an improvement over the late quarter but not where we would like it to be backing out the impact of the $800,000 reserve. Our efficiency ratio would have been 2% less while it is part of our ongoing operations. If we were to back out the equipment depreciation related to operating leases, our efficiency ratio would have been another percent less.

In addition to the recently announced branch closure, we are investigating a number of other opportunities to reduce expenses across the bank. We remain a very tax efficient company. Our effective tax rate was 15.6% for the quarter and 13.5% year-to-date.

Turning our focus to the balance sheet total loans and leases grew by $29 million during the quarter. This represents an annualized growth rate of 4%. During the quarter, we experienced increases in residential real estate and real estate construction loans that were partially offset by declines in C&I and CRE loans. The loans we are originating for our portfolio continually continue to be virtually all adjustable rate. And our leases all have maturities of five years or less.

So, this remains [CRE] lending bank. However, we have been more aggressive in pricing C&I loans and remain very disciplined in how we are pricing commercial real estate loans as we work to manage our CRE to risk based capital level and better align our lending and core funding.

During the quarter, new and renewed commercial loans were originated and the average rate of 7.59% portfolioed and sold residential real estate loans were originated at 6.6% and loans and leases originated by our leasing division were at an average rate of 9.87%, 30th loans secured by office buildings made up 5.1% of our total loan portfolio.

As we have stated previously, these loans are not secured by high rise metro office buildings rather they are predominantly secured by single or two-story offices located outside of central business districts. Along with year-to-date loan production, our pipelines remain solid and our undrawn construction lines were $261 million at September 30. We anticipate continuing to manage our loan growth to be in the low single digit range for the next several quarters allowing us to optimize funding and further improve our capital ratio.

We continue to focus on other initiatives aimed at deepening relationships and attracting new lower cost deposits that have resulted in our total deposits growing by $246 million for the quarter. Our commercial lenders, treasury management officers, private bankers and retail bankers continue to secure additional deposits in compensating balances from both business and personal customers.

This success is attributed to our ongoing initiatives. We are executing our downward beta strategy by continuing to decrease deposit rates on virtually all of our deposit accounts. However, our cost of interest-bearing deposits increased by 5 basis points to 2.80% during the quarter as deposit customers migrating from non-interest bearing into interest bearing accounts and many of our new accounts were opened at higher rates.

For the quarter, our overall funding costs were unchanged at 2.61% in comparison to our linked quarter. Our deposit base continues to be fairly granular with our average deposit account excluding CDs, approximately $24,000 non-interest-bearing deposits and business operating accounts continue to be a focus. Non-interest-bearing deposits made up 22% of total deposits at September 30. with respect to FDIC insured deposits excluding Civista's own deposit accounts, 13.4% or $430.9 million of our deposits were in excess of the FDIC limits at quarter end.

Our cash and unpledged securities at September 30 were $493.2 million which more than covered these uninsured deposits. Other than the $462.1 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30, we believe so this is low cost deposit franchise is one of our most valuable characteristics contributing significantly to our solid net interest margin and overall profitability.

We view our security portfolio as a source of liquidity at September 30, our security portfolio was $629 million which represents 15% of our balance sheet, and when combined with cash balances represents 21.9% of our total deposits.

We continue to see relief from the pressure that higher interest rates have been putting on our bond portfolio at September 30, all of our securities were classified as available for sale and had $44.6 million of unrealized loss associated with them. This represents a decline in unrealized losses of $17.9 million from the linked quarter in a $9.5 million decline since December 31, 2023.

Civista's earnings continue to create capital and our overall goal remains to maintain adequate capital to support organic growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is a real value. We ended the quarter with our tier 1 leverage ratio at 8.45% which is deemed well capitalized for regulatory purposes.

Our tangible common equity ratio was 6.64% at September 30 which was an increase from 6.19% at June 30, 2024. Our capital levels remain strong. We recognize our tangible common equity ratio screens low. Our previous guidance remains and we would like to rebuild our TCE ratio back to between 7% and 7.5% and we continue to make progress towards that target.

To that end, we will continue to focus on earnings and we'll balance any repurchases and the payment of dividends with building capital to support growth. Despite the uncertainties associated with the national economy, the economy across Ohio and southeastern Indiana is holding up well, our credit quality remains strong and our credit metrics remain stable.

We did make a $1 million net provision during the quarter which was partially attributable to loan growth but primarily attributable to the historically low prepayment and curtailment rates in our loan portfolio and its impact on the CECL model.

