Civista Bancshares, Inc. (NASDAQ:CIVB) Q3 2022 Results Conference Call October 27, 2022 1:00 PM ET
Company Participants
Dennis Shaffer – President and CEO
Chuck Parcher – SVP and Chief Lending Officer
Rich Dutton – SVP and COO
Conference Call Participants
Terry McEvoy – Stephens
Tim Switzer – KBW
Paul Stark – Chief Credit Officer
Nick Cucharale – Piper Sandler
Manuel Navas – D.A. Davidson
Terry McEvoy – Stephens
Operator
Good day, and welcome to the Civista Bancshares’ Third Quarter 2022 Earnings Call. [Operator Instructions]
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 team will take any questions you may have.
Now I’d like to turn the call over to Mr. Shaffer.
Dennis Shaffer
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 2022 earnings call. I am joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Chuck Parcher, SVP of the company and Chief Lending Officer of the bank; and other members of our executive team.
Let me start by noting several significant accomplishments or transactions that occurred during the third quarter. This morning, we reported net income of $11.1 million or $0.72 per diluted share for the third quarter of 2022 and net income of $27.3 million or $1.82 per diluted share for the 9 months ending September 30, 2022. This is a direct result of our continued focus on growing and diversifying our revenue streams and the disciplined approach that we take in managing the company.
We closed our transaction with Comunibanc Corp. on July 1 and completed the systems conversion over this past weekend. In addition to adding approximately $174 million of loans and $251 million of low-cost core deposits to our balance sheet, we are excited to introduce our new Northwest Ohio customers to the products and services that Civista has to offer.
Loan growth across our footprint continues to be strong. Even after adjusting for the loans that came to us via Comunibanc, loans grew organically by $93 million or 18% on an annualized basis during the quarter. Due to our strong core funding and rising interest rates, our margin expanded by 60 basis points over the linked quarter as new interest-earning assets were added at higher yields and existing loans repriced. Our deposit betas moved slower, and as a result, our funding cost only increased 2 basis points.
Our return on average assets was 1.35% for the quarter compared to 1% for the linked quarter, and our return on average equity was 14.45% for the quarter compared to 9.86% for the linked quarter. Year-to-date, our return on assets was 1.14%, and our return on equity was 11.34%.
We continue to be active in repurchasing common shares. During the quarter, we repurchased 286,611 shares. Year-to-date, we have repurchased 734,810 shares or 4.9% of the outstanding shares at December 31, 2021.
Finally, we were excited to announce the acquisition of Vision Financial Group, a full-service business equipment leasing and finance company based in Pittsburgh, Pennsylvania. The transaction closed on October 1. We believe the addition of a small ticket commercial leasing company to the Civista family further expands our revenue streams.
Now let’s turn our attention to our income statement and our balance sheet. Net interest income increased $6.2 million or 25.4% over the linked quarter and $6 million or 24.6% year-over-year. Net interest income for the first 9 months of 2022 increased $5.5 million or 7.7% compared to 2021. The increase was primarily the result of our excellent organic loan growth throughout the year, the rising interest rate environment and the acquisition of Comunibanc Corp. this past quarter. This increase was particularly impressive given that there were significant PPP fees amortized in the interest income in the prior year.
As I stated, we are extremely pleased with our loan growth for the quarter, excluding PPP fees or PPP loans and the loans acquired via our Comunibanc transaction, we were able to grow loans organically by $93 million or 4.5% for the quarter, which is 18% on an annualized basis. At the end of the quarter, of the approximately $400 million in PPP loans we originated during 2020 and 2021, only $819,000 remained outstanding. Without question, this program was a success for our business customers and communities throughout our footprint.
