Civista Bancshares - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered stronger profitability with diluted EPS of $0.63, up 19% QoQ and 2% YoY, as net interest income rose 7.3% sequentially and net interest margin expanded 20 bps to 3.36% on lower funding costs.
• Core deposit initiatives and brokered CD repricing drove total funding costs down; management expects further relief in Q1 2025 as $150M of 5.18% brokered CDs mature and are replaced at lower rates, supporting additional margin expansion into the low-to-mid 3.40s by Q2 2025.
• Credit quality remains generally stable, but nonperforming assets rose to 0.80% of assets (from 0.45% in Q3) driven by two specific loans totaling $16.4M; allowance-to-NPL fell to ~122% from ~227% in Q3.
• Efficiency ratio improved to 68.3% (vs. 70.2% in Q3 and 72.6% in Q2) as expenses stabilized and NII increased; management guided Q1 2025 noninterest expense to about $28.8M and continues cost actions (branch closure, vendor optimization).
• The quarterly dividend was increased to $0.17 per share (from $0.16), reflecting confidence in earnings and capital build; target TCE ratio is 7%–7.5% over time, which may constrain buybacks near term.

What Went Well and What Went Wrong

What Went Well

• Net interest margin expanded to 3.36% in Q4 from 3.19% in Q3, aided by brokered CD repricing and lower wholesale funding; “our margin expanded by 20 basis points during the quarter to 3.36%” (CEO).
• Strong noninterest income resiliency: FY noninterest income +$0.6M YoY despite exiting tax refund processing and overdraft changes; Q4 drivers included mortgage gains and BOLI death benefits.
• Deposit strategy execution: core deposit growth and index-based pricing for high-balance money market accounts reduced reliance on brokered funding, with a focus on relationship deposits and digital onboarding (MANTL).

What Went Wrong

• Nonperforming assets increased to $32.6M (0.80% of assets) due to two credits ($8.0M multifamily pending sale, $8.4M C&I out of compliance), reducing allowance-to-NPL coverage to ~122%.
• Noninterest expense rose YoY (Q4 +11.8%) from professional fees (finance team transition), FDIC accrual, and leasing system conversion reserves; efficiency ratio remains elevated at 68.3%.
• Deposit mix shift away from noninterest-bearing balances (-$76.6M YoY), reflecting customer migration to interest-bearing accounts and elimination of tax program balances, partially offset by savings/MM growth and program deposits.

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and welcome to the Civista Bancshares Inc. Fourth Quarter 2024 Earnings Conference 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 the most directly comparable GAAP measures.

The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civista.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)

Thank you. Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our Fourth Quarter 2024 Earnings Call. I am joined today by Chuck Parcher, EVP of the company, and President and Chief Lending Officer of the bank, Rich Dutton, SVP of the company and Chief Operating 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 fourth quarter of $9.9 million or $0.63 per diluted share, which represents a $1.5 million or 18% increase over the linked quarter and a $237,000 increase over our fourth quarter in 2023.

We also reported net income for the year of $31.7 million or $2.01 per diluted share, which compares to $43 million or $2.73 per diluted share for 2023. Our ROA for the year was 0.80%; however, it was 0.97% for the quarter, continuing our string of improving our ROA for each quarter of 2024. As I have mentioned during previous calls, 2024 was a year of transition for Civista, as we looked to replace nearly $5.2 million of 2023 non-interest income. This included $1.4 million due to changes to the way we process overdrafts, $2.4 million in tax refund processing revenue, and a $1.5 million Mastercard renewal fee. I am happy to report that our non-interest income for 2024 was $585,000 greater than our non-interest income for 2023.

We were able to make up this lost revenue by increasing other service charges, increased gains on the sale of mortgages, increased lease and loan originations, and increased lease and residual fee income. Loan demand continues to be strong in each of our markets. However, we continue to be disciplined in our approach to loan and lease pricing, which had the intended impact of slowing growth. Our loan and lease portfolio grew at an annualized rate of 4.9% during the fourth quarter and a respectable rate of 7.7% for the year. Core deposit funding continues to be a focus, and we were pleased that our core deposit funding grew organically by over $36 million during the quarter, which allowed us to reduce our reliance on brokered funding.

While overall, the impact was a slight decline in total deposits from the end of our third quarter, this represents a shift toward more relationship funding that we believe contributes to the overall value of our core deposit franchise. Currently, we have a number of core deposit gathering 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 $31.4 million, which represents an increase of $2.1 million or 7.3% compared to our last quarter. While our earning asset yield increased by one basis point, the increase in net interest income was primarily attributable to a 19 basis points decline in our overall funding cost, which ended the year at 2.41%.