Our ratio of allowance for credit losses to total loans is 1.36% at September 30, improving from 1.34% at June 30 and 1.30% at December 31, 2023. This change is primarily due to changes in interest rates and the quarterly updating of factors within our model. In addition, our allowance for credit losses to non-performing loans is 227% at September 30, 2024, compared to 246% at December 31, 2023, $1.5 million of the year-to-date increase in non-performing loans was attributable to a fraud related events that one of our clients experienced that we discussed during last quarter's call.

In summary, we are very pleased with our third quarter results. Our disciplined approach to loan pricing and the way our teams are executing on our deposit initiatives brought better alignment between our lending and core funding. These efforts coupled with the inflection in our net interest margin yielded solid results that I believe sets us up for a strong finish to 2024. Civista remains very focused on creating shareholder value and serving our customers and community.

Thank you for your attention this afternoon and your investment and now we will be happy to address any questions you may have.

Ladies and gentlemen, we will now begin the question-and-answer session.

(Operator instructions)

Justin Crowley, Piper Sandler.

Hey, good afternoon, everyone. I just wanted to start off on the margin here, saw some nice lift in the quarter and looks like some of the borrowings that were paid off occurred later in the period and you know, that could be a tail end into four Q and beyond. And you also mentioned some of the broker deposits that'll reset. But in terms of the borrowings, how are you thinking about further pay downs here? And I guess you can [marry] that with, just outlook on continued traction on the deposit gathering side.

Hi Justin, so we are continuing with the relationship gathering of deposits, with that we expect to just keep on bringing down our overnight borrowings and beyond that really, it's repricing the broker CDs as they become available, but keeping at about the same level on those.

Yeah, I would just add Justin, we have lower deposit cost. We kind of got out in front of that and we had lowered from the beginning of the year. Our highest rate at the time was 5%. We had lowered that prior to any rate reductions by the FED. We had lowered those about 35 basis points when the FED, lower rates. This last time we came down another 35.

So, we have been, we are down 70 basis points from the beginning of the year on all of our CD pricing. That's actually our probably our best rate is at Seven CDs. So, we are down we did that, we Lowered all money markets and everything. So, I think we'll get some lift there. We and as we mentioned, some of those brokered deposits, the repricing happened late in the quarter.

So, we do anticipate the further improvement in the margin. I think as we go forward, hopefully we would get you know, 5 basis points or so lift there and as we enter into the fourth quarter.

Okay. Got it and then I guess beyond that, how are you thinking about how aggressive you can be on lowering deposit rates further? I hear you on what you have done so far since the FEDs moved by 50 basis points, but just thoughts on just how the competitive environment will you know enable you to keep moving lower?

Well, I think we will try to be as aggressive as we can. I mean, when the FED lowers, we are going to lower some of it depends on how our customer reacts, but in general we are we maintain, or we retain probably 90% to 95% of CD customers and those are your most sensitive customers. So, we have been we feel we have we are a relationship bank, not a transaction bank.

We have never been the bank that's advertised for the highest rates. So we think that our customers do value our service and I think because of that, we are able to lower our deposit pricing. May be a little bit more so than a bank that that is less relationship there with that more transactional or somebody that's really advertising for deposit rates. So, we know, a lot of it will depend on what we do on the deposit side, but we do think we can continue to lower our deposit pricing if the FED Lowers rates.

Okay, that's helpful. And then maybe just pivoting a little here just as far as you mentioned the shelf registration, perhaps that's more just procedural than anything else. But, you know, more broadly, how are you thinking about capital management? I know you mentioned the 7% to 7.5% TC Eagle and just considering where you stood at the end of September what actions if any are you contemplating beyond just kind of tempering growth as you have stated in the past?

Well, we have been [laser] focused, I think on building that ratio back up that TCE ratio back up and so that's why we haven't done share repurchases, we still think that's really important for our capital management strategy. But I think we will, we want to stay focused on building that TCE ratio back up and we are not to the target that we have laid out there. So, I think that's, first and foremost is our priority is really building that back up.

Yeah, [right] this is rich. That's one of the things that we kind of thought maybe has been kind of one of the governors on our stock price is the fact that that TCE has been little lower than we have like it to be.

So we are kind of trading that for stock repurchases as much as we love to buy stock back. I think our shareholders are better served asking that TCE back to a point where the rest of the investing public says okay, now we know that they are not out there going to do a stock raise and dilute us. Right?

