Civista Bancshares Inc
NASDAQ:CIVB
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Civista Bancshares Inc
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Good afternoon, ladies and gentlemen, and welcome to the Civista Bancshares, Inc. Third Quarter 2024 Earnings Call. [Operator Instructions]. 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 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 to 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; Chuck Parcher, SVP of the company and Chief Lending Officer of the bank;Ă‚Â 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 linked 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 noninterest-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 30, 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 2 successful outcomes during the quarter.
Through the State of Ohio's Homebuyer 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 $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 formerly held outside the bank into a money market account with Civista. In addition to the deposits raised from these 2 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 linked 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 linked quarter. While one quarter is not a trend, we do believe that our margin troughed 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 brokered 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.Ă‚Â
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, 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 2 Napoleon branch locations, we do not anticipate losing any deposits. 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 linked 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 on 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've managed to replace nearly $5.7 million in 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 noninterest 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's prudent to establish an $800,000 reserve against a suspense account, which is included in other noninterest expense. We expect the conversion to be completed during the fourth quarter. Year-to-date, our noninterest 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 linked 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 1% 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 continue to be virtually all adjustable rate and our leases all have maturities of 5 years or less. Civista remains a 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 at an average rate of 7.59%. Portfolio 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 2-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 30th.
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 and 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 migrated from noninterest-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. Noninterest-bearing deposits and business operating accounts continue to be a focus. Noninterest-bearing deposits made up 22% of total deposits at September 30th. 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 30th 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 30th. We believe Civista's 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 30th, our security portfolio was $629 million, which represented 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 30th, 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 and 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 30th, which was an increase from 6.19% at June 30, 2024. While our capital levels remain strong, we recognize our tangible common equity ratio screens low. Our previous guidance remains that 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 will 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 30th, 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 nonperforming loans is 227% at September 30, 2024, compared to 246% at December 31, 2023. $1.5 million of the year-to-date increase in nonperforming loans was attributable to 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 in serving our customers and communities. Thank you for your attention this afternoon, and your investment. And now we will be happy to address any questions you may have.
[Operator Instructions]. Our first question comes from the line of Justin Crowley from Piper Sandler.
Just wanted to start off on the margin here. I saw some nice lift in the quarter, and it looks like some of the borrowings that were paid off occurred later in the period, and that could be a tailwind into 4Q and beyond. And you also mentioned some of the broker deposits that will reset. But in terms of the borrowings, how are you thinking about further paydowns here? And I guess, you can marry that with just outlook on continued traction on the deposit gathering side.
Justin, yes, so we're 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 brokered CDs as they become available, but keeping it at about the same level on those.
Yes. And I would just add, Justin, we have lowered deposit costs. 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 lowered rates this last time. We came down another 35. So, we're 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 7-month CD. So, we're down. We lowered money markets and everything. So, I think we'll get some lift there. And as we mentioned, some of those brokered deposits, the repricing happened late in the quarter. So, we do anticipate further improvement in the margin, I think, as we go forward. We hopefully, we would get 5 basis points or so lift there 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've done so far since the Fed has moved by 50 basis points, but just thoughts on just how the competitive environment will enable you to keep moving lower?
Well, I think we'll 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 maintain or we retain probably 90% to 95% of CD customers, and those are your most sensitive customers. So, we've been -- we feel we have a -- we're a relationship bank, not a transaction bank. We've 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, maybe a little bit more so than a bank that is less relationship, that's more transactional or somebody that's really advertising for deposit rates. So, 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 more broadly, how are you thinking about capital management? I know you mentioned the 7% to 7.5% TCE goal. 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've stated in the past?
Well, we've 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 want to stay focused on building that TCE ratio back up. And we're not to the target that we've laid out there. So, I think that's -- first and foremost, is our priority is really building that back up.
Yes, Brendan, this is Rich. That's one of the things I think we kind of thought maybe has been kind of one of the governors on our stock price, the fact that, that TCE has been a little lower than we'd like it to be. So, we're kind of treating that for stock repurchases. As much as we'd love to buy stock back, I think our shareholders are better served by us getting that TCE back to a point where the rest of the investing public says, okay, now we know that they're not out there going to do a stock raise and dilute us.
Okay. That's helpful. And then just one last one quickly on credit. Things look pretty clean here, and I appreciate some of the commentary on what drove the tick up in the allowance. And so, on the allowance, I imagine as you sit here today, you feel well reserved for. But looking out, what are some of the factors on your mind as we think about that reserve just directionally from here?
Mike, do you want to come? Mike Mulford, our Chief Credit Officer.
We just continue to look at various concentrations and industries that we're in and the trends from an economic standpoint as we look at the portfolio and where we consider any reserve changes.
Yes. Our reserve, we feel is pretty healthy. The model, as we said, 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, none of it was credit-related. We still feel our credit quality is really, really strong. It's just more we're accounting for those prepayments and for growth.
Our next question comes from the line of Brendan Nosal from Hovde Group.
Maybe just starting off on the Ohio Homebuyers program. That $100 million of balances that you got from 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?