Our decline in our funding cost was largely attributable to $200 million in brokered CDs that matured in October. They carried a rate of 5.58%, and we were able to reduce or replace them by laddering brokered CDs over the subsequent 12 months at a blended rate of 4.32%. The result was that our margin expanded by 20 basis points during the quarter to 3.36% and was 3.21% for the year. Similarly, we had $150 million in brokered CDs that matured in the last half of December that carried a rate of 5.08%. We were able to reduce and replace them with $125 million of CDs laddered over the next 12 months at a blended rate of 4.37%, representing a savings of 71 basis points.

While this had little impact on our fourth quarter results, we do anticipate that it will further reduce our overall funding costs in the first quarter of 2025. We also have another $150 million of brokered CDs at a rate of 5.18% that will mature at the end of the first quarter that we anticipate being able to replace at a lower cost. We believe that our margin troughed during the second quarter of 2024 and will continue to expand over the next few quarters. Earlier this month, we announced a penny per share increase in our quarterly dividend to $0.17 per share. Based on our year-end market close of $21.51, this represents an annualized yield of 3.16%. During the quarter, non-interest income decreased $671,000 or 6.9% from the linked quarter and increased $192,000 or 2.2% from the fourth 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 have noted, leasing fees, particularly residual income, is less predictable than more traditional banking fees. The primary drivers for the increase from the prior year's fourth quarter were a $384,000 increase in gains from the sale of mortgage loans and leases and the receipt of a $319,000 death benefit on life insurance policy held on a former employee. As I mentioned, we are particularly proud of the fact that our year-to-date non-interest income increased $585,000 or 1.6% in comparison to the prior year. Non-interest expense for the quarter of $28.3 million represents a 1.1% increase from our last quarter. Our continued focus on expense control yielded improvement in nearly every category of non-interest expense.

However, these declines in non-interest expense were offset by an increase in professional fees as we continued using consultants as we transitioned in our new finance team as our controller retired in July, and we experienced the resignations of two other tenured employees in our finance department during the third quarter. These positions have all been filled. We will continue to utilize consultants in a reduced capacity during the first quarter of 2025 and do not anticipate needing them beyond the end of the first quarter. As we discussed during last quarter's call, we are in the process of converting our lease accounting and servicing systems. This will consolidate a number of systems and introduce automation to a number of tasks currently being manually performed.

We noted during our last call that we had identified a reconciling item and established a reserve against it, which was included in other non-interest expense. As we continued the process, we increased the reserve by another $482,000 during the quarter. We expect the conversion to be completed during the first quarter. Year-to-date, non-interest expense increased $4.9 million or 4.6% over the prior year. Compensation expense increased $3.5 million over the prior year due to merit increases, insurance, and other payroll-related expenses. Taxes and assessments increased $1 million, primarily due to an FDIC accrual adjustment in the fourth quarter of 2024, coupled with an increase year-over-year in our total assessment base. Software maintenance expense was up $777,000 due to a new software contract aimed at improving our ability to detect and mitigate fraud losses, as well as increases in costs associated with existing software contracts.

These increases were partially offset by a $1.5 million decline in depreciation on equipment we own related to our operating lease contracts, which are included in equipment maintenance and depreciation. We continue to originate fewer operating leases and are purchasing residual value insurance on those operating leases that we do originate, with a goal of eventually eliminating depreciation expense related to operating leases. We remain a very tax-efficient company. Our effective tax rate was 13.1% for the quarter and 13.4% year-to-date. Our efficiency ratio for the quarter was 68.3%, which is an improvement over the linked quarter but continues to be higher than we would like. We did close a branch in December and anticipate $142,000 in annual savings as a result, and are transitioning our after-hours calls away from a third-party provider to our automated system, which should yield another $180,000 in annual savings and improve our customer experience.

We will continue our efforts in 2025, looking for revenue enhancements and cost efficiencies across the organization to bring this ratio more in line with our expectations. Turning our focus to the balance sheet, for the year, total loans and leases grew by $219.5 million. This represented a growth rate of 7.7% as we experienced increases in commercial and ag loans, non-owner-occupied CRE loans, residential real estate, and real estate construction loans. During the quarter, total loans and leases grew by $37.3 million. This represents an annualized growth rate of 4.8%. The loans we originate for our portfolio continue to be virtually all adjustable-rate, and our leases all have maturities of five years or less. Given today's rates, we expect approximately $180 million of our loans to reprice at higher rates over the next 12 months.

