Civista Bancshares - Q3 2024

Executive Summary

• EPS of $0.53, up 18% q/q from $0.45 and down vs $0.66 y/y; net interest margin inflected higher sequentially (3.19% tax-equivalent; 3.16% in average balance table) and management expects continued expansion into Q4 2024, aided by lower-cost funding resets.
• Core funding pivot delivered a $246M deposit increase and a $213.5M reduction in overnight FHLB borrowings; net interest income rose 5.3% q/q despite deposit migration to interest-bearing accounts.
• Noninterest income fell $0.9M q/q on leasing residual volatility but was up 19% y/y; efficiency ratio improved q/q to 70.2% though remains elevated y/y.
• Catalysts ahead: repricing of $200M matured brokered CDs to 4.32% (126 bps savings) and another $150M maturing by year-end, plus aggressive “downward beta” on deposits to support NIM expansion into early 2025.
• Capital remains sound (Tier 1 leverage 8.45%); management prioritizes rebuilding TCE to 7–7.5% and tempering CRE concentration and wholesale funding, with dividends maintained at $0.16/share.

What Went Well and What Went Wrong

What Went Well

• Deposit initiatives succeeded: $100M low-cost state deposits via Ohio Homebuyer Plus and ~1,000 new accounts; $87M wealth cash moved onto the balance sheet; $49M organic growth, driving loan-to-deposit ratio down to 95% from 102%.
• Margin turned the corner: NIM expanded ~7 bps q/q to 3.16%/3.19%, with net interest income up 5.3% q/q; management believes margin troughed in Q2 and will continue to expand over next few quarters (“we believe that our margin troughed…will continue to expand”).
• Noninterest income resilience: despite overdraft, tax processing exit, and prior-year one-time MasterCard fee, YTD noninterest income up $391k; Q3 y/y growth driven by mortgage/lease gains and BOLI death benefit.

What Went Wrong

• Sequential noninterest income softness: down $857k q/q (8.1%) on lower leasing residuals; management flagged leasing residuals as less predictable vs traditional fees.
• Efficiency ratio elevated: 70.2% in Q3 vs 65.3% y/y; includes $800k reserve related to lease system conversion; ex-reserve, efficiency would be ~2% lower per management.
• Asset quality optics: nonperforming assets rose to $18.2M (0.45% of assets) vs year-end; allowance to NPLs eased to 227% from 246% at year-end; provision increased vs Q3’23 driven by slower prepayments in CECL model.

Transcript

Operator (participant)

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 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 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.

Dennis Shaffer (President and CEO)

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares. 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. 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 last quarter and a $2 million decline from the 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 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 two 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 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 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 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, 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 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 last quarter, and increased $1.5 million, or 19.2% from the third quarter of 2023. The primary driver of the decline from our last 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 a life insurance policy held with 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 overdrafts, the elimination of the tax processing relationship, and the one-time bonus we received in 2023 for entering a new debit brand agreement. This year, we 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 last quarter, as our continued focus on expense control yielded 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 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 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 continue to be virtually all adjustable rate, and our leases all have maturities of five 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%. 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%. 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 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 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 last 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 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 securities portfolio as a source of liquidity. At September 30, our securities 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 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 last 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 30, which was an increase from 6.19% at June 30, 2024. While our capital levels remain strong, we recognize our Tangible Common Equity ratio screams 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 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 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 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 set 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.

Operator (participant)

Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star, followed by the number one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Our first question comes from the line of Justin Crowley from Piper Sandler. Go ahead, please.

Justin Crowley (Senior Research Analyst)

Hey, good afternoon, everyone.

Dennis Shaffer (President and CEO)

Justin.

Justin Crowley (Senior Research Analyst)

Just wanted to start off on the margin here. 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 brokered 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.

Ian Whinnem (SVP and CFO)

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

Dennis Shaffer (President and CEO)

Yeah, 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 by 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 probably our best rate, that seven-month CD. So we're down. We lowered all 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. Hopefully, we would get five basis points or so lift there as we enter into the fourth quarter.

Justin Crowley (Senior Research Analyst)

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's moved by 50 basis points, but just thoughts on how the competitive environment will enable you to keep moving lower.

Dennis Shaffer (President and CEO)

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%-95% of CD customers, and those are your most sensitive customers. So we feel we have—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. 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.

Justin Crowley (Senior Research Analyst)

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%-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?

