Earnings Call Transcript
CIVISTA BANCSHARES, INC. (CIVB)
Earnings Call Transcript - CIVB Q3 2024
Operator, Operator
Good afternoon, ladies and gentlemen and welcome to the Civista Bancshares Inc. Third Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode. Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial condition of Civista Bancshares, Inc., that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares' website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Civista management will take any questions you may have. Now, I will turn the call over to Mr. Shaffer.
Dennis Shaffer, President and CEO
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our third quarter 2024 earnings call. I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Chuck Parcher, SVP of the company and Chief Lending Officer of the bank, and Ian Whinnem, SVP of the company and Chief Financial Officer of the bank; and other members of our executive team. This morning, we reported net income for the third quarter of $8.4 million, or $0.53 per diluted share, which represents a $1.3 million, or 18% increase over the linked quarter and a $2 million decline from our third quarter in 2023. We are pleased with our results. As I mentioned during previous calls, this is a year of transition for Civista, as we look to replace the revenue from the exited relationship with our income tax refund processor, as well as changes in the way we process and charge for overdraft items. In addition, we had to replace the non-interest-bearing funding that was a byproduct of our relationship with our former tax refund processing customer. Exiting this relationship coupled with strong loan growth and flat deposit growth over the last several years has resulted in a greater reliance on wholesale funding. This reliance has put pressure on our net interest margin which we are taking steps to address. While loan demand continues to be strong in each of our markets, we are taking a disciplined approach in our loan and lease pricing, which has had the intended impact of slowing our loan and lease growth. Our loan and lease portfolio growth slowed to an annualized rate of 4% during the quarter, which when combined with our efforts to gather core funding lowered our loan-to-deposit ratio to 95% at September 30 compared to 102% at June 30. We discussed a number of our deposit initiatives during our last call, and I would like to provide an update on two successful outcomes during the quarter. Through the State of Ohio's Homebuyer Plus program, we were successful in opening 1,000 new deposit accounts aimed at helping Ohio residents save for the purchase of a new home. In addition to $10.5 million in customer deposits as a result of this program, of which 35% were new to the bank, we received $100 million in deposits from the State of Ohio at a cost of 89 basis points. We were also successful in moving approximately $87 million in cash balances of our wealth management clients that were formerly held outside the bank into a money market account with Civista. In addition to the deposits raised from these two initiatives, we had $49 million of organic growth during the quarter. Currently, we have a number of other deposit initiatives underway and I continue to be encouraged by our ability to remain disciplined in pricing both our loans and deposits through this entire interest rate cycle. We reported net interest income for the quarter of $29.2 million, which represents an increase of $1.5 million or 5.3% compared to our linked quarter, while our overall cost of funding was unchanged at 2.61%. Our yield on earning assets increased by seven basis points to 5.65%. This resulted in our margin expanding by seven basis points to 3.16% compared to our linked quarter. While one quarter is not a trend, we do believe that our margin troughed during the second quarter and will continue to expand over the next few quarters. I will also point out that we had approximately $200 million in brokered CDs that matured in the last half of October that carried a rate of 5.58%. We were able to replace them with CDs laddered over the next 12 months, at a blended rate of 4.32% with a savings of 126 basis points. We also have another $150 million of brokered CDs at a rate of 5.08% that will mature at the end of the fourth quarter that we anticipate replacing at a lower cost. Earlier this month, many of you noticed that we filed a $200 million shelf offering, while we have no immediate plans to use the offering our preceding shelf offering expired yesterday and we believe it is prudent to maintain the flexibility that having a shelf offering in place affords us as we manage the company. We also recently announced the closure of our Perry Street branch located in Napoleon, Ohio which is scheduled to close in early December. We expect this closure to result in savings of $234,000 annually, beginning in 2025. Given the proximity of our other two Napoleon branch locations, we do not anticipate losing any deposits. Last Friday, we announced a quarterly dividend of $0.16 per share which is no change from the prior quarter. Based on our October 25th share price of $17.84, this represents a 3.59% yield and a dividend payout ratio of 30.1% for the third quarter. During the quarter, non-interest income decreased $857,000 or 8.1% from the linked quarter and increased $1.5 million or 19.2% from the third quarter of 2023. The primary driver of the decline from our linked quarter was a $1.1 million decline in lease revenue and residual fees. As we are learning, leasing fees, particularly residual income, are less predictable than more traditional banking fees. This decline was partially offset by a $539,000 increase in the gain on the sale of mortgage loans and leases and the receipt of a $319,000 death benefit on a life insurance policy held with a former employee during the quarter. The primary drivers for the increase from the prior year's third quarter were a $640,000 increase in gains from the sale of mortgage loans and leases, a $515,000 increase in lease revenue and residual income, and the receipt of a $319,000 death benefit on the life insurance policy held on a former employee. We are particularly proud of the fact that our year-to-date non-interest income increased $391,000 or 1.4% in comparison