Our net interest margin was 4.03% for the quarter and 3.62% for the first 9 months of 2022, respectively. Both measures reflect expansion over the comparable 2021 periods. Similarly our margin expanded by 60 basis points over the linked quarter from 3.43% to 4.03%. The yield on our earning assets increased by 48 basis points compared to the prior year quarter and increased by 63 basis points over the linked quarter as new loans are being originated at higher rates and loans already on our books repriced at higher rates. Our yield on earning assets for the first 9 months of 2022 grew by 17 basis points compared to the same period in 2021, even though our 2021 loan yields were augmented by the accretion of $9.8 million in PPP interest and fees.
Funding costs for the quarter ticked up by 8 basis points over the prior year quarter and year-to-date compared to the prior year increased by 2 basis points. In comparison to the linked quarter, our third quarter funding costs also ticked up by 2 basis points.
During the quarter, non-interest income was consistent with the linked quarter at $5.7 million and declined $692,000 in comparison to the same quarter in the prior year. The primary driver of the decrease from our prior year quarter was a decline in gain on the sale of mortgage loans of $975,000, which were partially offset by a $366,000 increase in service charges.
Third quarter gains on the sale of mortgage loans were $637,000, an increase of 11.2% from our linked quarter as we returned to our more typical mortgage banking activity of financing new home purchases. You will recall that we recognized a $1.8 million gain on the sale of our Visa B shares as part of our balance sheet restructuring in the second quarter of 2021, which contributed to the year-to-date decline. However the primary driver of the decrease in our non-interest income was a $4.4 million decline in gains on the sale of mortgage loans. For the 9-month period, non-interest income declined $5.6 million or 22.8% in comparison to the prior year.
Wealth management revenues were consistent comparing our third quarter to the linked quarter as was our wealth management year-to-date revenue at $3.7 million compared to $3.6 million in the prior year. We continue to add new accounts and our existing clients continue to make additions to their existing accounts, which helped us keep pace with the declines in the overall market. While we anticipate that market pressures will continue to be a headwind for some time, we view the expansion of these services across our entire footprint as an opportunity to diversify and grow non-interest income.
Non-interest expense for the quarter was $22.6 million compared to our linked quarter of $20.4 million. $788,000 of the $2.2 million increase was a result of one-time deal costs associated with the Comunibanc transaction. Non-interest expense increased $2.5 million or 4.1% year-over-year as the prior year balance sheet restructuring costs were replaced by increases in compensation expense, professional fees, software maintenance expense and non-recurring expenses related to our Comunibanc transaction.
You may recall that during the second quarter of 2021, we incurred a $3.7 million prepayment penalty on our early termination of a FHLB long-term borrowing. Compensation expense increased $2.1 million or 6% over the prior year, primarily due to annual salary increases, which go into effect each year in April and the addition of approximately 44 former Comunibanc employees on July 1.
Professional fees increased $1.3 million or 59.3%, primarily related to $839,000 in legal and investment banking fees related to our Comunibanc transaction. Total expenses related to the Comunibanc transaction were in line with our expectations and totaled $1.9 million through September 30. Our efficiency ratio was 61.4% compared to 67% for the linked quarter and 64.4% year-to-date. If we had adjusted for one-time deal costs, our efficiency ratio for each of those periods would have been 59.7%, 66.1% and 62.9% respectively.
Year-to-date, our total loans increased by $330.7 million, which includes the addition of $174.3 million of loans from Comunibanc and a $42.4 million reduction in PPP loans. Excluding the Comunibanc and PPP loans, our loan portfolio would have grown by $198.8 million or at an annualized basis of 13.6%. Making the adjustment for Comunibanc and PPP, our third quarter growth was $93 million or 18% on an annualized basis. Demand for commercial real estate in virtually every one of our markets continue to drive the majority of this increase.
Along with our strong year-to-date loan production, our undrawn construction lines remain near an all-time high at $163.4 million at September 30. While we believe the higher interest rate environment will inevitably slow the economy and loan growth, we are confident that even in the face of the anticipated headwinds, we will grow our loan portfolio at a high single-digit rate for the balance of 2022 and at a mid-single-digit growth rate into 2023.