Dennis Shaffer (President and CEO)

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.

Rich Dutton (SVP and COO)

Yeah Justin, this is Rich. That's one of the things I think we've kind of thought maybe has been kind of one of the governors on our stock prices, the fact that that TCE has been a little lower than we'd like it to be. So we're kind of trading 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.

Justin Crowley (Senior Research Analyst)

Right. 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?

Dennis Shaffer (President and CEO)

Mike, you want to come? Mike Mulford's our Chief Credit Officer.

Mike Mulford (Chief Credit Officer)

We just continue to look at the 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.

Dennis Shaffer (President and CEO)

Yeah, our reserve, as 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 the model just has 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.

Justin Crowley (Senior Research Analyst)

Great. Appreciate the color there. I'll step back. Thanks for taking the questions.

Dennis Shaffer (President and CEO)

You bet.

Operator (participant)

Our next question comes from the line of Brendan Nosal from Hovde Group. Go ahead, please.

Brendan Nosal (Director)

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

Dennis Shaffer (President and CEO)

Hi, Brendan.

Brendan Nosal (Director)

Maybe just starting off on the Ohio Homebuyer Plus 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?

Dennis Shaffer (President and CEO)

Yeah, it is the maximum amount we could get. Those balances will stick around for up to five years. Some of them will depend when they were targeted for home buyers. So if those people do buy a house, we will give that $1 million deposit or whatever, that $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 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.

Rich Dutton (SVP and COO)

We are paying a premium rate on those deposits while they're at the bank, so even if that depositor doesn't find a home to buy, we're confident that they're going to leave that money in the bank, no matter what rate we're paying right now on that.

Dennis Shaffer (President and CEO)

It's 6%.

Chuck Parcher (SVP and Chief Lending Officer)

6%. So I mean, there's a reason for that money to stay there. 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.

Brendan Nosal (Director)

All right. That's helpful color. And yes, I think the 86 basis points on the honeymoon makes up for the higher cost on the $10 million. Moving on from there, kind of thinking about the expense basis 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. Thanks.

Ian Whinnem (SVP and CFO)

Yeah, hi, Brendan. Yeah, 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 increase as we do plan some investments into technology, but we are not giving guidance at this point into 2025.

Brendan Nosal (Director)

The other thing we've got...

Mike Mulford (Chief Credit Officer)

Yeah, Brendan, I was just mentioning 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 we got in $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.

Brendan Nosal (Director)

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

Dennis Shaffer (President and CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Terry McEvoy from Stephens. Go ahead, please.

Terry McEvoy (Managing Director)

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 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?

Dennis Shaffer (President and CEO)

Yeah, I think on the wholesale and the brokered stuff, we'd like to, over the next couple of years, to get that down to the 15%-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%-17% range. The loan-to-deposit ratio, ideally, somewhere around 90% probably on that. It 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. And then what was the last part of the reason? The CRE concentration, 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. Their focus, at least on all of our exams, has 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.

Terry McEvoy (Managing Director)

And then as a follow-up, maybe 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?

Chuck Parcher (SVP and Chief Lending Officer)

We really haven't baked it. Terry, this is Chuck. 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 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.

Rich Dutton (SVP and COO)

Yeah, many of them are probably going to roll to the high sixes, low sevens 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. Hold on one sec.

Chuck Parcher (SVP and Chief Lending Officer)

How about almost $300 million, actually, if we go out one to two years, I guess about $150 million over the next 12 months.

Rich Dutton (SVP and COO)

$150 million over the next 12 months and $300 million over the next 24 months. $150 million more. Yeah. So for a total of $300 million over the next 24 months. So we'll get just a combination of things between the brokerage repricing lower, us paying down the FHLB borrowings, the loans repricing, us being fairly aggressive and lowering when 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 SOFR. But we're going to offset that with a number of those other things. And a lot of them, they're more than if the Fed's going down 25, we're going down 125 on some of those brokerage funds. So we pick up some significant dollars there.

Chuck Parcher (SVP and Chief Lending Officer)

I think the other piece of that, Terry, is the credit team has done a lot of great work around it. We feel pretty good about, even though those rates are going to probably roll 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 adverse credit actions because of that.

Terry McEvoy (Managing Director)

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?

Chuck Parcher (SVP and Chief Lending Officer)

Yeah, Terry, this is Chuck. Again, 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 sevens, 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.