to the prior year. This is particularly impressive given the reduction in fee income related to overdraft, the elimination of the tax processing relationship, and the one-time bonus we received in 2023 for entering a new debit brand agreement. This year we've managed to replace nearly $5.7 million in lost fee revenue by adding new deposit customers, increasing service charges, increasing gains on the sale of mortgage loans and leases, and through increased lease revenue and residual income. Non-interest expense for the quarter of $28 million represents an 8.1% decline from our linked-quarter as our continued focus on expense control yielded an improvement in nearly every category of non-interest expense. We are in the process of converting our lease accounting and servicing systems. Not only will this consolidate a number of systems we are currently using, but it will introduce automation to a number of tasks currently being manually performed. As part of the conversion process, we identified a reconciling item that we are still investigating. Although we continue to gather information, we believe it's prudent to establish an $800,000 reserve against a suspense account which is included in other non-interest expense. We expect the conversion to be completed during the fourth quarter. Year-to-date our non-interest expense increased $2.5 million or 3.1% over the prior year. Our compensation expense increased $2.8 million over the prior year due to merit increases, insurance, and other payroll-related expenses. And software maintenance expense was up $540,000 due to new software contracts aimed at improving our ability to detect fraud and mitigate fraud losses as well as increases in costs associated with existing software contracts. These increases were partially offset by a $795,000 decline in depreciation related to equipment we own related to operating lease contracts which is included in equipment maintenance and depreciation. We have been originating fewer operating leases and purchasing residual value insurance on those operating leases that we do not originate with the goal of reducing and eventually eliminating depreciation expense related to operating leases. Our efficiency ratio for the quarter was 70.2% which is an improvement over the linked-quarter but not where we would like it to be. Backing out the impact of the $800,000 reserve, our efficiency ratio would have been 2% less. While it is part of our ongoing operations, if we were to back out the equipment depreciation related to operating leases, our efficiency ratio would have been another 1% less. In addition to the recently announced branch closure, we are investigating a number of other opportunities to reduce expenses across the bank. We remain a very tax-efficient company. Our effective tax rate was 15.6% for the quarter and 13.5% year-to-date. Turning our focus to the balance sheet. Total loans and leases grew by $29 million during the quarter. This represents an annualized growth rate of 4%. During the quarter, we experienced increases in residential real estate and real estate construction loans that were partially offset by declines in C&I and CRE loans. The loans we are originating for our portfolio continue to be virtually all adjustable rate, and our leases all have maturities of five years or less. Civista remains a CRE lending bank. However, we have been more aggressive in pricing C&I loans and remain very disciplined in how we are pricing commercial real estate loans, as we work to manage our CRE to risk-based capital level and better align our lending and core funding. During the quarter, new and renewed commercial loans were originated at an average rate of 7.59%. Portfolio and sold residential real estate loans were originated at 6.6% and loans and leases originated by our leasing division were at an average rate of 9.87%. Loans secured by office buildings made up 5.1% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings; rather they are predominantly secured by single or two-story offices located outside of central business districts. Along with year-to-date loan production, our pipelines remain solid and our undrawn construction lines were $261 million at September 30th. We anticipate continuing to manage our loan growth to be in the low single-digit range for the next several quarters, allowing us to optimize funding and further improve our capital ratio. We continue to focus on other initiatives aimed at deepening relationships and attracting new lower cost deposits, which have resulted in our total deposits growing by $246 million for the quarter. Our commercial lenders, treasury management officers, private bankers, and retail bankers continue to secure additional deposits and compensating balances from both business and personal customers. This success is attributed to our ongoing initiatives. We are executing our downward beta strategy by continuing to decrease deposit rates on virtually all of our deposit accounts. However, our cost of interest-bearing deposits increased by five 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. Noninterest-bearing deposits and business operating accounts continue to be a focus. Noninterest-bearing deposits made up 22% of total deposits at September 30th. With respect to FDIC insured deposits excluding Civista's own deposit accounts, 13.4% or $430.9 million of our deposits were in excess of the FDIC limits at quarter end. Our cash and unpledged securities at September 30th were $493.2 million, which more than covered these uninsured deposits. Other than the $462.1 million of public funds with various municipalities across our footprint, we had no deposit concentrations at September 30th. We believe Civista's low-cost deposit franchise is one of our most valuable characteristics, contributing significantly to our solid net interest margin and overall profitability. We view our security portfolio as a source of liquidity. At September 30th our security portfolio was $629 million, which represented 15% of our balance sheet and when combined with cash balances, represents 21.9% of our total deposits. We continue to see relief from the pressure that higher interest rates have been putting on our bond portfolio. At September 30th, all of our securities were classified as available for sale and had $44.6 million of unrealized loss associated with them. This represents a decline in unrealized losses of $17.9 million from the linked-quarter and a $9.5 million decline since December 31, 2023. Civista's earnings continue to create capital and our overall goal remains to maintain adequate capital to support organic growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is a real value. We ended the quarter with our Tier 1 leverage ratio at 8.45%, which is deemed well-capitalized for regulatory purposes. Our tangible common equity ratio was 6.64% at September 30th, which was an increase from 6.19% at June 30, 2024. While our capital levels remain strong, we recognize our tangible common equity ratio screens low. Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7% and 7.5% and we continue to make progress towards that target. To that end, we will continue to focus on earnings and balance any repurchases and the payment of dividends with building capital to support growth. Despite the uncertainties associated with the national economy, the economy across Ohio and Southeastern Indiana is holding up well. Our credit quality remains strong and our credit metrics remain stable. We did make a $1 million net provision during the quarter, which was partially attributable to loan growth but primarily attributable to the historically low prepayment and curtailment rates in our loan portfolio and its impact on the CECL loan. Our ratio of allowance for credit losses to total loans is 1.36% at September 30th, improving from 1.34% at June 30th and 1.30% at December 31, 2023. This change is primarily due to changes in interest rates and the quarterly updating of factors within our model. In addition, our allowance for credit losses to non-performing loans is 227% at September 30, 2024 compared to 246% at December 31, 2023. $1.5 million of the year-to-date increase in non-performing loans was attributable to fraud-related events that one of our clients experienced that we discussed during last quarter's call. In summary, we are very pleased with our third quarter results. Our disciplined approach to loan pricing and the way our teams are executing on our deposit initiatives brought better alignment between our lending and core funding. These efforts coupled with the inflection in our net interest margin yielded solid results that I believe sets us up for a strong finish to 2024. Civista remains very focused on creating shareholder value in serving our customers and communities. Thank you for your attention this afternoon and your investment. And now we will be happy to address any questions you may have.
Operator, Operator
Ladies and gentlemen, we will now begin the question-and-answer session. Our first question comes from Justin Crowley from Piper Sandler. Please go ahead.
Justin Crowley, Analyst
Hey, good afternoon, everyone.
Dennis Shaffer, President and CEO
Hi, Justin.
Justin Crowley, Analyst
Just wanted to start off on the margin here. I saw some nice lift in the quarter and it looks like some of the borrowings that were paid off occurred later in the period and that could be a tailwind into 4Q and beyond. And you also mentioned some of the broker deposits that will reset. But in terms of the borrowings how are you thinking about further paydowns here? And I guess you can marry that with just outlook on continued traction on the deposit gathering side.
Ian Whinnem, CFO
Justin, yes, so we're continuing with the relationship gathering of deposits. With that we expect to just keep on bringing down our overnight borrowings. And beyond that really it's repricing the brokered CDs as they become available but keeping it at about the same level on those.
Dennis Shaffer, President and CEO
Yes, Justin, I want to mention that we have reduced our deposit costs. We proactive took steps to do this. At the start of the year, our highest rate was 5%, and we lowered it by about 35 basis points before the Fed made any cuts. After the Fed's recent rate reduction, we decreased it another 35 basis points, bringing it down a total of 70 basis points since the beginning of the year for all our CD pricing. Our best rate currently is for a 7-month CD. We also lowered rates for money market accounts and anticipate seeing some benefits there. Additionally, the repricing for some of the brokered deposits occurred late in the quarter, so we expect further improvement in our margin moving forward, aiming for about a 5 basis point lift as we head into the fourth quarter.
Justin Crowley, Analyst
Okay. Got it. And then I guess beyond that how are you thinking about how aggressive you can be on lowering deposit rates further? I hear you on what you've done so far since the Fed has moved by 50 basis points but just thoughts on just how the competitive environment will enable you to keep moving lower?
Dennis Shaffer, President and CEO
I believe we will be as proactive as possible. When the Fed reduces rates, we will do the same. Our approach will largely depend on how our customers respond. Generally, we retain approximately 90% to 95% of our CD customers, who are the most rate-sensitive. We consider ourselves a relationship bank rather than a transaction bank and have never focused on promoting the highest rates. We trust that our customers appreciate our service, which allows us to potentially lower our deposit rates more than banks that are more transactional or heavily advertising for better rates. Ultimately, the decisions we make regarding deposits will guide our ability to lower our rates in line with any Fed cuts.
Justin Crowley, Analyst
That's helpful. Now, shifting gears a bit, you mentioned the shelf registration might be more of a procedural matter. Broadly speaking, how are you viewing capital management? You noted the target of 7% to 7.5% TCE. Considering your position at the end of September, what steps, if any, are you considering beyond just moderating growth as you've indicated previously?
Dennis Shaffer, President and CEO
We have been focused on increasing the TCE ratio again, which is why we haven't executed any share repurchases. We believe that improving this ratio is crucial for our capital management strategy, and we are not yet at the target we've set. Therefore, our primary focus remains on enhancing that TCE ratio.
