Civista Bancshares Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 29, 2024

There are 12 speakers on the call.

Operator

Good afternoon, ladies and gentlemen, and welcome to the Savista 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 Savista Bancshares Inc. That involve risks and uncertainties.

Operator

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call. Additionally, management may refer to non GAAP measures, which are intended to supplement but not substitute to most directly comparable GAAP measures. The press release also available on the company's website contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non GAAP measures.

Operator

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

Speaker 1

Good afternoon. This is Dennis Schafer, President and CEO of Savista Bancshares. And I would like to thank you for joining us for our Q3 2024 earnings call. I am 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 and Ian Wyndham, 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 Q3 of $8,400,000 or $0.53 per diluted share, which represents a $1,300,000,000 or 18% increase over the linked quarter and a $2,000,000 decline from our Q3 in 2023.

Speaker 1

We are pleased with our results. As I mentioned during previous calls, this is a year of transition for Savista as we look to replace the revenue from the exited relationship with our income tax return 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.

Speaker 1

While loan demand continues to be strong in each of our markets, we are taking a disciplined approach to 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 30th. We discussed a number of our deposit initiatives during our last call and I would like to provide an update on 2 successful outcomes during the quarter. Through the State of Ohio's Homebuyer Plus program, we were successful in opening 1,000 new deposit accounts aimed at helping Ohio residents save for the purchase of a new home. In addition to $10,500,000 in customer deposits as a result of this program, of which 35% were new to the bank, we received $100,000,000 in deposits from the state of Ohio at a cost of 89 basis points.

Speaker 1

We were also successful in moving approximately $87,000,000 in cash balances of our wealth management clients that were formerly held outside the bank into a money market account with Savista. In addition to

Speaker 2

the deposits raised from these two initiatives, we had $49,000,000

Speaker 1

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 $29,200,000 which represents an increase of $1,500,000 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.

Speaker 1

While 1 quarter is not a trend, we do believe that our margin troughed during the Q2 and will continue to expand over the next few quarters. I'll also point out that we had approximately $200,000,000 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 $150,000,000 of brokered CDs at a rate of 5.08% that will mature at the end of the 4th quarter that we anticipate replacing at a lower cost. Earlier this month, many of you noticed that we filed a $200,000,000 shelf offering.

Speaker 1

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

Speaker 2

having

Speaker 1

a shelf offering in place affords us as we manage the company. We also recently announced the closure of our Perry Street branch located in Napoleon, Ohio, which is scheduled to close in early December. We expect this closure to result in savings of $234,000 annually beginning in 2025. Given the proximity of our other 2 Napoleon branch locations, we do not anticipate losing any deposits. Last Friday, we announced a quarterly dividend of $0.16 per share, which is no change from the prior quarter.

Speaker 1

Based on our October 25 share price of $17.84 This represents a 3.59 percent yield and a dividend payout ratio of 30.1% for the 3rd quarter. During the quarter, non interest income decreased $857,000 or 8.1 percent from the linked quarter and increased $1,500,000 or 19.2% from the Q3 of 2023. The primary driver of the decline from our linked quarter was a $1,100,000 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.

Speaker 1

The primary drivers for the increase from the prior year's Q3 were a $640,000 increase in gains from the sale of mortgage loans and leases, a $515,000 increase in lease revenue and residual income and the receipt of a $319,000 death benefit on the life insurance policy held on employees. We are particularly proud of the fact that our year to date non interest income increased $391,000 or 1.4 percent in comparison to the prior year. This is particularly impressive given the reduction in fee income related to overdraft, the elimination of the tax processing relationship and the one time bonus we received in 2023 for entering a new debit brand agreement. This year, we've managed to replace nearly $5,700,000 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 $28,000,000 represents an 8.1% decline from our linked quarter as our continued focus on expense control yielded improvement in nearly every category of non interest expense.

Speaker 1

We are in the process of converting our lease accounting and servicing systems. Not only will this consolidate a number of systems we are currently using, it will introduce automation to a number of tasks currently being manually performed. As part of the conversion process, we identified a reconciling item that we are still investigating. Although we continue to gather information, we believe it prudent to establish an $800,000 reserve against a suspense account, which is included in other non interest expense. We expect the conversion to be completed during the Q4.

