Q3 2024 Civista Bancshares Inc Earnings Call
Speaker Change: Music Music
Speaker Change: Music
Speaker Change: [inaudible]
Speaker Change: Good afternoon ladies and gentlemen and welcome to the Savista Bank Shares Inc. 3rd 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 the Savista Bank Shares Inc. that involve risks and uncertainties.
Speaker Change: various factors could cause actual results to be materialied different from any feature results expressed or implied, such forward-looking statements.
Speaker Change: These factors are discussed in the company's FEC Filing, which are available on the company's website.
Speaker Change: The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-gap measures, which are intended to supplement but not substitute to most directly comparable gap measures.
Speaker Change: 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.
Speaker Change: This call will be recorded and made available on Savista Bankshare's website at www.civb.com. At the conclusion of Mr. Shaffer's remarks, he and the Savista management team will take any questions you may have. Now, I will turn the call over to Mr. Shaffer.
Mr. Shaffer: I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank, Chuck Parcher, SVP of the company and Chief Lending Officer of the bank, Ian Winnum, SVP of the company and Chief Financial Officer of the bank, and other members of our executive team.
Speaker Change: 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 length quarter, and a $2 million decline from our third quarter in 2023.
Speaker Change: 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 refund processor, as well as changes in the way we process and charge for overdraft items.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: This reliance has put pressure on our net interest margin, which we are taking steps to address.
Speaker Change: 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.
Speaker Change: 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 30th compared to 102% at June 30th.
Speaker Change: 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.
Speaker Change: Through the State of Ohio's Home Buyer 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.
Speaker Change: 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.
Speaker Change: 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 Savista.
Speaker Change: In addition to the deposits raised from these two initiatives, we had 49 million dollars of organic growth during the quarter.
Speaker Change: 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.
Speaker Change: 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 late quarter.
Speaker Change: While our overall cost of funding was unchanged at 2.61%, our yield on earning assets increased by 7 basis points to 5.65%.
Speaker Change: 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.
Speaker Change: That will mature at the end of the fourth quarter that we anticipate replacing at a lower cost.
Speaker Change: Given the proximity of our other two Napoleon branch locations, we do not anticipate losing any deposits.
Speaker Change: 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.
Speaker Change: The primary drivers for the increase from the prior year's third quarter
Speaker Change: for 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 for the life insurance policy held on a former employee.
Speaker Change: 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.
Speaker Change: This is particularly impressive given the reduction in fee income related to overdrafts, the elimination of the tax processing relationship, and the one-time bonus we received in 2023 for entering a new debit brand agreement.
Speaker Change: Non-interest expense for the quarter of $28 million represents an 8.1% decline from our link quarter as our continued focus on expense control, yield an improvement in nearly every category of non-interest expense.
Speaker Change: 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.
Speaker Change: Our efficiency ratio for the quarter was 70.2%, which is an improvement over the late quarter, but not where we would like it to be. Backing out the impact of the $800,000 reserve, our efficiency ratio would have been 2% less.
Speaker Change: 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%.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: During the quarter, new and renewed commercial loans were originated at an average rate of 7.59 percent.
Speaker Change: Along with your-the-date loan production, our pipeline remains solid and our unbroad 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
Speaker Change: We continue to focus on other initiatives aimed at deepening relationships and attracting new, lower cost deposits that have resulted in our total deposits growing by $246 million for the quarters.
Speaker Change: 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.
Speaker Change: We are executing our downward beta strategy by continuing to decrease deposit rates on virtually all of our deposit accounts.
Speaker Change: For the quarter, our overall funding costs were unchanged at 2.61% in comparison to our late quarter.
Speaker Change: With respect to FDIC-insured deposits, excluding SAMHSA's own deposit accounts,
Speaker Change: We view our security portfolio as a source of liquidity.
Speaker Change: At September 30th, our security portfolio was $629 million, which represented 15% of our balance sheet, and when combined with cash balances, it represents 21.9% of our total deposits.
Speaker Change: So VISTA's earnings continue to create capital and our overall goal remains to maintain adequate capital to support organic growth and potential acquisition.
Speaker Change: We ended the quarter with our Tier 1 leverage ratio at 8.45%, which is deemed well-capitalized for regulatory purposes.
Speaker Change: For our capital levels remain strong, we recognize our candidates will come in equity ratio screens low. Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7 and a half percent, and we continue to make progress towards that target.