Richard Dutton, COO
Yeah, Brendan, this is Rich. That's one of the things I think we kind of thought maybe has been kind of one of the governors on our stock price, the fact that that TCE has been a little lower than we'd like it to be. So we're kind of treating that for stock repurchases. As much as we'd love to buy stock back, I think our shareholders are better served by us getting that TCE back to a point where the rest of the investing public says okay now we know that they're not out there going to do a stock raise and dilute us.
Justin Crowley, Analyst
Okay. That's helpful. And then just one last one quickly on credit. Things look pretty clean here and I appreciate some of the commentary on what drove the tick up in the allowance. And so on the allowance, I imagine as you sit here today you feel well reserved for. But looking out what are some of the factors on your mind as we think about that reserve just directionally from here?
Dennis Shaffer, President and CEO
Mike, do you want to come? Mike Mulford, our Chief Credit Officer.
Mike Mulford, Chief Credit Officer
We just continue to look at various concentrations and industries that we're in and the trends from an economic standpoint as we look at the portfolio and where we consider any reserve changes.
Dennis Shaffer, President and CEO
Our reserve appears to be in good shape. We did increase it slightly this quarter, but that was mainly due to the slowdown in prepayments for both residential and commercial loans. This adjustment is simply a reflection of that trend, and it is not related to credit issues. We still believe our credit quality remains very strong; we are merely accounting for those prepayments and our growth.
Justin Crowley, Analyst
Great. Appreciate the color there. I'll step back. Thanks for taking my questions.
Dennis Shaffer, President and CEO
You bet.
Operator, Operator
Our next question comes from the line of Brendan Nosal from Hovde Group. Go ahead please.
Brendan Nosal, Analyst
Hi. Good afternoon, folks. Hope, you are doing well.
Dennis Shaffer, President and CEO
Hi, Brendan.
Richard Dutton, COO
Hi Brendan.
Brendan Nosal, Analyst
Maybe just starting off on the Ohio Homebuyers program that $100 million of balances that you got from the state for offering those accounts. First, I think that's the max that you can get from the state correct? And then number two, how long do those balances stick around for?
Dennis Shaffer, President and CEO
Yeah. It is the maximum amount we could get. Those balances will stick around for up to five years. Some of it will depend when they were targeted for homebuyers. So if those people do buy a house, we will give that $1 million deposit or whatever $100,000 deposit back to the state. But overall the program runs five years. So they should stick around and it should be a good source of relatively cheap funding for us. The cost does go up, but not significantly on those deposits. But as people buy homes, we would have to return the state's portion of that money. But hopefully we get the mortgage loans and we're building on those deposit relationships. 35% of those were new customers to the bank and we hope to be able to cross-sell them additional deposits.
Chuck Parcher, Chief Lending Officer
We are paying a premium rate on those deposits, while they're at the bank. So even if that deposit doesn't find a home to buy we're confident that they're going to leave that money in the bank. I don't know what rate we're paying right now on that. It's 6%. So there might be a reason for that to stay there. And we’re paying 6% on that $10 million or $11 million of customer deposits in exchange for $100 million at 89 basis points. Even a couple of guys from Ohio thought that was a pretty good trade.
Brendan Nosal, Analyst
All right. That's helpful color. And yeah, I think the 86 basis points on the $100 million makes up for the higher cost on the $10 million. Moving on from there, kind of thinking about the expense base this quarter down sequentially even with that $800,000 kind of accounting true-up that you made, just kind of curious your thoughts on where the cost number trajectories through year-end and into early 2025? Thanks.
Ian Whinnem, CFO
Yeah. Hi Brendan, yeah, so expenses I would say relatively flat into next quarter, maybe up a little bit as we fill some vacancies, beyond that going into next year. We would have our normal merit increases we do plan some investments in technology, but we are not giving guidance at this point into 2025.
Mike Mulford, Chief Credit Officer
Yes Brendan, I would just mention with that branch closure in December, we'll have some costs associated with that that might elevate that. And again, not significantly. I think we budgeted like $28.4 million for the quarter. I think we guided $28.3 million I think last time and came in under it. But I think that's probably a reasonable number to put in your model.
Brendan Nosal, Analyst
Fantastic. All right. Thank you for taking my questions. Appreciate it.
Dennis Shaffer, President and CEO
Thank you.
Operator, Operator
Our next question comes from the line of Terry McEvoy from Stephens. Go ahead please.
Terry McEvoy, Analyst
Hi guys, good afternoon. Just a lot of call it strategic actions within the balance sheet. Just taking a step back where would you like wholesale funding brokered CDs? Where would you like those to be relative to total funding? Do you have a targeted loan-to-deposit ratio it has come down? And maybe I'll also ask kind of CRE concentration. Any target areas there where you'd like commercial real estate loans to be relative to the portfolio?
