Civista Bancshares' Q1 2024 earnings call painted a picture familiar to many regional banks: margin compression, deposit migration to higher-yielding products, and concerns about overall economic uncertainty. While the headline numbers might seem underwhelming, a deeper dive reveals a potential game-changer lurking beneath the surface: Civista's strategic shift in wealth management deposit handling. This subtle adjustment could be the key to unlocking significant margin improvement and bolstering the bank's long-term profitability.

Dennis Shaffer, Civista's CEO, laid out the bank's immediate challenges with characteristic candor. Stepping away from the lucrative third-party tax refund processor program and implementing overdraft fee reforms have undoubtedly taken a toll on non-interest income. The familiar struggle to retain deposits in a high-rate environment further exacerbates the situation, squeezing Civista's margin as customers chase higher yields.

However, buried amidst the discussion of headwinds, Shaffer unveiled a strategic shift that might have flown under the radar of most analysts: bringing wealth management client cash deposits onto the bank's balance sheet. While the move itself might seem unremarkable, the potential impact is anything but.

Historically, Civista held these funds off-balance sheet, missing out on a potentially valuable source of low-cost funding. Now, the bank anticipates moving approximately $75 million of these deposits onto its books by the end of Q3 2024, with interest rates projected to be Fed funds less 20 to 25 basis points.

The Potential Margin Impact

Let's assume, conservatively, that Civista can attract an additional $50 million in wealth management deposits by year-end, bringing the total to $125 million. At a rate of Fed funds less 25 basis points (currently around 5.12% - 0.25% = 4.87%), this equates to approximately $6.1 million in annual interest income.

Now, consider the funding side. Based on Q1 2024 data, Civista's reliance on brokered CDs stands at approximately 16% of total deposits. These instruments are currently yielding around 5%, significantly higher than the projected rate for onboarded wealth management deposits.

If Civista can strategically use these new, lower-cost funds to replace a portion of its brokered CD reliance, the margin benefit could be substantial. Replacing even $50 million in brokered CDs with wealth management deposits would result in an annual interest expense savings of $250,000 (5% - 4.87% = 0.13% * $50 million).

A Long-Term Strategy

While these figures might seem small in the grand scheme of Civista's overall balance sheet, remember that this is just the beginning. As the bank continues to grow its wealth management division, the potential for adding even more low-cost deposits to its funding mix expands considerably.

Furthermore, this strategic shift aligns perfectly with Civista's focus on core deposit growth and reducing reliance on volatile wholesale funding. Shaffer highlighted several other initiatives aimed at achieving these goals, including aggressively pursuing public funds and targeting commercial clients with weak deposit relationships.

These efforts, combined with the wealth management play, signal a commitment to fortifying Civista's already-impressive core deposit franchise. A robust core deposit base provides a significant competitive advantage, allowing the bank to weather interest rate cycles and maintain a healthy margin profile.

Civista's Key Initiatives for Deposit Growth

Conclusion

Civista's Q1 earnings call was more than a recitation of challenges and headwinds. It was a glimpse into a bank strategically positioning itself for long-term success. While others focus on the immediate pressures facing regional banks, Civista is quietly building a foundation for sustained profitability and margin resilience. The wealth management deposit shift is a crucial piece of this puzzle, potentially unlocking a wave of low-cost funding that could propel the bank to even greater heights.

"Key Numbers: * Projected wealth management deposits (year-end): $125 million (conservative estimate) * Projected interest income from wealth management deposits: $6.1 million (annual) * Interest expense savings from replacing $50 million in brokered CDs: $250,000 (annual) * Current yield on brokered CDs: 5% * Projected yield on wealth management deposits: 4.87%"

"Fun Fact: Civista's roots trace back to 1884, making it over 140 years old! This rich history speaks to the bank's stability and deep understanding of its local markets."

While it remains to be seen how effectively Civista can execute its strategic vision, this unassuming wealth management play could be the hidden gem that differentiates this regional bank from its peers.