Terry McEvoy (Managing Director)

Thanks for taking my questions.

Operator (participant)

Our next question comes from the line of Tim Switzer from KBW. Go ahead, please.

Tim Switzer (VP)

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

Dennis Shaffer (President and CEO)

Yeah, Hi Tim.

Tim Switzer (VP)

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 more broadly, how do you think the margin reacts? And how does the trajectory change if the Fed decides to either cut more aggressively or less aggressively over the course of the cycle?

Dennis Shaffer (President and CEO)

Yeah, do you want to stay with that?

Ian Whinnem (SVP and CFO)

Yeah. Hey, 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, then 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.

Dennis Shaffer (President and CEO)

Tim, we're still borrowing some funds from FHLB. So we're going to get $200 million every time that will reprice too. So we have those loans in flow, but we also were borrowing money. That's another thing that we see immediate benefit from.

Tim Switzer (VP)

Okay. Yeah. Yeah, that was helpful. And then I believe when you guys talked about the two different deposit initiatives you guys had last quarter, you mentioned it was about a $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?

Dennis Shaffer (President and CEO)

Yeah, we grew deposits $247 million, I think, 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. 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 came bigger deposits and stuff. And some of those smaller clients kind of not that 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've 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 they're going to be able to, that was handled in our commercial area, those small business loans.

Some of them 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 low, the 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.

Chuck Parcher (SVP and Chief Lending Officer)

Yeah. And Tim, we also really, we have our treasury people and all of our private bankers really focusing in on our really good customers that happen to have some deposits at other institutions. And we're having quite a bit of success with 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.

Dennis Shaffer (President and CEO)

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, kicked 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. So 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, why are your deposits there? Are you borrowing from them?" And they tell us they do not like that institution. 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.

Chuck Parcher (SVP and Chief Lending Officer)

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

Dennis Shaffer (President and CEO)

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

Tim Switzer (VP)

Okay. Yeah, 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, the Fed continues to lower rates? Does that really help on the demand side there and your ability to take on more loans?

Chuck Parcher (SVP and Chief Lending Officer)

Like I said, Tim, I think we're really looking at and figuring out ways to bring that CRE concentration down. So that'll 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 get the growth that we need to get.

Tim Switzer (VP)

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?

Chuck Parcher (SVP and Chief Lending Officer)

I don't think so. I mean, I don't think that's really rate reflective from that piece of it. I think it's, I mean, the projects have got to work, and what we found is when rates went higher, people just put more money into the projects. When it comes lower and becomes, they don't need quite as much money in the projects, but the bottom line is I don't think that's going to, 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.

Dennis Shaffer (President and CEO)

Yeah. 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.

Tim Switzer (VP)

Okay. That was great. Thank you, guys.

Operator (participant)

Our next question comes from the line of Manuel Navas from D.A. Davidson. Go ahead, please.

Manuel Navas (Senior Research Analyst and Managing Director)

Hey, 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 every meeting, or are you talking about 50 basis points versus 25 basis points of a cut, and then if there's less cuts, 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?

Ian Whinnem (SVP and CFO)

Yeah. So I'll just say 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 3.20% 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 onto higher rates to help offset some of that.

Dennis Shaffer (President and CEO)

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 our new loans because they're tied to a five-year Treasury or something, which is not moving. 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.

Manuel Navas (Senior Research Analyst and Managing Director)

I appreciate that and all the details on the brokered 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?

Ian Whinnem (SVP and CFO)

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

Dennis Shaffer (President and CEO)

Yeah. We'll be able to get better guidance in 2025. We're working on the budget now. We follow the Blue Chip Forecast, really, of what the, 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 probability here in November that they're going to come down at least 25 basis points. So I think till the end of the year, we are expecting them to reduce rates.

Chuck Parcher (SVP and Chief Lending Officer)

Yeah. I mean, well, we probably have as much clarity as you have as far as on where rates are going to go in the future. But that's kind of our expectation.

Manuel Navas (Senior Research Analyst and Managing Director)

Got it. I get that. And I appreciate it. A lot of it's guesswork, 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 expenses. Just can you talk about that a bit more?

Rich Dutton (SVP and COO)

Sure, man. Well, this is Rich, and then 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 $800,000 is probably as good a guess as we could make.

I don't know that I can give you a whole lot more color than that. We feel good about that number. That's why we picked it.