On the funding side, we experienced growth in every category except interest-bearing demand with total deposits increasing $291.6 million or 12.1% since the beginning of the year. The addition of Comunibanc’s low-cost core deposits accounted for $251 million of this increase. Non-interest-bearing demand accounts continue to be a focus and made up 37% of our total deposits at September 30, as we continue to attract operating accounts of our business and municipal customers.
Even in light of the uncertainties associated with the economy, we have not seen any real deterioration in our customers’ financial positions across our footprint. While we did make a $300,000 provision during the quarter, it was attributable to growth in our loan portfolio rather than economic stress. In addition, we have realized $132,000 in net recoveries year-to-date.
The ratio of our allowance for loan losses to loans at September 30 declined slightly from December 2021 from 1.33% to 1.19%, as did our allowance for loan losses to non-performing loans, which was 476.2% at September 30, compared to 496.1% at the end of 2021. I would note that if we include the credit mark of $2.8 million associated with the Comunibanc’s loans, our ratio of allowance for loan losses to loans would have been 1.31% at the end of the quarter.
We continue to be on track to adopt the new CECL allowance requirements beginning in 2023. The higher interest rate environment and the pressure that it had on the bond market resulted in a $78.8 million decline from December 31, 2021, to September 30 and other comprehensive income related to our investment portfolio. As a result, we ended the quarter with a tangible common equity ratio of 6.05% compared to 9.25% at December 31, 2021. Despite this decline, our Tier 1 capital ratio at September 30 was 9.32%, which is well above what is deemed well capitalized for regulatory purposes.
Civista continues to create capital through earnings, and our overall goal remains to have adequate capital to support organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be the payment of dividends and share repurchases. We continue to believe our stock is a value. During the quarter, we repurchased 286,661 shares of common stock for $6.1 million for an average price of $21.33 per share. Year-to-date, we have repurchased 734,810 shares or 4.9% of our shares that were outstanding at December 31, 2021. We have an authorization of approximately $6.2 million remaining in our current repurchase program.
Civista understands the opportunities growth brings to our customers, employees and shareholders. Many of our employees were involved with the planning and execution of our recent conversion, and I could not be more pleased with the way they continue to manage their daily responsibilities. It has been a summer of much planning and even more work and to see the way the conversion came together this past weekend, reinforces my pride in our team.
As I indicated earlier, we closed our transaction with Vision Financial Group Inc. on October 3. Vision is an equipment leasing and finance company with over 30 years of history based in Pittsburgh, Pennsylvania, that brings a new revenue stream to Civista. While not exclusively, they do focus on 6 industry sectors; propane, recycling and waste management, environmental, additive manufacturing, construction and non-destructive testing. I’ve said on previous calls that each transaction must be a cultural fit. I’m confident, after our extensive due diligence process that both organizations drive results by building strong customer relationships and by providing a superior customer experience.
Deal highlights include the consideration mix was 84% or $28.6 million cash and 16% or $5.25 million stock. We expected the deal to be immediately accretive, ramping up from being 6.4% accretive in year 1 to being 15.1% accretive in year 2 as Vision leverages our low-cost funding to transition into a bank-funded model. The deal has a 3.8 year tangible book value earn-back. Our employees will continue to work towards the successful integration over the fourth quarter, and we look forward to leveraging both of our client bases to grow our commercial loan and leasing businesses.
In summary, we are pleased with another quarter of excellent earnings, continued loan growth and solid credit quality. Despite the volatile interest rates, the economic uncertainties and inflationary pressures we are all facing, we remain optimistic. Businesses and consumers across our footprint continue to have strong balance sheets. Our loan pipelines are solid. We successfully integrated Comunibanc into the Civista family and are well on our way to the same successful integration of Vision Financial Group.