Dennis Shaffer, President and CEO
We aim to reduce our wholesale and brokerage funding to the 15% to 17% range over the next few years, as we believe that’s more suitable. Achieving this will take time, but it's our goal. We would like to maintain a loan-to-deposit ratio around 90%, which provides some flexibility. While we’re comfortable going up to 100%, continuing to gather deposits will enhance our liquidity and improve our net interest margin in the long run. Regarding commercial real estate concentration, we would prefer to be under 300, although we haven't encountered any regulatory issues on this front. Regulators have primarily focused on how we manage that portfolio, and we've received positive feedback in that area. However, we do want to reduce this concentration as we believe it may impact our stock price. Our target is to be under 3, but we think a more realistic target is 3.25.
Terry McEvoy, Analyst
And then as a follow-up maybe as what were yields on loans maturing in the quarter? You said new production was 7.59%. And maybe more importantly when you look ahead into the fourth quarter and beyond what's the benefit from the fixed rate loans as those reprice higher? And how much is that baked into the margin comments that you had earlier?
Chuck Parcher, Chief Lending Officer
We really haven't baked Terry. This is Chuck. We really haven't baked a lot of it into the margin comments. I'll give you an exact number but we've got about $100 million over the next I think four quarters coming that will roll forward to new margins. I don't know if you have that number Rich from what they're rolling to and what we anticipate. But we do obviously feel over that piece of it that we will get some margin uplift from those rolls.
Richard Dutton, COO
Yes. Many of them are probably going to roll to the high 6s low 7s because the rates we did back in 2019 and 2020 when our CRE the treasuries were so low and those rates were on our books at 4.75 and 5. So we're looking at what's rolling here right now, all I would say.
Chuck Parcher, Chief Lending Officer
Almost $300 million actually. If we go out one to two years I guess about $150 million over the next 12 months.
Richard Dutton, COO
$150 million over the next 12 months and $300 million over the next 24 months. $150 million more. So for a total of $300 million over the next 24 months. So just a combination of things between the brokerage repricing lower us paying down the FHLB borrowings, the loans repricing us being fairly aggressive in lowering on the Fed. That's why we think that we're going to get margin improvement. It's going to offset because we have about $700 million that floats daily tied to prime or SOFR, but we're going to offset that with all a number of those other things. And a lot of them they're more than if the Fed is going down 25%, we're going down 125 on some of those brokers. So we picked up some significant dollars there.
Chuck Parcher, Chief Lending Officer
I think another important point is that the credit team has done a lot of excellent work. We feel optimistic, even though rates are likely to increase by 2% or 3%. We are confident about the cash flow from those projects moving ahead. I don't anticipate any significant adverse credit actions as a result.
Terry McEvoy, Analyst
Okay. And maybe just stepping out of the spreadsheet here. Are there any changes at all that you've observed among the larger banks that you compete with in some of your metro markets in terms of being more competitive? And what I'm asking is when the time is right to accelerate loan growth again back to that historical level that your business model would have the ability to do that?
Chuck Parcher, Chief Lending Officer
Terry, this is Chuck. We feel good about that. We've got a really good lending machine. We've probably walked away from a lot more projects, obviously over the last 12 to 18 months than we ever have before. We've really tried to keep that especially the CRE side those rates high 7s really most of them north of 8. So it's really tempered our growth back somewhat. But we feel like if we really want to turn the spigot back on, we don't see really any issues as far as getting back into that more mid to high single-digit growth rate that we normally have.
Terry McEvoy, Analyst
Thanks for taking my questions.
Operator, Operator
Our next question comes from the line of Tim Switzer from KBW. Go ahead please.
Tim Switzer, Analyst
Hey good afternoon guys. Thanks for taking my questions. I wanted a quick follow-up on some of the NIM commentary. You guys have given a lot of granular details. It has been great. But more broadly, how do you think the margin reacts? And like, how does the trajectory change if the Fed decides to either cut more aggressively or less aggressively over the course of the cycle?
Dennis Shaffer, President and CEO
Ian, do you want to answer that?
Ian Whinnem, CFO
Yes. Tim, this is Ian. So, on the loan pricing side, we have about $700 million that will reprice immediately on the lending side. On the deposit side, we have a downward beta strategy as Dennis alluded to of really being aggressive on our deposit downward side of things and then also not locking in too long on any kind of our long promos. So if the Fed does cut more aggressively, we think we'll be able to stay at par and be able to be aggressive on our deposit down. And then also, if it cuts less, then we should still be at an advantage from where the curve is right now just based on the brokered and CD pricing that we're putting in right now.
Dennis Shaffer, President and CEO
Tim, we're still borrowing some funds from FHLB. So we're going to get a couple of $100 million every time that will reprice too. So we have those loans that float but we also were borrowing money. That's another thing that we see immediate benefit from.