Speaker 1

Year to date, our non interest expense increased $2,500,000 or 3.1 percent over the prior year. Our compensation expense increased $2,800,000 over the prior year due to merit increases, insurance and other payroll related expenses and software maintenance expense was up $540,000 due to new software contracts aimed at improving our ability to detect fraud and mitigate fraud losses as well as increases in costs associated with existing software contracts. These increases were partially offset by a $795,000 decline in depreciation related to equipment we own related to operating lease contracts, which is included in equipment maintenance and depreciation. We have been originating fewer operating leases and purchasing residual value insurance on those operating leases that we do not originate with a goal of reducing and eventually eliminating depreciation expense related to operating leases. Our efficiency ratio for the quarter was 70.2%, which is an improvement over the linked quarter, but not where we would like it to be.

Speaker 1

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.

Speaker 1

Turning our focus to the balance sheet. Total loans and leases grew by $29,000,000 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 and I and CRE loan. The loans we are originating through our portfolio continue to be virtually all adjustable rate and our leases all have maturities of 5 years or less.

Speaker 1

Navista remains a CRE lending bank. However, we have been more aggressive in pricing C and 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%. 30th, loans secured by office buildings made up 5.1% of our total loan portfolio.

Speaker 1

As we have stated previously, these loans are not secured by high rise metro office buildings, rather they are predominantly secured by single or 2 storey offices located outside of central business districts. Along with year to date loan production, our pipelines remain solid and our undrawn construction lines were $261,000,000 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 $246,000,000 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.

Speaker 1

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 our linked quarter. Our deposit base continues to be fairly granular with our average deposit account excluding CDs approximately $24,000 Non interest bearing deposits and business operating accounts continue to be a focus.

Speaker 1

Non interest bearing deposits made up 22% of total deposits at September 30. With respect to FDIC insured deposits, excluding Subista's own deposit accounts, 13.4% or $430,900,000 of our deposits were in excess of the FDIC limits at quarter end. Our cash and unpledged securities at September 30 were $493,200,000 which more than covered these uninsured deposits. Other than the $462,100,000 of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30. We believe Savista's low cost deposit franchise is one of our most valuable characteristics contributing significantly to our solid net interest margin and overall profitability.

Speaker 1

We view our security portfolio as a source of liquidity. At September 30, our security portfolio was $629,000,000 which represents 15% of our balance sheet and when combined with cash balances represents 21.9% of our total deposits. We continue to see relief from the pressure that higher interest rates have been putting on our bond portfolio. At September 30, all of our securities were classified as available for sale and had $44,600,000 of unrealized loss associated with them. This represents a decline in unrealized losses of $17,900,000 from the linked quarter and a $9,500,000 decline since December 31, 2023.

Speaker 1

Demistus 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 term and equity ratio remains low.

Speaker 1

Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7% and 7.5% and we continue to make progress towards that target. To that end, we will continue to focus on earnings and we'll balance any repurchases and the payment of dividends with building capital to support growth. Despite the uncertainties associated with the national economy, the economy across Ohio and Southeastern Indiana is holding up well. Our credit quality remains strong and our credit metrics remain stable. We did make a $1,000,000 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.

Speaker 1

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 2 27% at September 30, 2024 compared to 246% at December 31, 2023. $1,500,000 of the year to date increase in non performing loans was attributable to a fraud related 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 Q3 results.

Speaker 1

Our disciplined approach to loan pricing and the way our teams are executing on our deposit initiatives brought better alignment between our lending and core funding. These efforts coupled with the inflection in our net interest margin yielded solid results that I believe sets us up for a strong finish to 2024. Savista 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

Ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Justin Crowley from Piper Sandler. Go ahead please.

Speaker 3

Hey, good afternoon everyone.

Speaker 4

Hi Justin.

Speaker 3

Just wanted to start off on the margin here. Saw some nice lift in the quarter and looks like some of the borrowings that were paid off occurred later in the period and that could be a tailwind into 4Q and beyond. And you also mentioned some of the broker deposits that will reset. But in terms of the borrowings, how are you thinking about further pay downs here? And I guess you can marry that with just outlook on continued traction on the deposit gathering side.

Speaker 5

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

Speaker 1

Yes. I would just add, Justin, we have lower 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.

Speaker 1

We had lowered those about 35 basis points When the Fed lowered rates this last night, we came down another 35. So we've been we're down 70 basis points from the beginning of the year on all of our CD pricing. That's actually our probably our best rate is at 7,000,000 CD. So we're down. We did that we lowered all money markets and everything.

Speaker 1

So I think we'll get some lift there. And as we mentioned, some of those brokered deposits, the repricing happened late in the quarter. So we do anticipate further improvement in the margin. I think as we go forward, we hopefully we get 5 basis points or so lift there as we enter into the Q4.