Thank you for your attention this afternoon, and now we’ll be happy to address any questions that you may have.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question here will come from Terry McEvoy with Stephens.
Terry McEvoy
Maybe start with a couple of questions on Vision, if I could. First off, is that included in your loan growth outlook for, I guess, the remainder of this year and next year? And then just as a follow-up there, can you help me understand the balance sheet impact as you kind of build loans? Where would you expect that portfolio to be at the end of next year? Any reserving that would be connected with that? And I guess the last piece is the expense side, just so we can kind of back into that accretion that was discussed earlier on the call.
Dennis Shaffer
It’s not included in any of our numbers for the remainder of the year, Terry. And then I think your second was the balance sheet impact?
Chuck Parcher
Yes, we would see most of that balance — Terry, this is Chuck. We’ll see most of that balance sheet impact obviously in the C&I portion of our lending side. I’m not sure, I know Rich is looking forward, right now I’m not sure we’ve actually modeled out yet from that perspective what the provision, et cetera, would be.
Rich Dutton
Terry, it kind of came together, and we’ve been trying to do this conversion. And I’d be less than honest with you if I said we had good expense numbers for the fourth quarter. We’ll get those out to you. We’ll do it for everybody. We’ll issue an 8K that has got that number in it. But I don’t have a good run rate for the fourth quarter that’s got the Vision numbers in it.
Terry McEvoy
And then on the just deposit costs, what are your thoughts on deposit costs going forward? You’ve done a great job holding them low? And have you raised deposit rates here in the month of October?
Dennis Shaffer
Yes. We look for the deposit beta, I think, to increase. Obviously it was virtually nothing in the third quarter. We are feeling a little bit of pressure, but we still think that we’ll have some margin expansion in the fourth quarter here. We have raised deposit rates slightly, and we’ll continue to watch that. But there is pressure on deposit rates right now, that deposit beta is going to be a little bit bigger than it was this past quarter. We know that. But we do think that we will continue to have some margin expansion as rates rise here in the fourth quarter.
Rich Dutton
Terry, this is Rich. We’ve consistently kind of modeled that 13 basis point beta on our non-maturing deposits. And that’s still what our balance tells us. I mean, we’ve done a pretty good job like you alluded to it, kind of holding the line. And like Dennis said, we’ve kind of approached a number of our larger depositors, a lot of municipalities kind of on a one-on-one and negotiated deals. But I think we’re feeling pressure for sure, and we’re taking care of them kind of one-on-one as we go forward. But there may be a time in the next quarter or so where we might have to do some across the board, not big increases, but certainly wider ranging increases.
Dennis Shaffer
Yes. The strength of our franchise is the strong core deposit base that we have. And you definitely see it in times like this. I think you saw it in the third quarter results. I think you’ll continue to see it. And I’ll continue to say that I think that’s what will separate the high-performing banks from one another. The banks that have this strong core deposit base. And as I mentioned in my comments, we have 37% non-interest-bearing deposit accounts.
Terry McEvoy
Maybe I’ll squeeze one last one. Maybe just talk about the Toledo market now that that conversion has occurred and as part of the conversion, I should ask the question, have you had any loss of customers or key employees since that deal is closed?
Dennis Shaffer
No, we’ve not lost any employees, and we’ve really not lost any accounts. Balances were pretty flat in that third quarter, both on the deposit and on the loan side. I think they were fairly flat. We are integrating them in now. Chuck’s working on hiring. We had in our original budget, just our budget alone, to add a person for that area. So I’ll let Chuck comment a little bit further on maybe some of the personnel and stuff.
Chuck Parcher
Yes, we’re working on right now hiring what I would call market exec. As Dennis mentioned, we did not lose anybody to competition per se of any substance from a personnel perspective. We did have one of their senior lenders retire, decided to retire at the time of conversion. So we’re looking to replace him. We’re looking to name a head and actually looking for another lender as well. So I feel like we’ll get that entire group built out by the end of the year.