Civista remains a CRE lending bank. However, we continue to be aggressive in pricing C&I loans and remain disciplined in how we are pricing commercial real estate loans as we work to manage our CRE to risk-based capital ratio and better align our lending and core funding. During the quarter, new and renewed commercial loans were originated at an average rate of 7.72%. Portfolioed and sold residential real estate loans were originated at 6.41%, and loans and leases originated by our leasing division were at an average rate of 9.32%. At December 31st, loans secured by office buildings made up 5.2% 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 office buildings located outside of central business districts.

Along with year-to-date loan production, our pipelines remained solid, and our undrawn construction lines were $238 million at December 31st. 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 ratios. Our commercial lenders, treasury management officers, private bankers, and retail teams continue to focus on deepening relationships and attracting core deposits. Total deposits were relatively unchanged from the last quarter. However, we did lower our balance of brokered deposits by $48 million. For the year, total deposits grew by $226.8 million or 7.6% on increases in savings and money market accounts and time deposits.

In addition to the initiatives of our frontline teams, we were successful in adding money market deposits from the State of Ohio's Ohio Homebuyer Plus program and cash deposits held in our Wealth Management clients' accounts, which represented $95.7 million and $97 million, respectively. At December 31st, our loan-to-deposit ratio was 96%. During the quarter, our cost of interest-bearing deposits declined by one basis point to 2.79% as we became more aggressive in pricing higher balance money market accounts and time deposits as part of our initiative to replace wholesale funding with core deposits. Our deposit base continues to be fairly granular, with our average deposit account excluding CDs approximately $27,000. At December 31st, 2024, non-interest-bearing deposits made up 21.9% of total deposits.

With respect to FDIC-insured deposits, excluding Civista's own deposit accounts, 13.4% or $431.7 million of our deposits were in excess of the FDIC limits at year-end, and our cash and unpledged securities of $499.3 million more than covered those uninsured deposits. Other than $463.3 million of public funds with various municipalities across our footprint, we had no deposit concentrations at December 31st. We believe Civista's low-cost deposit franchise continues to be 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 December 31st, our security portfolio was $652 million, which represents 15.9% of our balance sheet, and when combined with cash balances, represents 22.3% of our total deposits. At December 31st, 100% of our securities were classified as available for sale and had $53.4 million of unrealized losses associated with them.

This represents an increase in unrealized losses of $13.5 million from our last quarter and $5.8 million increase since December 31st, 2023. Civista's earnings continue to create capital, and our overall goal remains to maintain capital adequate to support organic growth and potential acquisitions. Although we did not repurchase any shares during the quarter or year, we continue to believe our stock is of value. We ended the year with our Tier 1 leverage ratio at 8.60%, which is deemed well-capitalized for regulatory purposes. Although earnings were strong, increasing our tangible common equity ratio from 6.36% at the previous year-end to 6.43% at December 31st, 2024, we recognize our tangible common equity ratio screams low, and our guidance remains that we would like to rebuild our TCE ratio back to between 7 and 7.5%.

To that end, we will continue to focus on earnings, and we'll balance any repurchases and the payment of dividends with building capital to support growth. Despite the uncertainties associated with the national economy, the economy across Ohio and Southeastern Indiana is showing no signs of deterioration. Our credit quality remains strong. Our ratio of the allowance for credit losses to total loans is 1.29% at December 31st, 2024, which is consistent with 1.30% at December 31st, 2023. However, our allowance for credit losses to non-performing loans declined from 246% at December 31st, 2023,-124% at December 31st, 2024. This was attributable to two loans totaling $16.4 million that were downgraded to non-performing during the quarter. One is an $8 million loan on a multi-family property that is under contract to be sold that is expected to close during the first quarter of 2025.

The second is an $8.4 million C&I loan that is current but out of compliance with our loan terms. We have met with the borrowers and believe that the loan will be brought back into compliance during the first quarter of 2025. During the quarter, we did make a $697,000 provision, 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 our CECL model. As many of you may have seen, we're happy to announce last week that we have promoted Chuck Parcher to Executive Vice President and Chief Lending Officer of the company and President and Chief Lending Officer of the bank. I will continue in my role of CEO and President of the company and CEO of the bank.