Speaker 3

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 just how the competitive environment will enable you to keep moving lower?

Speaker 1

Well, I think we'll try to be as aggressive as we can. I mean, when the Fed lowers, we are going to lower. Some of it depends on how our customer reacts. But in general, we are we maintain or we retain probably 90% to 95% of CDE customers and those are your most sensitive customers. So we've been we feel we have a we're a relationship bank, not a transaction bank.

Speaker 1

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 with that more transactional or some way that's really advertising for deposit rates. So we've 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.

Speaker 3

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?

Speaker 3

I know you mentioned the 7% to 7.5% TCEagle. 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?

Speaker 1

Well, we've been laser focused, I think, on building that ratio back up, that TCE ratio back up. And so that's why we haven't done share repurchases. We still think that's really important for our capital management strategy. But I think we want to stay focused on building that TCE ratio back up and we're not to the target that we've laid out there. So I think that's 1st and foremost is our priority is really building that back up.

Speaker 1

And Brendan, this is Rich.

Speaker 6

That's one of the things I think we kind of thought maybe has been kind of one of the governors

Speaker 5

on our stock price, the

Speaker 6

fact that that TCE has been a little lower than we'd like it to be. So we're kind of treating that for stock repurchases. As much as we'd love to buy stock back, I think our shareholders are better served by 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.

Speaker 5

Right.

Speaker 3

Okay. That's helpful. And then just one last one quickly on credit. Things look pretty clean here and 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?

Speaker 1

Mike, you want to come Mike Mulford is our Chief Credit Officer.

Speaker 4

We just continue to look at various concentrations and industries that we're in and the trends from an economic standpoint as we look at the portfolio and where we're considering reserve changes.

Speaker 1

Yes. 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 that slowed down on both residential and commercial loans. And that's the model just has you allocate for that. So it was not none of it was credit related.

Speaker 1

We still feel our credit quality is really, really strong. It's just more we're accounting for those prepayments and for growth.

Speaker 3

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

Speaker 7

You bet.

Operator

Our next question comes from the line of Brandon Nossall from Hovde Group. Go ahead please.

Speaker 8

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

Speaker 7

Hi, Brandon. Hi, Brandon.

Speaker 8

Maybe just starting off on the Ohio homebuyers program, that $100,000,000 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 2, how long do those balances stick around for?

Speaker 1

Yes, it is the maximum amount we could get. Those balances will stick around for up to 5 years. Some of it will depend when they were targeted for homebuyers. So if those people do buy a house, we will give that $1,000,000 deposit or whatever, dollars 100,000 deposit back to the state. But overall, the program runs 5 years.

Speaker 1

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. So 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.

Speaker 6

We are paying 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 under what rate we're paying right now on that. It's 6%. 6%. So I mean

Speaker 1

there's a reason for that money to stay there.

Speaker 6

And that so we're paying 6% on that $10,000,000 or $11,000,000 of customer deposits in exchange for $100,000,000 at 89 basis points. Even a couple of dumb guys from Ohio thought that was a pretty good trade.

Speaker 8

All right. That's helpful color. And yes, I think the 86 basis points on the $100,000,000 makes up for the higher cost on the 10,000,000 dollars 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.

Speaker 5

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

Speaker 7

The other thing we've got more Okay. I'm good.

Speaker 6

Yes, Brent, 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've budgeted like 28.4 $1,000,000 for the quarter. I think it's we guided $28,300,000 I think last time and came in under it, but I think that's probably a reasonable number to put in your model.

Speaker 8

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

Speaker 1

Thank you.

Operator

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

Speaker 9

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?

Speaker 9

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?

Speaker 1

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

Speaker 1

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 it also just will improve our net interest margin over time. And then the what was the last part of the CRE concentration, I think we've guided there. We'd like that

Speaker 5

to be obviously, we'd like

Speaker 1

to be under 300, but we get no pushback from regulators on that. I mean, there's been a lot of talk about regulators being focused on that. Their focus, at least on all of our exams, have been around how we manage that portfolio, what kind of portfolio managing we are doing with that portfolio. And we get high marks in that regard. So but we would like to reduce that because we do think it's a drag on maybe our stock price.

Speaker 1

So we'd like be under 3, but we'd be comfortable getting to 3.25, I think is a realistically realistic target that we could get to.