Yes, it is the maximum amount we could get. Those balances will stick around for up to 5 years. Some of it will depend when they were targeted for homebuyers. So, if those people do buy a house, we will give that $1 million deposit or whatever, $100,000 deposit back to the state. But overall, the program runs 5 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 significantly on those deposits. 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're 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're at the bank. So even if that deposit doesn't find a home to buy, we're confident that they're going to leave that money in the bank. I don't know what rate we're paying right now on that. It's 6%. So, I mean there's a reason for that might stay there. And so, we're paying 6% on that $10 million or $11 million of 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 right. 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. Moving on from there, kind of thinking about the expense base this quarter, down sequentially even with that $800,000 kind of accounting true-up that you made. Just kind of curious, your thoughts on where the cost number trajects through year-end and into early 2025?
Brendan, yes, so expenses, 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 in technology, but we are not giving guidance at this point into 2025.
Yes, Brendan, I would just mention 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 we guided $28.3 million, I think, last time and came in under it. But I think that's probably a reasonable number to put in your model.
Our next question comes from the line of Terence McEvoy from Stephens.
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 maybe I'll also ask kind of CRE concentration. Any target areas there where you'd like commercial real estate loans to be relative to the portfolio?
Yes. I think on the wholesale and the brokerage stuff, we'd 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 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. 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 gather deposits because I think that provides some liquidity for us, and also just will improve our net interest margin over time.Ă‚Â
And then we also have the CRE concentration, I think we've guided there. 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. 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 we get high marks in that regard. But we would like to reduce that because we do think it's a drag on maybe our stock price. So, we'd like to be under 3, but we'd be comfortable getting to 325, I think, is a realistic target that we could get to.
And then as a follow-up, maybe as what were yields on loans maturing in the quarter? You said new production was 7.59%. And maybe more importantly, when you look ahead into the fourth quarter and beyond, what's the benefit from the fixed rate loans as those reprice higher? And how much is that baked into the margin comments that you had earlier?
We really haven't baked Terry. This is Chuck. We really haven't baked a lot of it into the margin comments. I'll give you an exact number, but we've got about $100 million over the next, I think, 4 quarters coming that will roll forward to 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 some margin uplift from those rolls.
Yes. 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 4.75 and 5. So, we're looking at what's rolling here right now.
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 million more. So, for a total of $300 million over the next 24 months. So just a combination of things between the brokerage repricing lower, us paying down the FHLB borrowings. The loans repricing. Us being fairly aggressive in 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 floats daily tied to prime or SOFR, but we're going to offset that with all a number of those other things. And a lot of them, they're more than if the Fed is going down 25%, we're going down 125 on some of those brokers. So, we picked up some significant dollars there.
And I think the other piece of that, Terry, is the credit team have done a lot of great work around it. We feel pretty good 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. I don't feel like we're going to have really any credit or much credit -- adverse credit actions because of that.
Okay. And maybe just stepping out of the spreadsheet here. Are there any changes at all that you've observed among the larger banks that you compete with 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. We've really tried to keep that, especially the CRE side, those rates, high 7s, really most of them north of 8. So, it's really tempered our growth back somewhat. But we feel like 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.
Our next question comes from the line of Tim Switzer from KBW.
I wanted a quick follow-up on some of the NIM commentary. You guys have given a lot of granular details. It has been great. But more broadly, how do you think the margin reacts? And 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?
Yes. Tim, this is Ian. So, on the loan pricing side, we have about $700 million that will reprice immediately on the lending side. On the deposit side, we have a downward beta strategy, as 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 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, that 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.
Tim, we're still borrowing some funds from FHLB. So, we're going to get a couple of hundred million dollars 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. Yes, that was helpful. And then I believe when you guys talked about the 2 different deposit initiatives you guys had last quarter, you mentioned there was about $175 million deposit opportunity. But I think if I'm doing the math here, it looks like you already kind of beat that number. I'd love just some comments on if 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 success you've seen so far?
Yes. We grew deposits $247 million for the quarter or so. 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 customers. As we've grown over the years, our lenders have kind of focused on bigger loans, and with bigger loans came bigger deposits and stuff. And some of those smaller clients they didn't 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 kicked off a small business loan that 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 that was handled in our commercial area, those small business loans.
Some of those small business loans under $150,000 are going to be handled in the branches, and we think by doing that, one, 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 smaller loans. So that's one initiative, and throughout the bank, we're really focused on those low and no balance deposit customers. We think we'll get some lift there.
Tim, we have our treasury people and all of our private bankers really focusing in on -- are really good customers that happen to have some deposits at other institutions. We're having quite a bit of success in drawing some of those funds into our bank that were held at some of the larger or the regionals in the area when they get a little bit better, feel and touch from Civista.
Particularly, our commercial folks are really doing a good job because what we've seen coming over the last 15 years, coming out of the Great Recession, a number of those customers did their lending, 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 kicked them out, and we really are laser-focused on saying, "Look, you're not borrowing. Why are your deposits there? Are you borrowing from them?" They tell us they do not like that institution. So, we're laser-focused on getting them to move those accounts to us and saying, "Look, the community banks should benefit from that because we're the ones lending you the money."