This change reflects Civista's succession plan and our organization's commitment to stability, growth, and a strong future. Chuck's promotion is a well-deserved recognition of his contributions, and I look forward to working together with him to serve our customers, employees, and shareholders. In summary, we are very pleased with our fourth quarter and full year-end results. Our disciplined approach to loan pricing and the way our teams continue executing on our deposit initiatives is bringing our lending and core funding into alignment. These efforts, coupled with our expanding net interest margin, yielded solid results that I believe set us up for a strong 2025. Civista remains focused on creating shareholder value and 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 that you may have.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star followed by the number two. Your first question comes from the line of Brendan Nosal with Hovde Group. Please go ahead.

Brendan Nosal (Director in the Research Department)

Hi, good afternoon, guys. Hope you're doing well.

Charles A. Parcher (EVP)

Hi, Brandon.

Brendan Nosal (Director in the Research Department)

We were just starting off on fee income. You guys did a really nice job this year replacing what you lost from the tax business. I know that certain pieces of the fee base tend to be volatile, particularly the leasing fee piece. So maybe offer some thoughts on the run rate for that specific line item as well as the overall fee base as we move through 2025. Thanks.

Dennis Shaffer (President and CEO)

I think on fees, I think the leasing, we're pretty optimistic there as we move forward. We feel we've gained pretty good traction over the last six months or so, so we expect that to continue as it relates to the leasing fees. I think also we have higher assets under management on the wealth side, and we saw some nice improvement year-over-year with our wealth management fees, so I think that we'll hopefully continue. We're growing that business nicely. We're managing now over $800 million in assets there, so we're growing that. We continue to analyze and review our service charges, so we did replace some of that lost income with service charge increases last year, but as fraud has kind of taken off within the industry, we've been able to push a few more of our treasury management products out.

I think we think that we'll continue to see some improvement in our treasury management fees. The wild card on fees next year, I think, will be really residential mortgage loans. Now, that's all rate deposit dependent, but we did have almost $1 million more in residential gain-on-sale income than we had in 2023. So that's the wild card, but we really think we've got some seasoned and experienced residential mortgage lenders, and as long as rates hold in there okay, I think we can at least equal what we did this past year, so.

Brendan Nosal (Director in the Research Department)

Okay. All right. That's helpful color. Maybe staying on the topic of fee income here, the net gain-on-sale of loans line, I know that includes both the CLF volume plus traditional one to four family residential. Do you have the split between those businesses for the quarter, both in terms of fee income and sales?

Ian Whinnem (CFO)

Yeah. So on Q4, $1.3 million on the gain-on-sale split around 40% for CLF for leasing and 60% mortgage. So that equates out to about $510,000 for the leasing and about $750,000 for mortgage. In terms of the sold volume in the fourth quarter, mortgage volume was about $40 million. That compares to $38 million in the third quarter. And the leasing was just under $12 million. That equates or is equal or similar to the $14 million we had in the third quarter.

Brendan Nosal (Director in the Research Department)

Fantastic. That's super helpful. Thank you.

Dennis Shaffer (President and CEO)

Thanks, Brandon.

Operator (participant)

Your next question comes from the line of Justin Crowley with Piper Sandler. Please go ahead.

Justin Crowley (Senior Research Analyst)

Hey, good morning, everyone, or good afternoon, rather. Wanted to start just on the margin discussion and some of the inputs there. You've got to think about $700 million in loans, if I have that right, that were priced immediately. Can you remind us for that $180 million that you mentioned in fixed-rate loans that come due over the next 12 months, what yields those are coming off at, and then perhaps similar detail out to 2026, if you have it?

Dennis Shaffer (President and CEO)

Those loans are probably, Brandon, we don't have exactly what that is, but most likely those loans are in the high fours, the low fives. Yeah. So the high fours, the low fives. They're probably going to somewhere reprice into the high sixes.

Justin Crowley (Senior Research Analyst)

Okay. Got it.

Ian Whinnem (CFO)

Or the low sevens.

Justin Crowley (Senior Research Analyst)

Probably low sevens. Yeah.

Dennis Shaffer (President and CEO)

Probably low sevens, given where treasury yields have gone.

Ian Whinnem (CFO)

Almost all those are based on a five-year Treasury from that perspective, Justin.

Justin Crowley (Senior Research Analyst)

Okay. Got it. And then sticking with the margin, it looked like deposit costs on a net basis were flat quarter-over-quarter. You had the step-down in rates paid on time and brokered with some payoffs there, but it looks like it was offset by a pickup across other categories. Can you talk a little bit about efforts to drop rates outside of the repricing dynamics within the CD book and what of the Fed's 100 basis points and cuts so far has filtered through?