Speaker 9

And then as a follow-up, maybe as what were yields on loans maturing in the quarter? You said new production was $7.59 and maybe more importantly, when you look ahead into the Q4 and beyond, what's the benefit from that, the fixed rate loans as those reprice higher? And how much is that baked into the margin comments that you had earlier?

Speaker 7

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 $100,000,000 over the next, I think, 4 quarters coming that will roll forward to new margins. I don't know if you have that number, Rich, from what they're rolling to and what we anticipate. But we do obviously feel over that piece of it that we will get some margin uplift from those roles.

Speaker 1

Yes. Many of them are probably going to roll to the high 6s, low 7s because the rates we did back in 2019 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 the what's rolling here right now. Hold on one sec. You got

Speaker 7

it. Almost $300,000,000 actually, if we go out 1 to 2 years, I guess 100 and about 100 and $50,000,000 over the next 12 months.

Speaker 1

$150,000,000 over the next 12 months and $300,000,000 over the next 24 months. Dollars 150 more. Yes. Yes. So for a total of $300,000,000 over the next 24 months.

Speaker 1

So we'll get some so just a combination of things between the brokerage repricing lower, us paying down the FHLB borrowings, the loans repricing, us being fairly aggressive in lowering with the Fed. That's why we think that we're going to get margin improvement. It's going to offset because we have about $700,000,000 that is tied to that floats daily, tied to prime or sulfur. But we're going to offset that with all a number of those other things. And a lot of them there are more than if the Fed is going down 25, we're going down 125 on some of those brokers.

Speaker 1

So we picked up some significant dollars there.

Speaker 7

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

Speaker 9

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?

Speaker 7

Yes. Terry, this is Chuck here. 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.

Speaker 7

We've really tried to keep that CR especially the CRE side, those rates high 7s, really most of them north of 8. So it's really tempered our growth back somewhat. But we feel like if we really want to turn the spigot back on, we don't see really any issues as far as getting back into that more mid to high single digit growth rates that we normally have.

Speaker 9

Thanks for taking my questions.

Operator

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

Speaker 2

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

Speaker 7

Hey, Tim.

Speaker 2

I wanted a quick follow-up on some of the NIM commentary. You guys have given a lot of granular details, it's been great. But more broadly, how do you think the margin reaction like how does the trajectory change if the Fed decides to either cut more aggressively or less aggressively over the course of the cycle?

Speaker 5

Ian, do you want to extend a bit? Yes. Hey, Tim. This is Ian. So on the loan pricing side, we have about $700,000,000 that will reprice immediately on the lending side.

Speaker 5

On the deposit side, we have a downward beta strategy as Dennis alluded to, we're 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 having advantage from where the curve is right now just based on the brokered and CD pricing that we're putting in right now.

Speaker 1

And Tim, we're still borrowing some funds from FHLB. So a couple we're going to get a couple of $100,000,000 every time that will reprice too. So we have those loans that flow, but we also we're borrowing money. That's another thing that we see immediate benefit from.

Speaker 2

Okay. Yes. Yes, that was helpful. And then I believe when you guys talked about the 2 different deposit initiatives you guys had last quarter, you mentioned it was about $175,000,000 deposit opportunity. But I think if I'm doing the math here, it looks like you already kind of beat that number.

Speaker 2

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

Speaker 7

far?

Speaker 1

Yes. We grew deposits $247,000,000 I think for the quarter or so. So $49,000,000 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 kicked off is really focusing in on those low 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.

Speaker 1

And some of those smaller clients kind of not letting go by the wayside, but we didn't stay in touch with somebody that may have had an $80,000 loan in just one deposit relationship. So we're reaching back out to those folks. The other big initiative is we kicked off a small business loan that we are now going to start originating through our branches and our retail branches. And we feel that's a better place for those because those bankers see those customers every day. And they're going to be able to that was handled in our commercial areas, those small business loans.

Speaker 1

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 will talk to both sides of the balance sheet with those customers. And we think we're going to be able to develop and attract some deposits with those low the smaller loans. So that's one initiative. Throughout the bank, we're really focused on those low and no balance deposit customers.

Speaker 1

And we think we'll get some lift there.

Speaker 7

And Tim, we also really we have our treasury people and our 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 drawing some of those funds into our bank that were held at some of the larger or the regionals in the area when they get a little bit better feel and touch from Savista.

Speaker 1

Particularly our commercial folks are really doing a good job because what we've seen coming over the last 15 years coming out of the great recession, a number of those customers did their lending, some of these larger relationships did their lending at the bigger institutions. When those institutions cut them off or in some cases kick them out of the bank, they started borrowing from community banks. So many of those borrowers when we look at them, they may have 15% of their deposits with us and 15% with another community bank and 15% with another community bank. But 55% of their deposits are still with that bank that they were with. They kicked them out.