Yes. And we've had some success, obviously, with 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, there's just a number of initiatives that we have underway that we think we're going to benefit from.
Okay. Yes, that was great. Appreciate all the details. The only other follow-up I have really is 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 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, being 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, we'll 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 getting 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 lower, they don't need quite as much money in the projects. But the bottom line is I don't think the lowering of rates is going to make it a situation where we're going to grow faster because of the rates.
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.
Our next question comes from the line of Manuel Navas from D.A. Davidson.
Could you clarify some of your NIM discussion? If Fed cuts are pretty aggressive, you'd likely stay stable. And by aggressive, are you meaning like every meeting or are you talking about like 50 basis points versus 25 basis points of a 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?
Yes. So, Manuel, this is Ian. We're expecting NIM to expand. We think we've troughed in second quarter expansion. Probably not as much as what we had from Q2 into Q3, but we could probably get into the low 3.20s by the fourth quarter, and then we would expect continued expansion in the beginning part of 2025, probably 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 is starting to correct itself. So, our lending rates are not going to come down as quick as on new loans because they're tied to a 5-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 now as your short-term rates will be.
I appreciate that. And all the details on the broker and the CDs, 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?
Yes. I think we're expecting November and December, and then maybe probably no more than 4 stopping by middle of '25, probably closer to 2 in 2025.
Yes. We'll be able to give better guidance in 2024. 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 2 months for sure, there is pretty high probability here in November that they're going to come down at least 25 basis points. So, I think until the end of the year, we are expecting them to reduce rates.
Yes. 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. A lot of it is guesswork and it's difficult. Can you give me a little more color on the $800,000 reserve? I think it came up in OpEx. What is it exactly for? Can it go higher? It's like you found something in expenses. 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 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 it 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 can make. I don't know. I can give you a whole lot more color than that. We feel good about that number. That's why we picked it.
Okay. And then back to fees for a moment. Usually, there's a stronger fourth quarter in leasing. Is that developing in that direction in terms of gain on sale for leasing? And potentially, lease balance growth, which wasn't that much this quarter. Can 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'd 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 the pipelines are growing in the leasing for the fourth quarter. Not sure it will be quite as strong as last year, but still 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 and sales side 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 Ian, I'll let you talk about what the actual numbers on the gain on sale of mortgages, et cetera.
Thanks, Chuck. Yes. 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 leasing, $800,000 mortgage.
Okay. Is there any desire to add to your capability on the mortgage side? If we're down 150 basis points from here in Fed funds, where could mortgage be next year?
Yes. Well, I guess we've contemplated that. We know that we probably have to add some more people in the mortgage area 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 have got a mortgage 5, 6, 8, 10 years ago, we are still sitting on those 3% rates. 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. But we do feel like there will be an expansion. We knock on wood; we were hoping to get to it in the fourth quarter of this year to refi some of the stuff we have on our books. But as you've seen in the last week or so, the 5- and 10-year treasuries have actually moved up instead of down. So, we don't -- we feel like the refinance boom will probably not take place in the fourth quarter, but hopefully, in the first or second quarter of next year if rates move appropriately.
And the expense side of that also is, most of those on the sales side on 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 room right now to do more volume.
Our next question comes from the line of Daniel Cardenas from Janney Montgomery Scott.
Just a couple of questions here. 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 Mike Mulford, our Chief Credit Officer to answer that question.
Criticized have been fairly stable the past 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 -- or other relationships that were one that was downgraded into the criticized category along with a couple of other smaller deals that kind of replaced it. So, for the quarter, there was an increase, but it was mostly related to a couple of loan relationships. And again, we had some other -- one other relationship that came out of 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, were those commercial loans? Can you give us a little bit of color there?
Yes, commercial loans, commercial relationships that we've been monitoring. And just nothing that's in litigation or anything. It's just financially just warranted a downgrade to the criticized category.
Were they concentrated in any one industry?
No. I think there was going to be hospitality in there. And I want to say one was health care, maybe a nursing home or something. I can't remember.
Definitely no. what I would say is the systemic things that we're seeing move in and out.
And then no office. Again, we're kind of creeping back towards what's normal, I think. And 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.
All right. So, with kind of normalization then is the expectation is that charge-off levels begin to move towards a normal kind of more historical level as we look forward into '25?
Yes. This quarter was a very good quarter from that standpoint. But I think we'll see charge-offs elevate a little bit back to normal in the next couple of quarters.
Yes. First and second quarter probably migrates back towards those levels, I would say. Yes.
And then kind of a follow-up question on the deposit 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 the 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.
All right. And then on the initiative to kind of grow that low/no balance customer base. I mean, what percentage of your customer base does that make up? Is that small, relatively small or?
Yes. It's not the majority of our customer base for sure. I don't know. We probably don't have a number for you there. But there's opportunity for sure. We actually do have that number somewhere. We can probably get that to you. There are a number, but we don't have a handy.
Okay. Yes, that would be good if you can.
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'd 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. The quarter's results were due in large part to a lot of hard work and dedication and discipline from our team. We'll continue to be focused on growing Civista 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 just talking with all of you in a few months as 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 lines. Have a lovely day.