Dennis Shaffer (President and CEO)

Yeah. We have been very proactive, I think, in reducing rates as the Fed has lowered rates. I mean, we are almost reducing them immediately. We have reduced them in nearly every category. Again, brokered deposits, we're going to pick up some pricing. Our total funding costs should continue to migrate down, but I think overall deposit costs may trend a little bit higher as we get more aggressive in trying to generate core deposits. Most of them in this rate environment will probably be money market and CD accounts. And that increase will really be related to more volume as we gather those funds to pay down borrowings or to pay off brokered deposits, more expensive brokered deposits or borrowings. So you'll see that cost kind of remain relatively flat, maybe tick up slightly as we, but overall funding costs should come down.

Justin Crowley (Senior Research Analyst)

Okay. I appreciate that. And then shifting gears a little bit, you spoke about some expected savings on the expense side. Are you able to provide some more granular detail on how or if inflation across some other categories may offset that and where you maybe expect costs to shake out in the first quarter and then beyond?

Ian Whinnem (CFO)

Yeah. I can do that one. So in the fourth quarter, we had some accrual adjustments just on marketing and some professional fees. We also mentioned we had some non-recurring items associated with the finance staff transition as well as our leasing conversion project. So in the first quarter, we're going to have a little bit of that expense remaining. It will start dropping off in the second quarter. We are expecting the first quarter expenses to be around $2,880. And then also some of our cost savings that we've mentioned that are either started in December or underway in the first quarter are going to start taking effect really in that second quarter, as well as we'll add some offset to that of investments that we're making as we move towards attracting some digital deposits.

Dennis Shaffer (President and CEO)

We are being very aggressive with some of our vendors, trying to see if they'll hold the line on some of the passing those off, and when those contracts are coming up, they're going out to bid, and we're telling them kind of our expectation, so just with sheer inflation and stuff, we are being much more really working the expense side. We'll continue to look to identify cost savings, and as I mentioned, we picked up a couple of those cost savings there in the fourth quarter. We'll really realize those throughout 2025, so we do know we have merit increases and stuff coming generally in April, but for the most part, we are aggressively looking to reduce expenses where we can.

We are making, though, that offset is investment in technology that initially bears some expense on the front end, and the revenue comes on the back end. So Ian and Rich will probably give you some sort of guidance there, run rate guidance as we move forward, but just realize that some of that, at least on the technology side, that expense, we won't recognize some of that revenue until the back end.

Justin Crowley (Senior Research Analyst)

Okay. And then I guess with that 2,880 in the first quarter, would your bias be toward starting to see a leg down as we head through the year, or would it kind of be stable at that level?

Ian Whinnem (CFO)

I would expect it to be stable at that level, excluding some investments we'll be doing into the place to attract some digital deposits. So we could see a little bit of a tick up because of marketing or software expenses.

Justin Crowley (Senior Research Analyst)

Okay. Got you. I will leave it there. Thanks so much, everyone.

Dennis Shaffer (President and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Tim Switzer (VP Equity Research)

Hey, good afternoon. Thanks for taking my questions.

Ian Whinnem (CFO)

Detailed.

Tim Switzer (VP Equity Research)

Appreciate some of the commentary you guys gave towards loan growth and working towards low single digits near term. What are some of the puts and takes that could cause an acceleration here? And I know it might be a little early for this, but with the change in the administration, with the kind of a weird macro outlook, and we're still not sure about the impact on tariffs or where rates will go, are you seeing that result in any caution at all from some of your borrowers? Or in certain industries, that kind of go in the other direction where they're a lot more bullish? And has that impacted your loan pipeline in any way?

Ian Whinnem (CFO)

Not a whole lot, Tim. I mean, some of the people that are very dependent upon imports actually kind of got ahead of it and pre-bought either some inventory or some supplies till they see how it shakes out. We haven't really seen a whole lot from the bullish side of it yet. So I would say no there, but I would say that overall, the attitude of our customers is definitely better today than it was three months ago.

Charles A. Parcher (EVP)

Yeah. And I would just add there, I think our biggest restriction, Tim, is going to be funding. That's the biggest restriction, but we think we can generate some decent deposits. One, we've never been a high CD payer, and we're going to get a little bit more aggressive as long as we can bring in funds that are cheaper than what we're borrowing at.

I think we're going to see some. We'll get some lift there. That'll be our biggest challenge. I think we can generate the loans. The loan demand is there in our markets. We've talked previously about all the stuff that's happening in Central Ohio with Intel. Last week, the state of Ohio announced the largest job creation expansion project in the history of the state of Ohio. We have a defense contractor moving into Central Ohio there that's going to create 4,500 new jobs over the next 10 years. That and Intel and what that means for the whole state because there'll be suppliers locating throughout the state. We've already started to see that some with Intel. Neither of those projects are fully implemented now, but I do think that the loan demand is going to be there.