Dennis Shaffer
And remember, Terry, Chuck’s background was Toledo. That’s where he was born, and that’s where he spent most of his banking career. So he’s got a lot of contacts there, not only with customers, but with other bankers in the market.
Operator
Our next question here will come from Tim Switzer with KBW.
Tim Switzer
My first question is on the loan guide for a slight deceleration from high single to mid-single digits next year. And is that assuming some sort of weakness in the economy from here?
Yes, my question was on the loan guide, a little bit of deceleration from high single to mid-single digits in ’23. Is that assuming some weakness in the economy just given the impact of Fed tightening and the recent trends we’ve seen? And then like, let’s say, if the economy holds up, is there upside to maintain the high single digits?
Chuck Parcher
Yes. Tim, this is Chuck. I think there is upside if it does hold up. We feel pretty clear based on our pipeline right now through November and probably into December. Then it becomes a little hazy as we look out past that. We have normally been, from a budget perspective, a mid-to-high single-digit planner, and that’s kind of what we’re starting to build our plans around. But if the economy does hold up, I would say, yes, we’ll be looking at a higher single-digit to lower double-digit piece going forward.
Dennis Shaffer
Tim, I would add. We’re new to leasing. But those projections, we are just starting to kind of get our arms around what the leasing division and the impact that will have on our loan and lease footings going forward too.
Tim Switzer
Right. And to be clear, that mid-single digit rate in ’23 does not include Vision right?
Dennis Shaffer
Correct.
Tim Switzer
I’m sorry if I missed it. Do you guys have what the impact of purchase accounting was on NII this quarter?
Chuck Parcher
I’m sure it wasn’t big, but just trying to get a handle on it.
Dennis Shaffer
4 basis points.
Tim Switzer
I know it’s been tough to guess where the NIM is going to head. But more generally, do you think at some point in ’23, probably like middle of ’23, once you’ve had a lot of the asset re-pricings finished, deposit betas will still be catching up? Is there a scenario where we start to see a little bit of NIM compression in the second half of ’23, just driven by the deposit betas? And I know the leasing portfolio growth can maybe offset that, but forgetting that part?
Rich Dutton
And this is Rich again. And I think historically, I mean, we’ve done a pretty good job of being disciplined in re-pricing our deposits. Certainly if the Fed levels things out after another increase or 2, logic would say that deposits would creep up a little bit. But again, we’re just talking basis points. Again, with such a huge portion of our funding, 37% of our deposits are non-interest-bearing and 91% of those deposits are basically in low-cost deposits. So they’re in personal savings or business checking and personal checking. So we don’t have a heavy reliance on CD. So I think we’ll have less impact. But I think once the rates slow down, and I don’t know if we’ll see significant margin compression, but it will certainly flatten out quite a bit.
Paul Stark
The other point that we would want to make is of those noninterest-bearing deposits, 70%, I mean, I don’t have my notes.
Rich Dutton
71% of those are business accounts.
Chuck Parcher
Yes, so those are operating lines that really aren’t interest rate sensitive, if you will. I mean, our lenders, and I don’t credit them often, but our lenders do a great job of gathering deposits when they gather loans. We don’t do transactions, Tim. We’re a relationship bank, like Dennis alluded to during his comments. And that’s, again, I think that pays dividends when rates start to move. I think, again, we’ll see some compression when the music stops, but it’s not going to be significant.
Tim Switzer
And the last question I had. Have you guys been running like a parallel CECL accounting? And do you know what the impact will be next quarter or have any idea?
Paul Stark
This is Paul Stark. We’ve been running in parallel for a couple of quarters now. And based on the numbers today, I don’t think we’re going to see a huge change. But I would say that a lot of that’s going to depend on what happens over the next 3 or 4 months.
Chuck Parcher
If I could just interject for one second before Paul misspeaks. We’re going to adopt CECL on January 1, so it’s not going to be the next quarter. It will be Q1.