Tim Switzer, Analyst
Okay. Yes, that was helpful. And then I believe when you guys talked about the two different deposit initiatives, you guys had last quarter, you mentioned there was about $175 million deposit opportunity. But I think, if I'm doing the math here it looks like you already kind of beat that number. I'd love just some comments on, if there's further upside there at all? And then you mentioned you have a few other deposit initiatives underway. Could you provide some more details on those given the success you've seen so far?
Dennis Shaffer, President and CEO
Yes. We grew deposits $247 million for the quarter or so. So $49 million of that was just organic growth that we have by really reaching out to some of our relationships and stuff. Right now one of those initiatives that we've kicked off is really focusing in on those no and low balance deposit customers. We have a number of – and as we've grown over the years, our lenders have kind of focused on bigger loans and with bigger loans came bigger deposits and stuff. And some of those smaller clients, they didn't go by the wayside but we didn't stay in touch with somebody that may have had an $80,000 loan and just one deposit relationship. So we're reaching back out to those folks. The other big initiative is we kicked off a small business loan that we are now going to start originating through our branches and our retail branches and we feel that's a better place for those because those bankers see those customers every day and that was handled in our commercial area those small business loans. Some of those small business loans under $150,000 are going to be handled in the branches and we think by doing that one, we're going to educate our bankers and make them more rounded, so that they're able to talk to both sides of the balance sheet with those customers and we think they're going to be able to develop and attract some deposits with those smaller loans. So that's one initiative and throughout the bank, we're really focused on those low and no balance deposit customers. We think we'll get some lift there.
Chuck Parcher, Chief Lending Officer
And Tim, we also really we have our treasury people and all of our private bankers really focusing in on – are really good customers that happen to have some deposits at other institutions. We're having quite a bit of success in drawing some of those funds into our bank that were held at some of the larger or the regionals in the area when they get a little bit better feel and touch from Civista.
Dennis Shaffer, President and CEO
Particularly our commercial folks are really doing a good job because what we've seen coming over the last 15 years coming out of the Great Recession, a number of those customers did their lending, some of these larger relationships did their lending at the bigger institutions. When those institutions cut them off or in some cases 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 and 55% of their deposits are still with that bank that they were with. They kicked them out, and we really are laser-focused on saying 'Look, you're not borrowing. Why are your deposits there? Are you borrowing from them?' They tell us, they do not like that institution. So we're laser-focused on getting them to move those accounts to us and saying 'Look, the community banks should benefit from that because, we're the ones lending you the money.'
Chuck Parcher, Chief Lending Officer
Yes. And we've had some success obviously, with conditioning compensating balances, with some of the new loans that we've done over the last two to three quarters. That's helped quite a bit too Tim.
Dennis Shaffer, President and CEO
So, there are just a number of initiatives that we have underway, that we think we're going to benefit from.
Tim Switzer, Analyst
Okay. Yes, that was great. Appreciate all the details. The only other follow-up I have really is your outlook for low single-digit loan growth over the next few quarters. What's the upside there, if we get a soft landing Fed continues to lower rates? Does that really help, on the demand side there and your ability to take on more loans?
Chuck Parcher, Chief Lending Officer
Like I said, Tim, I think we're really looking at and figuring out ways to bring that CRE concentration down. So that will temper some of our growth as we continue to look at that. If we do some things to clear that up beforehand, I think our loan growth will be a little bit faster. But the bottom line is, we're really focused right now on doing a little bit more being a little bit more aggressive on the C&I side and tempering back our CRE growth. So I think, as we cure or bring that back down to some more what we would call manageable levels even though we're very comfortable where we're at, to more manageable levels we'll grow faster from that perspective. I guess, I don't have a lot of concern of when we want to turn that spigot back on and getting the growth that we need to get.
Tim Switzer, Analyst
Okay. I guess maybe a more appropriate question is, if rates do move lower does that increase your appetite for CRE and you don't worry as much about the CRE concentration?
Chuck Parcher, Chief Lending Officer
I don't think so. I don't think that's really rate reflective from that piece of it. I mean, the projects have got to work and what we found is when rates went higher people just put more money into the project. When it comes lower, they don't need quite as much money in the projects. But the bottom line is, I don't think the lowering of rates is going to make it a situation where we're going to grow faster because of the rates.
Dennis Shaffer, President and CEO
We're not worried about the CRE concentration from a credit perspective, we're worried about it from a perception basis. We think that maybe somebody doesn't value our stock as much because we have more CRE. From a credit quality perspective, we're very confident in our portfolio. We're not that worried from a credit perspective.
Tim Switzer, Analyst
Okay. That’s great. Thank you, guys.
Operator, Operator
Our next question comes from the line of Manuel Navas from D.A. Davidson, go ahead please.
Manuel Navas, Analyst
Could you clarify some of your NIM discussion? If Fed cuts are pretty aggressive, you'd likely stay stable. And by aggressive are you meaning like, every meeting or are you talking about like 50 basis points versus 25 basis points of a cut? And then, if there's less cuts, could we see how big of a NIM increase could you have and what would constitute less? Can you just kind of give me a little bit better range of outcomes there?