Okay. That's helpful and then just one last one quickly on credit, you know things look pretty clean here and appreciate some of the commentary on what drove, you know, the tick up in the allowance and so on the allowance, I imagine as you sit here today, feel well reserve for but looking out what are some of the factors on your mind as we think about that reserve just directionally from here?

Like you want to come, Michael Mulford our Chief Credit Officer.

We just continue to look at the various concentrations and industries that we are in and the trends from an economic standpoint as we looked at the portfolio and where we consider any reserve changes.

Yeah, our reserve as we feel is pretty healthy. The model as we said you know we did increase that a couple of basis points this quarter, but it was really all related to the prepayments have slowed down on both residential and commercial loans and that's the model just as you allocate for that. So it was not none of that was credit related. We still feel our credit quality is really strong. It is just more with are accounting for those prepayments and for growth.

Great, appreciate the [color] there. I'll step back. Thanks for taking the questions.

Brendan Nosal, Hovde Group.

Hey, good afternoon folks. Hope you're doing well.

Hire. (technical difficulty)

Maybe just starting off on the Ohio home buyers program that that 100 million of balances that you got from the, the state for offering those accounts. First, I think that's the max that you can get from the state, correct? And then number two, how long do those balances stick around for?

It is the maximum amount we could get; those balances will stick around for up to five years. Some of it will depend when they were targeted for home buyers. So, if those people do buy a house, we will give that a million-dollar deposit or whatever, [$100,000] deposit back to the state. But overall the program runs five years. So, they should stick around, and it should be a good source of relatively cheap funding for us. The cost does go up but not significant significantly on those deposits. So you know, but as people buy homes, we would have to return the state's portion of that money. But hopefully we get the mortgage loans, and we are building on those deposit relationships, 35% of those were new customers to the bank and we hope to be able to cross sell them additional deposits.

We are paying a premium rate on those deposits while they are at the bank. So, if even if that deposit doesn't find a home to buy, we are confident that they are going to leave that money in the bank, I don't know what rate we are paying right now on that 6%.

It's, I mean, there's a reason for that way to stay there and that. So, we are paying 6% on that $10 million or $11million customer deposits in exchange for $100 million at 89 basis points. Even a couple of dumb guys from Ohio thought that was a pretty good trade.

All that's helpful color and yes, I think the 86 basis points on the 100 million makes up for the higher cost on the 10 million. I mean, moving on from there kind of thinking about the expense basis quarter, you know, down sequentially even with that $800,000 kind of accounting true up that you, you made just kind of curious your thoughts on where the cost number trajects through year end and into early 2025?

Yeah. Hi Brendan. Yeah, so expenses, you know, I would say relatively flat into next quarter, maybe up a little bit as we fill some vacancies beyond that going into next year, we would have our normal merit increases. We do plan some investments and just technology, but we are not giving guidance at this point into 2025.

Yeah, but I would just mention that with that branch closure in December, we'll have some costs associated with that, that might elevate that. And again, not significantly. I think we budgeted like $28.4 million for the quarter. I think it's; we got a $28.3 million, I think last time and came in under it, but I think that that's probably a reasonable number to put in your model.

Fantastic. All right. Thank you for taking the questions. Appreciate It.

Terry McEvoy, Stephens.

Hi guys. Good afternoon. Just a lot of call it strategic actions within the balance sheet. Just taking a step back. Where would you like wholesale funding? Brokered CDs? Where would you like those to be relative to total funding? Do you have a targeted loan to deposit ratio? It has come down and, and maybe I'll also ask you know, kind of CRE concentration any target target areas there where you'd like commercial real estate loans to be relative to the portfolio?

Yeah, I think on the wholesale and the brokered stuff we, we, you know, we like over the next couple of years to get that down to the 15% to 17% range, we think that's a more appropriate number that's not going to happen overnight. But that's what you know, what we're shooting for is to get that down into the 15% to 17% range, the loan to deposit ratio ideally somewhere around 90% probably on that gives us a little bit of flexibility.

I think we were comfortable being all the way up to 100%. But we want to continue to grab, you know, gather deposits because I think that provides some liquidity for us and it also just will improve our net interest margin over time.