And so really, our biggest restriction is just generating those deposits. We're making investments in our online new account opening, and it's a system that's going to not only help us be able to simplify how we open accounts online. It's also we're going to take that same experience into the branches and also when our bankers are out making calls in people's offices and stuff. I think we'll see some deposit lift because of that investment as well. So that's really where our restriction lies and what we can do. Our teams are really seasoned, really experienced, very well connected, and they can generate quite a bit of loan demand if we turn them fully loose.

Justin Crowley (Senior Research Analyst)

Great. That's good to hear. And then outside of the two credits you guys mentioned earlier, are there any areas or geographies where you're seeing a little bit more pressure on the credit side? And any, color you, provide there would be helpful.

Michael Mulford (Chief Credit Officer)

Hi. This is Mike, Chief Credit Officer. No, we're not seeing any specific areas where we're having any issues, any systemic issues at all. So any credit issues typically are one-offs. And so nothing in the way of geographic or concentration areas have we had any heightened risk.

Tim Switzer (VP Equity Research)

Okay. Great. That's good to hear. And then the last question I have is you guys have talked about wanting to build the TCE ratio to 7%-7.5% over time. If we forget about the impact of AOCI going forward, assuming rates stay consistent, do you have a timeline of getting there? And does this preclude you from doing buybacks at all or any other kind of capital deployment?

Dennis Shaffer (President and CEO)

Well, again, it's all based on our earnings, but we do think we did increase the dividend here last quarter, fourth quarter. And I think it's all just depending on our earnings, but we are bullish where we think our earnings could go. I mean, we wouldn't have done that if we didn't think our earnings were going to remain strong. So some of that depends on the earnings. And then the other wildcard is the interest rates and what they're tied to. We would hopefully migrate closer to 7% by the end of the year, I would think. And we continue to discuss our capital needs as we move forward.

Tim Switzer (VP Equity Research)

Okay. Got it. Well, that's all for me. And congrats to Chuck on the promotion.

Dennis Shaffer (President and CEO)

Thank you, Tim.

Operator (participant)

Your next question comes from the line of Terry McEvoy with Stephens Inc. Please go ahead.

Terry McEvoy (Managing Director and Research Analyst)

Thank you. Good afternoon. Echoing earlier comments on the impressive job replacing the fee income last year. And also congratulations, Chuck, on your new role at the company.

Dennis Shaffer (President and CEO)

Thank you.

Terry McEvoy (Managing Director and Research Analyst)

Maybe just a first question. Do you have a targeted loan-to-deposit ratio? It was about 96% at the end of the year, and I guess just as a follow-up question there, brokered deposits were in the regulatory crosshairs a bit last year. Is there any, I don't want to use the word pressure, but any incentive to drive those balances lower outside of just building more core relationships?

Dennis Shaffer (President and CEO)

I think the loan-to-deposit, we're comfortable in that 90%-95% range. That's where ideally we would like to operate because I think we're utilizing our balance sheet best at that level there. No regulatory pressure or anything on brokered deposits. We just think that we can generate maybe cheaper deposits, some CDs, and stuff that are less expensive than brokered and borrowing on our FHLB line. That's really why we want to drive core deposits, those core deposits higher, and get a little bit more aggressive on our CDs. Up until a year or two ago, we didn't have the need. We always felt that brokered deposits was a very efficient way to attract deposits, but we really didn't have the need. We were always kind of somewhere in that 75%-90% range.

But as our loan growth accelerated coming out of the pandemic, particularly in 2022 and 2023, we had 7% loan growth in 2024 for the year. It's pretty good. As that loan growth, just deposits didn't keep up. So we've kind of shifted our focus and said, "Let's get a little bit more aggressive to try to attract some of our own money as opposed to continuing to increase that with our brokered deposits.

Terry McEvoy (Managing Director and Research Analyst)

Appreciate that. And then just as a follow-up, a fair amount of your loan growth has been non-owner-occupied multifamily. In Metro Ohio markets, could you just talk about renter demand, occupancy rates, construction activity, and the overall health of those markets? Because there are some soft patches we're hearing about elsewhere across the country. Thank you.

Ian Whinnem (CFO)

Yeah. I would tell you, Terry, we're not really seeing that right now as far as most of the, especially the construction projects that we're bringing on. The rents are actually higher than what they were projected in the appraisals. So we're not really seeing a softening of demand from that piece of it, and they're filling up on schedule, I guess, from that. The absorption rates have been pretty much spot on, if not a little bit better, so knock on wood, we feel really good about especially the three major, I guess, the three C's where we've got a lot of those projects at.