Ian Whinnem, CFO
Yes. So Manuel, this is Ian. We're expecting NIM to expand. We think we've troughed in second quarter expansion. Probably not as much as what we had from Q2 into Q3, but we could probably get into the low 3.20s by the fourth quarter, and then we would expect continued expansion in the beginning part of 2025, probably at a slightly slower pace, each part of the expansion. Like I said, with the Fed cuts, we think we can be aggressive on our deposit pricing side as well as the FHLB repricing, and having the loans, $700 million of loans repricing down. But plenty of our loans are going to be repricing on to higher rates to help offset some of that.
Dennis Shaffer, President and CEO
And remember when the Fed lowers the short-term rates. Right now, the yield curve is starting to correct itself. So, our lending rates are not going to come down as quick as on new loans because they're tied to a 5-year treasury or something, which is not moving. If short-term rates come down 25%, that's coming down 5%. So your loan rates are not repricing as quickly now as your short-term rates will be.
Manuel Navas, Analyst
I appreciate that. And all the details on the broker and the CDs, that's all helpful. What are you assuming on the rate forecast? Are you assuming November and December and then a couple of cuts into January, into the first quarter of next year? Can you just kind of help with that rate assumption?
Ian Whinnem, CFO
Yes. I think we're expecting November and December, and then maybe probably no more than four stopping by the middle of 2025, probably closer to two in 2025.
Dennis Shaffer, President and CEO
Yes. We'll be able to give better guidance in 2024. We're working on the budget now. We follow the blue-chip forecast really as opposed to us trying to predict that. We just follow that blue-chip forecast for 2025. But I think for the next two months for sure, there is a pretty high probability here in November that they're going to come down at least 25 basis points. So, I think until the end of the year, we are expecting them to reduce rates.
Chuck Parcher, Chief Lending Officer
Yes. Manuel, we probably have as much clarity as you have, as far as where rates are going to go in the future. So that's kind of our expectation.
Manuel Navas, Analyst
I get that, and I appreciate. A lot of it is guesswork and it's difficult. Can you give me a little more color on the $800,000 reserve? I think it came up in OpEx. What is it exactly for? Can it go higher? It's like you found something in expenses. Just can you talk about that a bit more?
Richard Dutton, COO
Certainly, Manuel. This is Rich. We're transitioning from multiple systems to a single system. During this process, we discovered some items in a suspense account that we couldn't reconcile. Fortunately, we found this during a profitable quarter, allowing us to be conservative in our reservations. While I can't guarantee that the number won't increase, we don't expect it to. We prefer to potentially recover some of that and surprise you next quarter. However, I think $800,000 is likely the best estimate we can make for now. I don't have much more detail to provide, but we feel confident about that number, which is why we chose it.
Manuel Navas, Analyst
Okay. And then back to fees for a moment. Usually, there's a stronger fourth quarter in leasing. Is that developing in that direction in terms of gain on sale for leasing? And potentially, lease balance growth, which wasn't that much this quarter. Can you talk about that and its potential next year? And then talk about how much of the gain on sale was mortgage-related, because I'd love to hear your thoughts on mortgage and leasing next year if rates are substantially lower?
Chuck Parcher, Chief Lending Officer
Well, I'll let Ian give you the exact numbers in a second. However, I can say that the pipelines are increasing in leasing for the fourth quarter. It may not be as strong as last year, but I'm still optimistic about where we are. We have implemented some strategies to be more aggressive on the sales side in the leasing division, particularly regarding the whole loan-to-deposit aspect. I expect that the gain on sale will exceed the portfolio growth for the fourth quarter. Ian, please share the specific numbers regarding the gain on sale of mortgages and so on.
Ian Whinnem, CFO
Thanks, Chuck. Yes. So of the $1.4 million gain on sale that we had in the third quarter, about 45% of it was leasing and the remaining 55% was mortgage. So call it $600,000 leasing, $800,000 mortgage.
Manuel Navas, Analyst
Okay. Is there any desire to add to your capability on the mortgage side? If we're down 150 basis points from here in Fed funds, where could mortgage be next year?
Chuck Parcher, Chief Lending Officer
Yes, we’ve thought about that. We know that we may need to add more staff in the mortgage sector if the refinance boom returns. However, it’s important to consider that the refinance boom will mainly consist of mortgages originated in the last two and a half years. Those of us who took out mortgages five, six, eight, or ten years ago are still benefiting from those 3% rates. We don’t expect to see those mortgages change unless someone decides to purchase a new home or consolidate other debts into one mortgage. We do anticipate some growth. We were hopeful to start refinancing some of our existing loans in the fourth quarter of this year, but as you may have noticed recently, the five and ten-year treasuries have actually increased rather than decreased. Therefore, we don’t expect the refinance boom to occur in the fourth quarter, but we are optimistic for the first or second quarter of next year, assuming rates move favorably.