Paul Stark
I think basically the question I always get is that, is the model going to make a significant impact. I would say, overall, no. But we’re far from the point where we can start saying, hey, here’s what the number is going to be.
Operator
Our next question will come from Nick Cucharale with Piper Sandler.
Nick Cucharale
Can you help us think about the cost savings from the Comunibanc deal and how much you expect to extract out of the run rate in future periods, just especially given the recent systems conversion?
Rich Dutton
We had 35% cost saves model, 75% of them in really — in this year, I think 25% of them were in next year, Nick. So we’ve realized most of those cost saves will take place, a lot of them in compensation, employee compensation because, remember, the 4 most senior people at the bank basically have retired, and that was a lot of that compensation expense. So this unlike a lot of the acquisitions that we’ve done, we’ve recognized that almost immediately, those people did stay on to help us through this conversion period and stuff. But we’ll start recognizing those almost immediately now.
Dennis Shaffer
Nick, we will get you some better numbers. But if you take the one-time cost out of Q3 for the conversion costs, our non-interest expense was about $20.8 million. And I would say that’s probably a good proxy ex-Vision for Q4. And we’ll get you a better number. I apologize. I’m usually better than this, and I just don’t have it.
Nick Cucharale
No apology necessary. And lastly, I just wanted to touch on capital return and the active share buyback. So in light of your current tangible common equity and further anticipated dilution from the Vision deal, can you give us some color on your appetite for continued repurchase?
Dennis Shaffer
Yes. I think we still think that’s a great way to deploy capital. We’ve paused a little bit here over the — paused a little bit. I think we’re thinking about that. We want to see how these numbers shake out once with the Vision stuff. We see how they’ve shaken out now with HCB. So we’re being very mindful of that as we move forward. We are creating capital with our earnings and our earnings are stronger than they’ve ever been. And so I think that’s a plus. And we are, as things roll out, we think this is somewhat temporary. Get past this fourth quarter, if these rate increases slow down because we are replacing things maturing in the portfolio with higher yielding assets and stuff. So we do think that trends will eventually reverse. So those are our thoughts, I guess, around that.
Operator
[Operator Instructions] Our next question here will come from Manuel Navas with D.A. Davidson.
Manuel Navas
So going back to the NIM discussion. Can you just remind me, have you firmed up yet what type of yields you’re going to pursue on the Vision transaction? I think you were modeling 8% to 9%. Is that right?
Dennis Shaffer
Yes, 8% was what we modeled on the Vision transaction. Should rates have risen since then, we should be putting on things a little higher than that number, but it just depends on the mix that they’ll be able to generate. We do think they’ll be a little bit more competitive and going after some of these larger corporation lease deals. That was one of the things and I think they found us attractive. Those rates are higher than our loan rates, but they’re not for lending in at 6.25% today, they may be leasing or leasing that at 7% or 7.25% on those higher, those larger deals and stuff. So, Chuck, do you have any color more you want to add there?
Chuck Parcher
No, I’m comfortable with the 8% number that we put out there, our capital and our pricing structure gives them. What I would say is, if you said their average customer was a 3-rated customer in the past, it gives them a little bit of opportunity to bid on some higher quality credit leases, which, let’s say a 2 rate credit, which will give them the opportunity to maybe come off that 8% number. But I would say, in general, that 8% number looking forward, as Dennis said, was a good number to look as you’re modeling forward.
Manuel Navas
It seems like there’s still a lot to work through, but I wanted to bring that back to the NIM discussion. How high can you peak out? Because a lot of folks we talked to are talking about a peak NIM in the first half of next year, but you’re going to still be adding Vision assets at a much higher accretive to the loan book cliff? Could you still see the NIM rising past through the rest of next year?