Speaker Change: Despite the uncertainties associated with the national economy, the economy across Ohio and South-Eastern Indiana is for holding up well.
Speaker Change: Our credit quality remains strong and our credit metrics remain stable. We did make a $1 million net provision during the quarter, which was partially attributable to loan growth, but primarily attributable to the historically low prepayment and curtailment rates in our loan portfolio and its impact on the CECL model.
Speaker Change: If you are using a speakerphone, please lift the handset before pressing any key.
Speaker Change: I just wanted to start off on the margin here. Saw some nice lift in the quarter, and it looks like some of the borrowings that were paid off occurred later in the period, and that could be a tailwind into 4Q and beyond. And you also mentioned some of the broker deposits that'll 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.
Speaker Change: you know, our best rate is that seven month CD. So we're down. We did that we lowered all money markets and everything. So I think we'll get some lift there. And as we mentioned, some of those brokered deposits.
Speaker Change: The repricing happened late in the quarter.
Speaker Change: So, we do anticipate further improvement in the margin, I think, as we go forward. Hopefully, we will get five basis points or so lift there as we enter into the fourth quarter.
Speaker Change: Okay, got it. And then I guess beyond that, how are you thinking about, you know, 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, you know, how the competitive environment will, you know, enable you to keep moving lower.
Speaker Change: 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, you know, how our customer reacts.
Speaker Change: But in general, we maintain or we retain probably 90-95% of CEE customers, and those are your most sensitive customers.
Speaker Change: So, we've been, you know, we feel we have a, you know, we're a relationship bank, not a transaction bank. We've never been the bank that's advertised for the highest rates.
Speaker Change: 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 than a bank. So, that's a good point. Thank you.
Speaker Change: relationship with that more transactional or somebody that's really advertising for deposit rates. So, you know, 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 Change: Okay, that's helpful. Maybe just pivoting a little here, just...
Speaker Change: As far as, you know, you mentioned the shelf registration, perhaps that's more just procedural than anything else. But, you know, more broadly, how are you thinking about capital management? You know, I know you mentioned the 7 to 7.5% TCE goal. And, you know, just considering where you stood at the end of September, you know, what, you know, actions, if any, are you contemplating, you know, beyond just kind of tempering growth, as you've stated in the past?
Speaker Change: really important for our capital management strategy.
Speaker Change: But, you know, I think we want to stay focused on building that TCE ratio back up.
Speaker Change: and we're not to the target that we've laid out there. So, you know, I think that's, you know, first and foremost is our priority is really building that back up.
Speaker Change: Yeah, Brenda, 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 prices. The fact that that TCE has been a little lower than we'd like it to be. So, we're kind of trading that for stock repurchase.
Speaker Change: 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.
Speaker Change: Okay, that's helpful. And then just one last one quickly on credit. You know, things look pretty clean here and appreciate some of the commentary on what drove, you know, 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 Change: Mike, you want to come? Mike Mulford is our Chief Credit Officer. We just continue to look at the various concentrations and industries that we're in and the trends from an economic standpoint.
Speaker Change: as we look at the portfolio and where we consider any reserve changes.
Mike Mulford: Yeah, our reserve we feel is pretty healthy. The model, as we said, you know, we did increase that a couple basis points this quarter but it was really all related to
Mike Mulford: you know, the prepayments have slowed down on both residential and
Mike Mulford: commercial loans and that's the model just as you allocate for that so it was not none of it was credit related we still feel our credit quality is really really strong it's it's just more we're accounting for those prepayments and for growth
Speaker Change: Great. Appreciate the call out there. I'll step back. Thanks for taking the questions.
Speaker Change: You win.
Speaker Change: Our next question comes from the line of Brendan Nozal from Healthy Group. Go ahead, please.
Speaker Change: Hey, good afternoon, folks. Hope you're doing well. Hi, Brendan.
Speaker Change: 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 home buyers. So if those people do buy a house, we will give that million-dollar deposit or $100,000 deposit.
Speaker Change: 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.
Speaker Change: but not significantly on those deposits.
Speaker Change: 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 Change: Well, we are paying a premium rate on those deposits while they're at the bank, so even if that depositor doesn't find a home to buy...
Speaker Change: 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. Six percent. Six percent. So, I mean, there's a reason for that money to stay there. So, we're paying six percent on that $10 million or $11 million.