Dennis Shaffer, President and CEO
And the expense side of that, also is most of those, on the sales side, on the origination side are commission-based folks. So, it's not like we're adding a ton of base expense there to do that and we feel we have capacity in the back room right now to do more volume.
Manuel Navas, Analyst
I appreciate all the commentary. Definitely it’s all a lot is influx. I appreciate it. Thank you very much.
Dennis Shaffer, President and CEO
Thank you.
Operator, Operator
Our next question comes from the line of Daniel Cardenas from Janney Montgomery Scott. Go head, please.
Daniel Cardenas, Analyst
Hi. Good afternoon, guys.
Dennis Shaffer, President and CEO
Good afternoon.
Daniel Cardenas, Analyst
Just a couple of questions here. Can you give us any color on what criticized loans look like at the end of the quarter? I know they were up in Q2 versus Q1, but have they stabilized come down? And then maybe categorically if they've come up which categories are kind of driving the increase?
Dennis Shaffer, President and CEO
I'll have Mike Mulford our Chief Credit Officer to answer that question.
Mike Mulford, Chief Credit Officer
Criticized loans have remained relatively stable over the past quarter. While we did experience some movement with loans, including a significant relationship payoff during the quarter, we also saw another relationship downgrade into the criticized category, along with a few smaller deals that offset it. Overall, there was an increase this quarter primarily due to a couple of loan relationships. Additionally, one relationship exited the criticized category. We anticipate stability moving forward and hope to see another loan relationship payoff this quarter, though it's uncertain if that will occur.
Daniel Cardenas, Analyst
So the loans that migrated onto the criticized portfolio were those commercial loans? Can you give us a little bit of color there?
Mike Mulford, Chief Credit Officer
Yes, we have been monitoring our commercial loans and relationships. There is nothing currently under litigation; however, we had to downgrade some to the criticized category due to financial reasons.
Daniel Cardenas, Analyst
Were they concentrated in any one industry?
Mike Mulford, Chief Credit Officer
No.
Daniel Cardenas, Analyst
New office or anything.
Mike Mulford, Chief Credit Officer
No. I think there was going to be hospitality in there. And I want to say one was healthcare maybe a nursing home or something. I can't remember.
Chuck Parcher, Chief Lending Officer
Definitely no. what I would say is the systemic things that we're seeing move in and out.
Dennis Shaffer, President and CEO
And then no office. Again, we're kind of creeping back towards what's normal, I think.
Ian Whinnem, CFO
Yeah.
Dennis Shaffer, President and CEO
Okay. And we anticipate that kind of as we move forward. There are a couple of credits that may be close to moving out, but you always have stuff moving in and that's pretty much what happened in the third quarter.
Daniel Cardenas, Analyst
All right. So with kind of normalization then is the expectation is that charge-off levels begin to move towards a normal kind of more historical level as we look forward into 2025?
Ian Whinnem, CFO
Yeah. This quarter was a very good quarter from that standpoint. But I think we'll see charge-offs elevate a little bit back to normal in the next couple of quarters.
Dennis Shaffer, President and CEO
Yeah. First and second quarter probably migrates back towards those levels I would say. Yeah.
Daniel Cardenas, Analyst
And then kind of a follow-up question on the deposit front. Are there any remnants of the tax program still in your deposit base? And if so how much and when do you expect those to float off?
Dennis Shaffer, President and CEO
I believe there were $14 million at the end of the quarter that were still there. And I will tell you that if not today before the end of the week, we've been on the phone with the folks to get those accounts closed out. So they'll all be gone certainly by the end of this week or next, if they're not already.
Daniel Cardenas, Analyst
All right. And then on the initiative to kind of grow that low/no balance customer base. I mean, what percentage of your customer base does that make up? Is that small relatively small or?
Dennis Shaffer, President and CEO
Yeah. It's not the majority of our customer base for sure. I don't know. We probably don't have a number for you there. But there's opportunity for sure. We actually do have that number somewhere. We can probably get that to you. There are a number, but we don't have a handy.
Daniel Cardenas, Analyst
Okay. Yeah, that would be good if you can. All right. That’s all I have.
Dennis Shaffer, President and CEO
Okay. Thank you.
Operator, Operator
There are no further questions at this time. I'd now like to turn the call back over to Mr. Shaffer for final closing remarks.
Dennis Shaffer, President and CEO
Well, I'd just like to say in closing, I just want to thank everyone for joining and those that participated on today's call. Really pleased with the quarter. The quarter's results were due in large part to a lot of hard work and dedication and discipline from our team. We'll continue to be focused on growing Civista the right way. I believe our focus on improving our strong core deposit franchise and just the disciplined approach we take to pricing loans and deposits and managing the company positions us very well for the future. And I look forward to just talking with all of you in a few months as we share our fourth quarter results. Have a great rest of the afternoon and thank you.
Operator, 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 lines. Have a lovely day.