And the rents are really higher, I think, because the borrower to make the project work is having to put in more capital, more equity into the deal. So to get their return, they've got to charge higher rates. And it appears so far we're still seeing demand.

Terry McEvoy (Managing Director and Research Analyst)

Great. Thanks again.

Ian Whinnem (CFO)

Thank you, Terry.

Operator (participant)

Your next question comes from the line of Manuel Navas with D.A. Davidson. Please go ahead.

Manuel Navas (SVP and Equity Research Analyst)

Hey, good afternoon, guys. Can you go into more detail on your future deposit gathering initiatives? You had great success with the Ohio Homebuyer Plus, with the Wealth Management transfer in brokered last year. I mean, all of that was kind of, it allowed you to keep core deposits untouched. So I just would love to hear more about what you're going to do going forward, and kind of how you're going to keep from the new money market accounts cannibalizing any deposit costs.

Dennis Shaffer (President and CEO)

Yeah. Good question. So we have a number of initiatives underway, Manuel. One of those is I think with our new finance and accounting team and under Ian's leadership, you're going to see the utilization of more dashboards that our frontline bankers are going to have available for them, which will allow them to kind of look at that total relationship. It's more of a manual process for our bankers to do that. And I think so we're migrating to more of these dashboards and profitability models. I think that one will help. We have identified and run our whole book of business and identified a number of accounts where we have either no deposit relationship or low deposits with. And we are reaching out through all of our business lines: our retail bankers, our commercial bankers, our private banking group, our treasury banking group.

They really are focused on those lists and working those lists, so that's a project that's underway. In addition, we made this investment. We've invested in a product called MANTL, and MANTL, we think, is probably the premier new account opening system out there. We think that's—we've looked at a number of those. When we invested in a product called Q2 about a year and a half, two years ago, they had an online account opening solution, but we found that we weren't real pleased with that solution. We're still using the Q2 platform, but we're going to have MANTL, and we think it's a much superior product, and again, once we kick that off, we just think it's going to be much more efficient for our bankers and the customer. It's going to be a much better customer experience.

And it's going to allow us to gather some deposits through a channel where we really haven't tapped into yet. And that's the digital channel. So we think that that will also enhance some of those. We look at deposit rates weekly. We're meeting very frequently with our deposit rates. So obviously, we try to keep an eye so we're not cannibalizing deposit costs. But I think it kind of goes back to those comments I made on one of the earlier questions that I think some of those deposit costs will inch up just because we're gathering more volume as opposed to just paying higher rates across the board.

Ian Whinnem (CFO)

Well, and I'll add, I think we're pretty focused on high-balance money market accounts. Again, we're trying to do everything we can not to cannibalize that core deposit balance that we value so much, so we're doing some things with index-based pricing that we haven't done in the past, and I think our depositors understand better, and we get some decent feedback from the really big depositors in that they don't have to worry about shopping and whether or not we're charging them a fair rate. Our lenders and the other folks, treasury management folks that are out in the field can explain that product to them, and we still have to take care of them, but that's something that they understand, and again, initially, it seems like we've got some pretty solid feedback on that.

But again, those are aimed at really high-dollar deposits so that we don't cannibalize kind of the smaller deposits that we have so many of.

Manuel Navas (SVP and Equity Research Analyst)

For new money? Or if it's a large enough commercial relationship, you would offer the index product?

Ian Whinnem (CFO)

Absolutely. If it's a large commercial product or customer, we would. But it's geared toward new money, but I don't think we've said it has to be new money.

Michael Mulford (Chief Credit Officer)

It's really geared toward that deposit customer that's a $1 million deposit or over.

Manuel Navas (SVP and Equity Research Analyst)

Sure. Okay.

Michael Mulford (Chief Credit Officer)

It's not a customer cannibalizing the entire book, obviously.

Manuel Navas (SVP and Equity Research Analyst)

Right. And do you have a—what's the initial index price? And I'm obviously going to float around with Fed movements, I'm sure, or some percentage of Fed movements. What's kind of the initial price, though?

Ian Whinnem (CFO)

Manuel, you give me a call after this, and we'll sign you up.

Dennis Shaffer (President and CEO)

We have it tiered based on the size of balances. So there's a bottom threshold, as Chuck alluded to. And then we're tiering it off of Fed funds.