And then, the, what was the last part of the reason? The CRE I think we've guided there, we'd like that to be, obviously, we'd like to be under 300 but we get no pushback from regulators on that. I mean, there's been a lot of talk about regulators being focused on that and their focus, at least on all of our exams have been around how we manage that portfolio, what kind of portfolio managing we are doing with that portfolio and they, and we get high marks in that regard.

So, but we would like to reduce that because we do think it's a drag or maybe our stock price. So we, we, we'd like, you know, be under three, but we'd be comfortable getting to 325 I think is a realistically realistic target that we could get to.

And then as a follow up, maybe what were yields on loans maturing in the quarter, you said new production was 759. And, and maybe more importantly, when you look ahead into the fourth quarter and beyond, what's the benefit from that the fixed rate loans as, as the re those reprice higher. And how, how much is that baked into the, the margin comments that you had earlier?

We really haven't baked it. Tell you this truck, we really haven't baked a lot of it into the margin comments. We've got about, I'll give you an exact number, but we've got about $100 million over the next, I think four quarters coming, that'll roll forward to the new margins. I don't know if you have that number rich from what they're rolling to and what we anticipate, but we do obviously feel over that piece of it that we will get the margin uplift from those roles.

Yeah, many of them are probably going to roll to the high 6s, low 7s. Because the rates we did back in 2019 and 2020 when our CRE the treasuries were so low and those rates were on our books at [475 and five]. So, we're looking at the, what's rolling here right now.

About almost $300 Million. Actually, if we go out 1 to 2 years, I guess about $150 million over the next 12 months.

$150 million over the next 12 months and 300 million over the next 24 months. 150 more. Yeah. So for a total of 300 over the next 24 months. So, we'll get some, so, you know, just a combination of things between the brokerage repricing, lower us paying down the FHLB borrowings, the loans, we price it, us being fairly aggressive and lowering on the FED. That's why we think that we're going to get margin improvement. It's going to offset because we have about 700 million that is tied to that floats daily, tied to prime or so. But we're going to offset that with all a number of those other things and a lot of them, they're, they're more than if the FEDs going down 25, we're going down 125 on some of those brokerage funds. So, we picked up some significant dollars there.

And I think the other piece of that is the credit team is doing a lot of, has done a lot of great work around it. We feel pretty good about even though those rates are going to probably roll in 2%or 3% higher. We feel pretty good about the cash flow of those projects looking forward and don't feel like we're going to have really any credit or much credit, adverse credit actions because of that.

And maybe just stepping out of the, the spreadsheet here. Are there any changes at all that you've observed among the larger banks that you compete with and in some of your metro markets, in terms of being more competitive? And what I'm asking is when the time is right to accelerate loan growth again, back to that historical level that your business model would have the ability to do that?

Terry, this is Chuck. we feel good about that. We've got a really good lending machine. We've probably walked away from a lot more projects obviously over the last 12 to 18 months than we ever have before. And we've really tried to keep that especially the CRE side, those rates high 7s is really most of them north of 8. So, it's really tempered our growth back somewhat. But we feel like, you know, if we get, if we really want to turn the spigot back on, we don't see really any issues as far as getting back into that more mid to high single digit growth rate that we normally have.

Thanks for taking my questions.

Tim Switzer, KBW.

Hey, good afternoon guys. Thanks for taking my questions.

I wanted a quick follow up on some of the NIM commentary. You guys are giving a lot of granular details. It's been great but you know, more broadly, how do you think the margin reaction like how does the trajectory change if the FED decides to either cut more aggressively or less aggressively over the course of the cycle?

Ian, Do you want answer that?

Yeah, Hi Tim and so on the loan pricing side, we have about $700 million that we reprice immediately on the lending side. On the deposit side, we have a downward beta strategy as a Dennis alluded to of really being aggressive on our deposit downward side of things. And then also not locking in too long on any kind of our long promos. So if the if the fed does cut more aggressively, we think we'll be able to stay at par and be able to be aggressive on our deposit down.

And then also if it cuts less, and we should still be at an advantage from where the curve is right now just based on the brokered and CD pricing that we're putting in right now.

And Tim, we're still borrowing some funds from FHLB. So, you know we're going to get a couple of $100 million every time that will reprice too. So, we have those loans that float, but we also were borrowing money. That's another thing that we see immediate benefit from.

Okay. Yeah, that was helpful. And then I believe when you guys talk about the two different deposit initiatives you guys had last quarter. You mentioned it was about $175 million deposit opportunity.