Speaker Change: customer deposits in exchange for $100 million at 89 basis points.
Speaker Change: Even a couple of them guys from Ohio thought that was a pretty good trade. All right. That's helpful, Collar. And yes, I think the 86 basis points on the 100 million makes up for the higher cost on the 10 million.
Speaker Change: Moving on from there, I'm kind of thinking about the
Speaker Change: the expense basis quarter down sequentially, even with that 800,000 accounting true up that you made. Just curious your thoughts on where the cost number trajects through year-end and into early 2025.
Speaker Change: Thanks.
Speaker Change: Yeah, so expenses, you know, I would say relatively flat into next quarter, maybe up a little bit as we fill some vacancies.
Speaker Change: 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 Change: The other thing we've got to look at, 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.
Speaker Change: I think we budgeted $28.4 million for the quarter.
Speaker Change: I think it's, we got it 23 I think last time and came in under it, but I think that's probably a reasonable number to put in your model.
Speaker Change: Fantastic. All right. Thank you for taking the questions. Appreciate it.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Terry McAvoy from Stevens. Go ahead, please.
Speaker Change: Hi guys, good afternoon.
Speaker Change: 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, or would you like those to be relative to
Terry McAvoy: total funding? Do you have a targeted loan to deposit ratio? It has come down. And maybe I'll also ask, you know, kind of CRE concentration, any target areas there where you'd like commercial real estate loans to be relative to the portfolio?
Speaker Change: Yeah, I think on the wholesale and the brokered stuff, we'd like to, over the next couple of years, to get that down to the 15-17% range.
Speaker Change: We think that's a more appropriate number. That's not going to happen overnight, but...
Speaker Change: But that's what we're shooting for is to get that down into the 15 to 17 percent range. The loan to deposit ratio, ideally somewhere around 90 percent probably on that. It gives us a little bit of flexibility, I think.
Speaker Change: We were comfortable being all the way up to 100%.
Speaker Change: We want to continue to gather deposits because I think that provides some liquidity for us and it also will improve our net interest margin over time.
Speaker Change: And then, uh, the...
Speaker Change: was the last part of the CRE concentration. I think we've guided there. We'd like that to be, obviously, we'd like to be under 300, but we get no pushback from regulators on that. I mean, there's been a lot of talk about regulators being focused on that. Their focus, at least on all of our exams,
Speaker Change: have been around how we manage that portfolio. What kind of portfolio managing we are doing with that portfolio, and we get high marks in that regard. But we would like to reduce that because we do think it's a drag on maybe our stock price, so we'd like to be under three, but we'd be comfortable getting to 325 I think is a realistic target that we could get to.
Speaker Change: And then as a follow-up, maybe what were yields on loans maturing in the quarter? You said new production was...
Speaker Change: 759, and maybe more importantly, when you look ahead into the fourth quarter 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?
Chuck Parcher: We really haven't baked it, Terry this is Chuck, we really haven't baked a lot of it into the marketing comments. We've got about
Chuck Parcher: I'll give you an exact number, but we've got about 100 million dollars over the next, I think, four quarters coming that will roll forward.
Speaker Change: 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. Yeah, many of them are probably going to roll to the high sixes, low sevens.
Speaker Change: because the rates we did back in 2019 and 2020 when you know our CRE the treasuries were so low and you know those rates were on our books at 475 and 5.
Speaker Change: Almost 300 million, actually. If we go out one in two years, I guess a hundred and about, you know, a hundred and...
Speaker Change: $50 million over the next 12 months. $50 million over the next 12 months and $300 million over the next 24 months.
Speaker Change: I have 150 more.
Speaker Change: Yeah, so for a total of 300 over the next 24 months, so we'll get some
Speaker Change: So, you know, just a combination of things between the brokerage repricing lower, us paying down, you know, the FHLB borrowings, the loans repricing.
Speaker Change: That's being fairly aggressive and lowering with the Fed That's why we you know, we think that we're going to get margin improvement It's going to offset because we have about 700 million that is tied to that floats daily tied to prime or so for But we're going to offset that with all a number of those other things
Speaker Change: And I think the other piece of that, Terry, is the credit team has done a lot of great work around it. We feel pretty good about, even though those rates are going to probably roll 2 or 3% higher, we feel pretty good about the cash flow of those projects looking forward and don't feel like we're going to have really any much adverse credit actions because of that.