Manuel Navas (SVP and Equity Research Analyst)

And then the digital channel. I heard something about marketing costs. Is it all branded with Civista? Is it some outside partnerships?

Dennis Shaffer (President and CEO)

No, it's all branded with Civista. And then marketing, we're going to be doing most of that marketing through social media, which really there's not a lot of cost. We'll run campaigns that they're helping us with. But I think most of the cost to market is just internally stuff that we're going to do. But most of that will be through social media. We've been really utilizing that channel. That's how we hope to gather deposits and then in-branch signage and things like that.

Justin Crowley (Senior Research Analyst)

This has been very helpful. I appreciate kind of this detail. Can I just take a kind of a bigger picture view? Do you have a sense for kind of where the near-term NIM could go? Where could it go by the end of the year? And what are you thinking in terms of the rate environment for the year?

Ian Whinnem (CFO)

Yeah. So we finished Q4 with a 336 NIM. We know we have additional loans that are going to reprice on those lower rates that we mentioned.

Manuel Navas (SVP and Equity Research Analyst)

Yeah.

Ian Whinnem (CFO)

We have the brokered benefit that happened in December of those repricing. We have another tranche that's going to happen in March 2025 for $150 million. In terms of where the Fed is going, it changed really quickly in the last 30 days. We're definitely not economists to be able to figure that out. It's quite likely that there's one rate cut in the first half of the year. Right now, we're kind of thinking we'll get to maybe in the low to mid-340s and then level out from there.

Manuel Navas (SVP and Equity Research Analyst)

That's helpful, and that's just in this first half of the year or kind of?

Ian Whinnem (CFO)

Yeah. We think we'll get there kind of by second quarter, and then probably level out from there depending on what the Fed does second half of the year.

Manuel Navas (SVP and Equity Research Analyst)

Just with your deposit initiatives, with loan and brokered repricing, and this NIM outlook, has pricing competition on either side of the balance sheet picked up? Where does it kind of stand right now?

Dennis Shaffer (President and CEO)

I would say the pricing is not really picked up. It's probably fairly stable right now. I mean, it's competitive on both sides. If you look at both deposit and loan pricing, it's still competitive. But it's been competitive throughout all of last year. So I wouldn't say it's any more intense. We think we're going to get more competitive. So we'll have to see what the rest of the marketplace does. But it's been, what we feel, has been pretty competitive over the last year. So I'm not sure it picks up in the marketplace. But there are a number of community banks that are in the same situation we're in and looking for deposits. We just wanted to make sure we're ready to not only when we get a little bit more aggressive, but we're not just aggressive on price.

We're aggressive in being able to deliver kind of a better customer experience. And that was, again, the investment into MANTL and stuff that kind of triggered that. So we wanted to kind of do those things in conjunction.

Manuel Navas (SVP and Equity Research Analyst)

That's helpful, and my last question is about the securities book. You offered it up as a potential source of liquidity. Does that give you a little more flexibility? Where can that end? What are the cash flows coming out for that? Where can that end the year in terms of do you want it to be at the same size, larger, and does that give you flexibility to kind of manage your deposits well? Just kind of talk through that.

Dennis Shaffer (President and CEO)

Yeah. We'll end up keeping it relatively the same size as a percentage of deposits, so we do believe in just having that liquidity available, so as the cash flows come out, we'll reinvest those and have to increase that investment portfolio if deposits start to go up or when.

Ian Whinnem (CFO)

Yeah. We don't want to decrease that as a percentage of deposits. We feel liquidity is probably the biggest thing that can hurt a bank more so than credit. Banks have failed because of liquidity issues, so we have a certain targeted percentage that we shoot for, and so most likely, we'll decrease that and use that to fund loans.

Manuel Navas (SVP and Equity Research Analyst)

That makes sense. Thank you. I'll step back into the queue. I appreciate the commentary.

Operator (participant)

Thank you, and there are no further questions at this time. I would like to turn it back to Mr. Shaffer for closing remarks.

Dennis Shaffer (President and CEO)

I just said in closing, I just want to thank everyone for joining us for today's call. This quarter and our year-end results were due in large part to a lot of the hard work and discipline of our team. I want to, first and foremost, thank them for all of their efforts. We will continue to focus on growing Civista the right way. I believe that our focus on improving our strong core deposit franchise and our improvement and discipline approach that we take in pricing our loans and deposits, and managing the company positions us very well for the future. I look forward to talking with all of you again in a few months to share our first quarter results call. Have a great rest of the afternoon. Thank you.

Operator (participant)

Thank you, presenters. This concludes today's conference call. Thank you all for participating. You may now disconnect.