Speaker 1

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

Speaker 7

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

Speaker 1

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

Speaker 2

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

Speaker 7

Like I said, Tim, I think we're really looking at and figuring out ways to bring that CRE concentration down. So that will temper some of our growth as we continue to look at that. If we do some things to clear that up beforehand, I think our loan growth will be a little bit faster. But the bottom line is we're really focused right now on doing a little bit more, being a little bit more aggressive on the C and 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, so it's a more manageable level, we'll grow faster from that perspective.

Speaker 7

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.

Speaker 2

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?

Speaker 7

I don't think so. I don't 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 project. But when it comes lower and becomes they don't need quite as much money in the project. 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.

Speaker 1

Yes. 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.

Speaker 1

We're not that worried from a credit perspective.

Speaker 2

Okay. That was great. Thank you, guys.

Operator

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

Speaker 10

Hey, could you clarify some of your NIM discussion? If there's if Fed cuts are pretty aggressive, you likely stay stable. And by aggressive, are you meaning like every median? Are you talking about like 50 basis points versus 25 basis points of a cut? And then if there's less cuts, could we see how big of an NIM increase

Speaker 5

could you have? And what would constitute less?

Speaker 10

Can you just kind of give me a little bit better range of outcomes there?

Speaker 5

Yes. So, Manuel, this is Ian. We're expecting NIM to expand. We think we've troughed in 2nd quarter. Expansion, probably not as much as what we had from Q2 into Q3, but we should probably get into the low 320s by the Q4.

Speaker 5

And then we would expect continued expansion in the beginning part of 2025 albeit a slightly slower base 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,

Speaker 1

dollars 700,000,000 of loans repricing down, but plenty of our loans are going to be repricing on to higher rates to help offset some of that. And remember when the Fed lowers the short term rates, right now the yield curve is starting to correct itself. So our lending rates are not going to come down as quick as our new loans because they're tied to a 5 year treasury or something, which is not moving. If short term rates come down 25, that's coming down 5. So your loan rates are not repricing as quickly now as your short term rates will be.

Speaker 10

I appreciate that. And all the details on the broker and the fees, that's all helpful. What are you assuming on the rate forecast? Are you assuming November December and then a couple of cuts into January into the Q1 of next year? Can you just kind of help with that rate assumption?

Speaker 5

Yes. I think we're expecting November December and then maybe probably no more than 4 stopping by middle of 'twenty five, probably closer to 2 in 2025. Yes, we'll be

Speaker 1

able to get better guidance in 2020. But we're working on the budget now. We follow the blue chip forecast really what's as opposed to us trying to predict that. We just follow that blue chip forecast for 2025. But I think for the next 2 months for sure, there is pretty high probability here in November that they're going to come down at least 25 basis points.

Speaker 1

So I think through the until the end of the year, we are expecting them to reduce rates.

Speaker 7

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

Speaker 10

Got it. I get that and I appreciate it. It's all a lot of it's guesswork and it's difficult. Can you give me a little

Speaker 1

bit more color on the $800,000

Speaker 10

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.

Speaker 10

Just can you talk about that a bit more?

Speaker 1

Sure, Manuel. This is Rich. And we're moving from

Speaker 6

one system or actually several systems to 1. And as we go through that process, we've had a couple of things in a suspense account. We just couldn't get reconciled. I think our good fortune of finding it during

Speaker 1

a quarter where we were making a lot of

Speaker 6

money allowed us to probably be pretty conservative in how we reserve for it. I mean,

Speaker 7

I can't tell you we'll go higher, but

Speaker 6

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 is probably as good a guess as we could make. I don't know. I can give you a whole lot more color than that.

Speaker 6

We feel good about that number. That's why we picked it.

Speaker 10

Okay. And then back to fees for a moment. Usually, there's a stronger 4th quarter in leasing. Is that developing in that direction in terms of gain on sale for leasing? And then and potentially lease balance growth, which wasn't that much this quarter.

Speaker 10

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.

Speaker 7

I'll let Ian give you the exact numbers in a second, but I would tell you that we see the pipelines are growing in the leasing for the Q4. Not sure it'll be quite as strong as last year, but still good about where we're sitting at. We have tried to put some things in play to be a little more aggressive on the sales, the gain on sale and sales size in the leasing division just based on the whole loan to deposit piece of it. So I would anticipate that the gain on sale will be more than the portfolio growth when you look at the 4th quarter. And Ian, I'll let you talk about what the actual numbers on the gain on sale mortgage, etcetera.