Speaker Change: Okay.
Terry McAvoy: and maybe just stepping out of the spreadsheet here, are there any changes at all that you've observed among?
Terry McAvoy: 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 Change: 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 CR, especially the CRE side, those rates.
Speaker Change: You know, high sevens, really most of them north of eight. So it's really tempered our growth back somewhat. But we feel like, you know, 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.
Speaker Change: Our next question comes from the line of Tim Switzer from KBW. Go ahead, please.
Tim Switzer: Hey, good afternoon, guys. Thanks for taking my questions.
Speaker Change: She can't play too.
Tim Switzer: I wanted a quick follow-up on some of the NIMH commentary. You guys are giving a lot of granular details. It's been great, but more broadly, how do you think the margin reacts and how does the trajectory change if the Fed decides to either cut more aggressively or less aggressively over the course of the cycle?
Tim Switzer: Ian, do you want to stay with it? Yeah. Hey, Tim. This is Ian. So on the loan pricing side, we have about $700 million that will be repriced immediately on the lending side. On the deposit side, we have a downward beta strategy.
Speaker Change: As Dennis alluded to, we're being aggressive on our deposit downward side of things.
Speaker Change: and then also not locking in too long on any kind of our long promos.
Speaker Change: 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 deposits down.
Speaker Change: Thank you.
Speaker Change: and then also if it cuts less.
Speaker Change: that we should still be at an advantage from where the curve is right now just based on the brokered and CD pricing that we're putting in right now.
Speaker Change: Okay yeah yeah that was helpful and then I believe when you guys talked about the two different deposit initiatives you guys had last quarter you mentioned it was about a hundred and seventy five million dollar
Speaker Change: deposit opportunity, but I think I'm doing the math here. It looks like you already kind of beat that number.
Speaker Change: I'd love just some comments on, you know, if there's further upside there at all, and then.
Speaker Change: 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?
Speaker Change: You know, we grew deposits 247, I think, million for the quarter or so, so, you know, 49 million of that was just organic growth that we have, you know, 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 low and low balance deposit customers.
Speaker Change: We have a number of as we've grown over the years, you know, our lenders have kind of focused on you know Bigger loans and with bigger loans came bigger deposits and stuff and some of those smaller clients
Speaker Change: kind of
Speaker Change: you know, not to go by the wayside, but we didn't...
Speaker Change: stay in touch with somebody that may have had an $80,000 loan and just one deposit relationship. So we're reaching back out to those folks. The other big initiative is we've kicked off a small business loan but 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
Speaker Change: Anchors.
Speaker Change: See those customers every day.
Speaker Change: and they're going to be able to, 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, you know, and throughout the bank we're really focused on those.
Speaker Change: low and no balance deposit customers.
Speaker Change: and we think we'll get to lift there. And we also really, we have our treasury people and our...
Speaker Change: are all of our private bankers really focusing in on
Speaker Change: 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 where they get a little bit better feel and touch from Savista.
Speaker Change: Particularly our commercial folks are really doing a good job because what we've seen coming, you know, over the last 15 years, coming out of the Great Recession, a number of those customers did their lending, you know, some of these larger relationships, did their lending at the larger, bigger institutions.
Speaker Change: When those institutions cut them off, or in some cases, kicked them out of the bank, they started borrowing from community banks.
Speaker Change: 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 us.
Speaker Change: that bank that they were with, they kicked them out. 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.
Speaker Change: to us, and to us and say, look, the community banks should benefit from that because we're the ones lending you the money.
Speaker Change: Yeah, we've had some success obviously with conditioning compensating balances with 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.
Speaker Change: So it's just a number of initiatives that we've got, you know, we have underway that we think we're going to benefit from.
Speaker Change: Okay, yeah, that was great. Appreciate all the details. The only other follow-up I have, really, is...
Speaker Change: You know, your outlook for low single-digit loan growth over the next few quarters, you know, what's the upside there if, you know, we get a soft landing, Fed continues to lower rates, does that really help?
Speaker Change: Yeah, on the demand side there and your ability to take on more loans, like I said, I think we're really.
Speaker Change: looking at and figuring out ways to bring that CRE concentration down.