But I think I'm doing the math here. It looks like you already kind of beat that number. I'd love just some comments on, you know, there's further upside there at all and then you mentioned you have a few other deposit initiatives underway. Could you provide some more details on those given the, you know, the success you've seen so far?

Yeah, we grew deposits $247 million for the quarter or so 49 million of that was just organic growth that we have by really reaching out to some of our relationships and stuff. Right now one of those initiatives that we've kicked off is really focusing in on those no and low balance deposit customer.

We have a number of as we've grown over the years, our lenders have kind of focused on bigger loans and with bigger loans and bigger deposits and stuff and some of those smaller clients kind of you know, not they go by the wayside, but we didn't stay in touch with somebody that may have had an $80,000 loan and just one deposit relationship. So we're reaching back out to those folks.

The other big initiative is we we kicked off a small business loan, but we are now going to start originating through our branches and our retail branches. And we feel that's a better place for those because those bankers see those customers every day and they're going to be able to, that was handled in our commercial area of small business loans. Some of them small business loans under $150,000 are going to be handled in the branches.

And we think by knowing that what we're going to educate our bankers and make them more rounded so that they're able to talk to both sides of the balance sheet with those customers. And we think they're going to be able to develop and attract some deposits with those low, you know, the smaller loans. So, that's one initiative that, you know, and throughout the bank, we're really focused on those low and no balance deposit customers and we think we'll get some lift there.

And Tim, we also really, we have our treasury people and our all of our private bankers really focusing in on-are really good customers that happen to have some deposits at other institutions. And we're having quite a bit of success drawing some of those funds into our bank that were held at some of the larger or the regionals in the area where they get a little bit better feel and touch from Civista.

This particularly our commercial folks that really a good job because what we've seen coming, you know, over the last 15 years coming out of the great recession, a number of those customers did their lending. You know, these, some of these larger relationships did their lending at the bigger institutions.

When those institutions cut them off or in some cases, kick them out of the bank, they started borrowing from community banks. So many of those borrowers, when we look at them, they may have 15% of their deposits with us and 15% with another community bank and 15% with another community bank, 55% of their deposits are still with that bank that they were with.

They kick them out and we really are laser focused on saying, look you're not borrowing. Why are all your deposits there? Are you borrowing from them? And they tell us they do not like that institution. So, we're laser focused on getting them to move those accounts to us and to the other, you know, to us and say, look the community banks should benefit from that because we're the ones lending you the money.

Yeah, we've had some success obviously with the conditioning compensating balances, with some of the new loans that we've done over the last 2 to 3 quarters. That's helped quite a bit too Tim.

So, it's just a number of initiatives that that we've got, you know, we have underway that we think we're going to benefit from.

Okay. Yeah, that was great. Appreciate all the details. The only other follow up I have really is, you know, your outlook for low single digit loan growth over the next few quarters. what's the upside there if we get a soft-landing FED continues to lower rates? Does that really help on the demand side there and your ability to take on more loans?

Like I said Tim, I think what we're really looking at and figuring out ways to bring that CRE concentration down. So, that will temper some of our growth as we continue to look at that. If we do some things to clear that up beforehand, I think our loan growth will be a little bit faster but the bottom line is we're really focused right now.

On doing a little bit more aggressive on the C&I side and tempering back our CRE growth. So, I think as we cure or bring that back down to some more what we would call manageable levels even though we're very comfortable where we're at to, more manageable levels will grow faster from that perspective. I guess I don't have a lot of concern of when we want to turn that spigot back on and get the growth that we need to get?

Okay. I guess maybe a more appropriate question is, if rates do move lower, does that increase your appetite for CRE, and you don't worry as much about the CRE concentration?

I don't think so. I don't think that's really rate reflective from that piece of it. I mean the projects have got to work and what we found is when rates went higher, people just put more money into the project. when it comes to lower they don't need quite as much money in the project. But the bottom line is, I don't think the lowering of rates is going to make it a situation where we're going grow faster because of the rates.

Because of the rate. You know, we're not worried about the CRE concentration from a credit perspective. We're worried about it from a perception basis. We think that maybe somebody doesn't value our stock as much because we have more CRE from a credit quality perspective. We're very confident in our portfolio. We're not that worried from a credit perspective.

Okay. That was great. Thank you guys.

Manuel Navas, DA Davidson.