Speaker 5

Thanks, Jeff. Yes, so of the $1,400,000 gain on sale that we had in the Q3, 45 percent of it was leasing and remaining 55% was mortgage. So call it $600,000 leasing to $800,000 mortgage.

Speaker 10

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

Speaker 7

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

Speaker 7

So we don't see that book moving off of that unless they really are going to buy a new home or they've got some other debt they want to refinance into that mortgage. So but we do feel like there will be an expansion. We were knock on wood, we were hoping to get to it in the Q4 of this year to refi some of the stuff we have on our books. But as you've seen in the last week or so, the 5 10 year treasuries have actually moved up and set it down. So we don't what we feel like is the refinance boom will probably not take place in the Q4, but hopefully in the 1st or second quarter of next year, rates move appropriately.

Speaker 1

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

Speaker 10

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

Speaker 6

Yes. Thank you.

Operator

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

Speaker 7

Hey, good afternoon guys.

Speaker 1

Good afternoon. Good afternoon.

Speaker 11

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?

Speaker 1

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

Speaker 4

The credit size have been fairly stable past quarter. We did have some loans move. We have a large relationship move paid off during the quarter, but then we had some other loans that or other relationships that were one that was downgraded into the criticized category along with a couple of other smaller deals that kind of replaced it. So for the quarter, there was an increase, but it was mostly related to a couple of loans, loan relationships. And again, we had some others one of the relationship that came out and criticized.

Speaker 4

We expect that to remain fairly stable. There's hoping to see a loan relationship pay off this quarter, but we're not sure if that's going to happen.

Speaker 11

So the loans that migrated onto the criticized portfolio, what are those commercial loans? Can you give us a little

Speaker 7

bit of color there?

Speaker 4

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

Speaker 11

Were they concentrated in any one industry?

Speaker 4

No. No office or anything? No. No office. No.

Speaker 4

I think there was hospitality in there and honestly one was healthcare, maybe a nursing home or something.

Speaker 10

I can't remember.

Speaker 7

Yes, one was in the food industry. Food industry. Yes, definitely no what I would say is systemic things that we're seeing move in and out.

Speaker 1

And then no office. Again, we're kind of

Speaker 6

creeping back toward what's normal, I think.

Speaker 4

Right.

Speaker 6

Okay.

Speaker 1

Yes. And we anticipate that's kind of as we move forward. There are a couple of credits that may be close to moving out, but always have stuff moving in and that's pretty much what happened in the Q3.

Speaker 5

All right.

Speaker 11

All right. So what kind of a normalization then is the expectations that charge off levels begin to move towards a normal kind of more historical level as we look forward into 2025?

Speaker 4

Yes. This quarter was a very good quarter from that standpoint. But I think we'll see charge offs elevate a little bit back to normal in the next couple of quarters.

Speaker 1

Yes. 1st and second quarter probably migrates back towards those levels, I would say.

Speaker 4

Yes.

Speaker 11

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?

Speaker 6

I believe there were $14,000,000 at the end of

Speaker 1

the quarter that were still there.

Speaker 6

And I will tell you that if not today or 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.

Speaker 11

Okay. All right. And then on the initiative to kind of grow that lowno balance customer base, I mean, what percentage of your customer base does that make up? Is that small, relatively smaller?

Speaker 1

Yes. It's not the majority of our customer base for sure. We don't we probably don't have a number for you there. But there's opportunity for sure. I don't we actually do have that number somewhere.

Speaker 1

We could probably get that to you. There are a number of we don't have any AMP.

Speaker 11

Okay. Yes, that'd be good if you can. All right. That's all I have right, Jonathan.

Speaker 5

All right.

Speaker 11

Thanks guys. Appreciate

Speaker 7

it. Okay. Thank you.

Operator

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

Speaker 1

Well, I'd just like to say in closing, I just want to thank everyone for joining and those that participated on today's call. I was 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 Savista the right way. I believe our focus on improving our strong core deposit franchise and just the disciplined approach we take to pricing loans and deposits and managing the company positions us very well for the future.

Speaker 1

And I look forward to just talking with all of you in a few months as we share our 4th quarter results. Have a great rest of the afternoon and thank you.

Operator

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.

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Earnings Conference Call
Civista Bancshares Q3 2024
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