Speaker Change: So, that'll temper some of our growth as we continue to look at that. You know, if we do some things to clear that up beforehand, I think our low 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 CNI side and tempering back our CRE growth. So, I think as we cure or bring that back down to some more what we would call manageable levels, even though we're very comfortable where we're at, to more manageable levels, we'll grow faster from that perspective. I guess I don't have a lot of concern of when we want to turn that spigot back on and get the growth that we need to get.
Speaker Change: 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 Change: I don't think so. I don't think that's really rate-reflective from that piece of it.
Speaker Change: You know, the projects have got to work. And what we found is when rates went higher, people just put more money into the project. But, you know, when it comes lower and becomes, you know, they don't need quite as much money in the project. But the bottom line is, I don't think that's going to...
Speaker Change: 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. You know, we're not worried about the CRE concentration from a credit perspective. We're worried about it from a perception basis.
Speaker Change: 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.
Speaker Change: Thank you.
Speaker Change: Okay, that was great. Thank you, guys.
Speaker Change: Our next question comes from the line of Manuel Navas from DA Davidson. Go ahead, please.
Manuel Navas: Hey, could you clarify some of your NIMS...
Manuel Navas: discussion, if there's...
Manuel Navas: every meeting, or you're talking about like 50 basis points versus 25 basis points of a cut. And then if there's less cuts, we see how big of a NIM increase could you have and what would constitute less? Can you just kind of give me a little bit better range of outcomes there?
Speaker Change: We're expecting NAND to expand. I think we've dropped in the second quarter. Expansion, probably not as much as what we had from Q2 into Q3, but we should probably get into the low 320s.
Speaker Change: by the fourth quarter, and that we would expect continued expansion in the beginning part of 2025. Probably at a slightly slower pace each part of the expansion.
Speaker Change: Thank you. Bye-bye.
Speaker Change: Like I said with
Speaker Change: The Fed cuts, we think we can be aggressive on our deposit pricing side as well as the FHLB repricing.
Speaker Change: and having the loads.
Speaker Change: 700 million of loans repricing down, but plenty of our loans are going to be repricing onto higher rates to help offset some of that.
Speaker Change: And remember, when the Fed lowers...
Speaker Change: the short-term raise.
Speaker Change: is not moving, if short-term rates come down to 25, that's coming down to 5. So your loan rates are not repricing as quickly now as your short-term rates will be.
Speaker Change: 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 and December and then a couple cuts into January? Into the first quarter of next year? Can you just kind of help with that rate assumption?
Speaker Change: Yeah, I think we're we're expecting November and December
Speaker Change: Amen.
Speaker Change: You know, maybe it...
Speaker Change: probably closer to two in 2025.
Speaker Change: Yeah, we'll be able to get better guidance in 2024. We're working on the budget now. We follow the blue-chip forecast, really, what they, you know, 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, you know, there is, you know, pretty high probability here in November that they're going to come down at least 25 basis points. So...
Speaker Change: I think until the end of the year, we are expecting them to reduce rates. We probably have as much clarity as you have as far as the order rates are going to go in the future. That's kind of our expectation.
Speaker Change: I get that, and I appreciate that. A lot of it is guesswork, and it's difficult. Can you give me a little more color on the 800,000 reserve?
Speaker Change: I think it came up in OpEx, what was it exactly for, can it go higher, it's like you found something in expenses, just can you talk about that a bit more?
Speaker Change: Sure, man. Well, this is Rich, and we're moving from one system, or actually several systems, to one, and as we go through that process we found a couple things in a suspense account, and we just couldn't get reconciled. I think our good fortune of finding it during a quarter where we were making a lot of money allowed us to probably be
Speaker Change: pretty conservative and how we reserve for it.
Speaker Change: I mean, I can't tell you it won't go higher, but we certainly don't believe it will go higher. We believe that we would rather, I suppose, recover some of that and surprise you guys next quarter. But I think 800 is probably as good a guess as we could make. I don't know. I can give you a whole lot more clearer than that. We feel good about that number. That's why we picked it.
Speaker Change: Oh, okay. And then back to fees for a moment.
Speaker Change: 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 it.