Hey, could you clarify some of your NIM discussion? If there's a if that cuts are pretty aggressive, you likely stay stable and by aggressive are you meaning like, every meeting or you're talking about like 50 basis points versus 25 basis points of the cut? And then if there's less cuts, could we see how big of a NIM increase could you have? And what would constitute less? Can you just kind of give me a little bit better range of outcomes there?

Yeah. So Manuel, this is Ian, we're expecting NIM to expand. I think we've dropped in second quarter. Expansion probably not as much as what we had from Q2 into Q3, but we could probably get into the low three 20s by the fourth quarter that we would expect continued expansion in the beginning part of 2025 of at a slightly slower pace each part of the expansion.

Like I said, with the FED cuts, we think we can be aggressive on our deposit pricing side as well as the FHLB repricing and having the loans, $700 million of loans repricing down. But plenty of our loans are going to be repricing on to higher rates to help offset some of that.

And remember, when the FED lowers the short-term rates right now, the yield curve starting to correct itself. So our lending rates are not going to come down as quick as on new loans because then, you know, they're tied to a five-year treasury or something which is not moving. If short term rates come down 25% that's coming down 5%. So your loan rates are not repricing as quickly down as your, as your short-term rates will be.

I appreciate that and all the details on the, the broker and the fees, that's all helpful. What are you assuming on the rate forecast? Are you assuming November and December and then a couple of cuts into January into the first quarter of next year? Can you just kind of help with that rate assumption?

Yeah, I think we're expecting November and December and then, maybe probably no more than four stopping by the middle of 25 probably closer to two in 2025.

And we'll be able to give better guidance in 2024. But we're working on the budget now. We follow the blue-chip forecast really as opposed to us trying to predict that. We just follow that blue chip forecast for 2025. But I think for the next two months for sure. There is pretty high profitability here in November that they're going to come down 20 at least 25 basis points. So, I think until the end of the year we are expecting them to reduce rates.

Yeah Manuel, we probably have as much clarity as you have as far as where rates are going to go in the future. So that's kind of our expectation.

I get that, and I appreciate, it's all, a lot of, it's guess work and it's difficult. Can you give me a little bit more color on the 800,000 reserve? I think it came up in OpEx. What was it exactly for? Can it go higher? It's like you found something in expensive, just can you talk about that a bit more?

Sure, Manuel. This is Rich and we're moving from one system or actually several systems to one. And as we go through that process, we found a couple of things in this in a suspense account that we just couldn't get reconciled. I think our good fortune of finding it during a quarter where we were making a lot of money allowed us to probably be pretty conservative in how we reserve for it.

I mean, I can't tell you, won't go higher, but we certainly don't believe it will go higher. We believe that we would rather, I suppose, recover some of that and surprise you guys next quarter. But I think $800 million is probably as good a guess as we could make. I don't know I can give you a whole lot more than that. We feel good about that number. That's why we picked it.

Oh, okay. And then back to fees for a moment, usually there is a stronger fourth quarter in leasing. Is that developing in that direction, in terms of gain on sale for leasing? And then and potentially lease balance growth, which wasn't that much this quarter. Do you talk about that and its potential next year? And then talk about how much of the gain on sale was mortgage related because I would love to hear your thoughts on mortgage and leasing next year if Rates are substantially lower.

Well, I'll let Ian give you the exact numbers in a second. But I would tell you that we see the pipelines are growing and the leasing for the fourth quarter, not sure it would be quite as strong as last year, but you feel good about where we're sitting at. We have tried to put some things in play to be a little more aggressive on the sales, the gain on sale, sale size and the leasing in the leasing division just based on the whole loan to deposit piece of it. So, I would anticipate that the gain on sale will be more than the portfolio growth when you look at the fourth quarter. And again, I'll let you talk about what the actual numbers on the sale, mortgage, etcetera.

Thanks, Chuck. Yeah, so of the 1.4 million gain on sale that we had in the third quarter, about 45% of it was leasing and the remaining 55% was mortgage. So, call it $600,000, $800,000 mortgage.

Okay. And is there any desire to add to your capability on the on the mortgage side? What if we're down 150 basis points from here in FED funds, where could mortgage be next year?

Yeah, well, I guess we have contemplated that we know that we probably have to add more people in the mortgage area to if the refinance boom really comes back. But the one piece of it you really got to take into consideration Manuel, is when you're looking at it, the refinance boom is really only going to be what's been originated over the last 2.5 years. Those of us that you got a mortgage 5,6,8,10 years ago are still sitting on those 3% rate.