Manuel Navas (Senior Research Analyst and Managing Director)

Oh, 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.

Chuck Parcher (SVP and Chief Lending Officer)

I'll let Ian give you the exact numbers in a second. I would tell you that the pipelines are growing in the leasing for the fourth quarter. Not sure it'll be quite as strong as last year, but 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 gain on sale and sale size in the leasing division just based on the whole loan to deposit piece of it. I would anticipate that the gain on sale will be more than the portfolio growth when you look at the fourth quarter. Ian, I'll let you talk about what the actual numbers on the gain on sale, mortgage, etc.

Ian Whinnem (SVP and CFO)

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

Manuel Navas (Senior Research Analyst and Managing Director)

Okay. And 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?

Chuck Parcher (SVP and Chief Lending Officer)

Yeah. 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 two and a half years. Those of us that got a mortgage five, six, eight, ten years ago 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 were, knock on wood.

We were hoping to get to it in the fourth quarter of this year to refine 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 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.

Dennis Shaffer (President and CEO)

The expense 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. We feel we have capacity in the back room right now to do more volume.

Manuel Navas (Senior Research Analyst and Managing Director)

I appreciate all the commentary. Definitely, it is all. A lot is in flux. I appreciate it. Thank you very much.

Dennis Shaffer (President and CEO)

Yeah. Thank you.

Our next question comes from the line of Daniel Cardenas from Janney Montgomery Scott. Go ahead, please.

Daniel Cardenas (Director and Equity Research Analyst)

Hey, good afternoon, guys.

Dennis Shaffer (President and CEO)

Good afternoon. Good afternoon.

Daniel Cardenas (Director and Equity Research Analyst)

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 were kind of driving the increase?

Dennis Shaffer (President and CEO)

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

Mike Mulford (Chief Credit Officer)

The criticized have been fairly stable the past quarter. We did have some loans move. We had a large relationship move pay off during the quarter, but then we had some other loans 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 loans, loan relationships, and again, we had one other relationship that came out of criticized. We expect that to remain fairly stable. We're hoping to see a loan relationship pay off this quarter, but we're not sure if that's going to happen.

Daniel Cardenas (Director and Equity Research Analyst)

So the loans that migrated onto the criticized portfolio, were those commercial loans? Can you give us a little bit of color there?

Mike Mulford (Chief Credit Officer)

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

Daniel Cardenas (Director and Equity Research Analyst)

Were they concentrated in any one industry?

Mike Mulford (Chief Credit Officer)

No.

Daniel Cardenas (Director and Equity Research Analyst)

No office or anything.

Mike Mulford (Chief Credit Officer)

No. It wasn't an office. It was. No. No. I think there was maybe a hospitality in there, and I want to say one was healthcare, maybe a nursing home or something. I can't remember.

Dennis Shaffer (President and CEO)

One was.

Chuck Parcher (SVP and Chief Lending Officer)

Yeah. One was in the food industry.

Dennis Shaffer (President and CEO)

Food industry.

Chuck Parcher (SVP and Chief Lending Officer)

Yeah. Definitely not what I would say the systemic things that we're seeing move in and out.

Dennis Shaffer (President and CEO)

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

Daniel Cardenas (Director and Equity Research Analyst)

Okay.

Dennis Shaffer (President and CEO)

Yeah. 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.

Daniel Cardenas (Director and Equity Research Analyst)

All right. All right. So with 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 look forward into 2025?

Ian Whinnem (SVP and CFO)

Yeah. 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.

Dennis Shaffer (President and CEO)

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

Daniel Cardenas (Director and Equity Research Analyst)

Okay, 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?

Dennis Shaffer (President and CEO)

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.

Daniel Cardenas (Director and Equity Research Analyst)

Okay. All right. And then on the initiative to kind of grow that low/no-balance customer base, I mean, what percentage of your customer bases does that make up? Is that small, relatively small, or?

Dennis Shaffer (President and CEO)

Yeah. It's not the majority of our customer base for sure. We probably don't have a number for you there. But 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 it handy.

Daniel Cardenas (Director and Equity Research Analyst)

Okay. Yeah. That'd be good if you can. All right. I'll call it half right now. All right. Thanks, guys. Appreciate it.

Dennis Shaffer (President and CEO)

Okay. Thank you.

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.

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 discipline approach we take to pricing loans and deposits and managing the company positions us very well for the future. 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.

Operator (participant)

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.