Speaker Change: mortgage and leasing next year rates are substantially lower. Well, I'll let Ian give you the exact numbers in a second. But I would tell you that the pipelines are growing in the leasing for the fourth quarter. Not sure it'll be quite as strong as last year, but you know feel good about what we're sitting at. We have
Speaker Change: Tried to put some things in play to be a little more aggressive on the sales The gain on sale and sale size in the leasing in the leasing division just based on you know The whole loan to deposit piece of it So I would anticipate that the gain on sale will be more than the portfolio growth when you look at the fourth quarter
Speaker Change: And Ian, I'll let you talk about what the actual numbers on the gain on sale and mortgage, etc. Thanks, Chuck. So of the $1.4 million gain on sale that we had in the third quarter, about 45% of it was leasing.
Speaker Change: 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?
Speaker Change: where it could mortgage be next year.
Speaker Change: Yeah, well, I you know, I guess we haven't 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 you know the one piece of it you really got to take into consideration
Speaker Change: some of the stuff we have on our books, but...
Speaker Change: You know, as you've seen in the last week or so, the five and ten year treasuries have actually moved up instead of down, so we feel like the refinance boom will probably not take place in the fourth quarter, but hopefully in the first or second quarter of next year if rates move appropriately. And the expense side of that also is, you know, most of those on the sales side of the origination side are commission-based folks, so, you know, 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 that.
Speaker Change: to do more volume.
Speaker Change: I appreciate all the commentary definitely it's it is all if a lot is in flux I appreciate it thank you very much
Speaker Change: Yeah, thank you
Speaker Change: Our next question comes from the line of Daniel Cardenas from Janney, Montgomery, Scott. Go ahead, please.
Daniel Cardenas: Good afternoon, guys.
Speaker Change: Good afternoon. Good afternoon.
Daniel Cardenas: Just a couple questions here. Can you give us any color on
Daniel Cardenas: What do 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, you know, if they've come up, you know, which categories are kind of driving the increase?
Speaker Change: I'll have Mike Mulford, our Chief Credit Officer, answer that question.
Speaker Change: for one that was downgraded into the criticized category along with a couple other smaller deals that it kind of replaced it so
Mike Mulford: For the quarter, there was an increase, but it was...
Mike Mulford: mostly related to a couple of loans, loan relationships.
Mike Mulford: and again we had some others one other relationship that they came out of criticized
Mike Mulford: There's...
Mike Mulford: I'm hoping to see a loan relationship pay off this quarter, but we're not sure if that's going to happen.
Speaker Change: The loans that migrated onto the criticized portfolio, were those commercial loans? Can you give us a little bit of color there? Yeah, commercial loans, commercial relationships that we've been monitoring.
Speaker Change: and just nothing that's in litigation or anything it's just you know financially just warranted a downgrade to the criticized category.
Speaker Change: Were they concentrated in any one industry?
Speaker Change: No.
Speaker Change: I want to see if one was health care, maybe a nursing home or something.
Speaker Change: I can't remember.
Speaker Change: Yeah, one of the food industry
Speaker Change: I definitely know what I would say is that systemic things that we're seeing move in and out.
Speaker Change: And then no office, right, you know, again, we're kind of creeping back toward what's normal, I think.
Speaker Change: Bye.
Speaker Change: Okay. Yeah, 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.
Speaker Change: All right, 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 Change: Yeah, this quarter was a very good quarter from that standpoint, but I think we'll see charge-offs continue.
Speaker Change: Elevate a little bit back to normal in the next couple quarters. Yeah, first and second quarter probably migrates back towards those levels I would say, yeah.
Speaker Change: Okay.
Speaker Change: And then kind of a follow-up question on the deposits on the deposit front
Speaker Change: 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 Change: 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 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 Change: Okay.
Speaker Change: Yeah, it's not the majority of our customer base for sure. We probably don't have a number for you there. But there's opportunity for sure.
Speaker Change: We actually do have that number somewhere. We can probably get that to you. There are a number, but we don't have any of the...
Speaker Change: Okay. Yeah, that'd be good if you can. All right, we'll go ahead and break down.
Speaker Change: Alright, thanks guys. Appreciate it. OK, thank you.
Speaker Change: 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.
Mr. Shaffer: 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.
Mr. Shaffer: I'm really pleased with the quarter and the quarter results. We're doing large parts, a lot of hard work.
Mr. Shaffer: and dedication and discipline from our team. We'll continue to be focused on growing Savista the right way.
Mr. Shaffer: 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.
Mr. Shaffer: and I look forward to just talking with all of you in a few months as we share our fourth quorum results. Have a great rest of the afternoon and thank you.
Speaker Change: 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.