So, we don't see that book moving off of that unless they really are going to buy a new home or they've got some other debt they want to refinance into that mortgage. So, but we do feel like there will be an expansion. I mean, we were, you know, knock on wood, we were hoping to get to it, you know, in the fourth quarter of this year to refi some of the stuff we have in our book.

But as you've seen in the last week or so that the five and 10-year treasuries have actually moved up and set it down. So, we don't, we feel like the refinance boom will might not take place in the fourth quarter, but hopefully in the first or second quarter next year if rate move appropriately.

And the extended side of that also is most of those on the sales side of the origination side are commission-based folks. So, it's not like we're adding a ton of base expense there to do that and we feel we have capacity in the back row right now to do more volume.

I appreciate all the commentary. Definitely. It's all a lot is in flux. I appreciate it. Thank you very much.

Daniel Cardenas, Janney Montgomery Scott.

Hey, good afternoon guys.

Good afternoon.

Just a couple questions here. Can, can you give us any color on what criticized loans look like at the end of the quarter? I know, they were up in Q2 versus Q1, but have they stabilized come down and then maybe, categorically, if they've come up which categories are kind of driving the increase?

I'll have Michael Mulford, our Chief Credit Officer answer that question.

The Criticized have been fairly stable, last quarter. We did have some loans move, we have a large relationship move, pay off during the quarter, but then we had some other loans that are or other relationships that for one, it was downgraded into the criticized category along with a couple of smaller deals that it kind of replaced it.

So, for the quarter, there was an increase but it was mostly related to a couple of loans loan relationships and again, we had some other one other relationship that came out and criticized. We expect that to remain fairly stable. There's, hoping to see a loan relationship pay off this quarter, but we're not sure if that's going to happen.

So, the loans that migrated on to the criticized portfolio, what were those commercial loans? where can you give us a little bit of color there?

Yeah, commercial loans, commercial relationships that we've been monitoring and just nothing that's in litigation or anything. It's financially just warranted a downgrade to the criticized category.

Were they concentrated in any one industry?

No.

[New] office or anything?

No, [but no office No], I think there was a hospitality in there and (technical difficulty), one was health care, maybe a nursing home or something can't remember.

Yeah, one was in the food industry, yeah, nothing. Definitely no. What I would say that they have systemic things that we're seeing move in and out.

And then no office, right. Again, we're kind of creeping back to what's normal, I think.

Yeah.

We anticipate that kind of as we move forward, there are a couple of credits that may be close to moving out but you always have stuff moving in and that's pretty much what happened in the third quarter.

Alright. So, what kind of a normalization then is the expectations that charge off levels begin to move towards a normal kind of more historical level as we as we look forward into 25?

Yeah. This quarter was a very good quarter from that standpoint, but I think we'll see charge off some elevate a little bit back to normal in the next couple of quarters.

Yeah. First and second quarter probably migrates back towards those levels I would say.

And then kind of a follow up question on the deposits front. Are there any remnants of the tax program still in your deposit base? And if so, how much and when do you expect those to float off?

I believe there were 14 million at the end of Quarter that were still there and I will tell you that if not today before the end of the week, we've been on the phone with the folks to get those accounts closed out. So they'll all be gone certainly by the end of this week or next, if they're not already.

Alright. And then on the initiative to kind of grow that low slash no balance customer base. I mean, what percentage of your customer base is does that make up? Is that small, relatively small? Or?

Yeah, it's not the majority of our customer base for sure. We don't have a number for you there but if there there's opportunity for sure. we actually do have that number somewhere. We could probably get that to you. There are a number, but we don't have any of handy.

Okay. Yeah, that would be good if you can. All right. That’s all I have. Alright, thanks guys, appreciate it.

There are no further questions at this time. I'd now like to turn the call back over to Mr Shaffer for final closing remarks.

Well, I just like to say in closing, I just want to thank everyone for joining and those that participated on today's call. Really pleased with the quarter and the quarter results we're doing in large part, a lot of hard work, and dedication discipline from our team will continue to be focused on growing. So this the right way, I believe our focus on improving our strong core deposit franchise. And just the disciplined approach we take to pricing loans and deposits and managing the company positions us very well for the future.

And I look forward to talking with all of you in a few months. We share our fourth quarter results, have a great rest of the afternoon and thank you.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line. Have a lovely day.