Dennis Shaffer
Potentially we’re working through right now, too, just to try to figure out how much we want to hold, how much we want to sell. So you’ll probably see some more gain on sale type numbers looking forward into next year. That’s some of the stuff that we’re still working through on a mix perspective to try to decide how much we’re going to hold. A lot of that will depend on how our loan deposit ratio increases over that time period.
Rich Dutton
Yes. So we’ll watch that. I mean, we modeled about retaining 50 and selling 50, but some of that’s going to depend on where those loan-to-deposit ratios shake out. Currently we’re about 89% loan to deposit. So we’ve got plenty of run room right now, which I think will be very beneficial. Vision is on pace to do $120 million to $130 million in loans or leases this year. I think we’ve modeled close to about $155 million or so. So if we retain half of those, there’s $75 million or so that perhaps goes on or should go on at higher yields. So that will definitely be a benefit for us. And that’s one of the reasons we like the deal. We not only wanted to diversify our revenue streams, but we’re picking up a revenue stream that we think is a little bit higher yielding than what we have out there today.
Chuck Parcher
And it’s also the other part we really like about it is the synergy that it has within our organization. We’ve already seen the first couple of weeks, quite a few referrals going back and forth. And we really think that especially in our C&I customer base, it’s a way to bring in a leasing company and instead of them jumping to one of our competitive banks that has leasing right now that may end up us losing the customer long-term. So the synergies are great within this deal.
Dennis Shaffer
And we didn’t model any of those synergies into our base model. So that’s all lift for us.
Manuel Navas
And just to confirm, I think it’s come up, but your loan guidance for next year does not include Vision yet?
Dennis Shaffer
Correct.
Manuel Navas
And with how well you’ve kept in deposit costs, is there any update to like the through-the-cycle deposit beta there? Or is that you’re still assuming the same rough percentage?
Chuck Parcher
Well, I think again, we do anticipate margin expansion. The deposit beta will be more than it was the third quarter because it was virtually nothing. So it will be slightly lower. But again, I just look back to the ’16, ’17, ’18 time period, one, before rates had fallen, our margin was 55 to 60 basis points better than our peer banks. As rates started to fall, our peers caught up a little bit to us. We were still 15 to 20 basis points because we had less room for improvement. Now as more — now as they’re going back up, we feel — we’ve proven that we were disciplined before. We’re going to stay put disciplined again. We think that our margin is going to remain much healthier than some of our peer banks, just what we’ve done in the past. And then we’re back in that cycle with rising rates.
Manuel Navas
Okay. That’s great. I appreciate the comments.
Operator
Our next question is a follow-up from Terry McEvoy with Stephens.
Terry McEvoy
Just one more I figured that the TV keeps telling me we’re in a recession, so I should ask a credit quality question. When I look at your CRE portfolio, which is quite a bit, it’s over $1 billion. Have you stress tested for higher interest rates as those loans mature? And then within the CRE, maybe talk about what you’re seeing in office, retail, hotels or anything else that you’re watching closely?
Paul Stark
I’ll start first. This is Paul. So I think we do have a significant amount of CRE out there. And we have been stressing this as we go. When COVID hit, we really started monitoring these things even more completely than we did in the past. So on the construction deals, we’re looking at the interest reserves to make sure that they’re on top of that. We’re making sure that getting more frequent financials as we go. We really haven’t seen much deterioration in this at all. In fact, we’ve seen all the hotels, all the criticize that we have built up over COVID have really been upgraded since that time. And there’s maybe probably a little bit more of a leisure mix than business, but they are all returning to pre-COVID revenues. So from that standpoint, we feel pretty good about it. I don’t think we’re going to open the door and start doing a lot of them. But clearly I think the concern we had at the time is gone. I think as we go forward, office, that’s still the big question mark, what’s going to happen there. Although the vacancy rates have not significantly deteriorated in our markets.
Chuck Parcher
Yes, I would say, Terry, looking across at least from the sales side or the sales perspective, our markets have been really stable. As Paul mentioned, we’re watching office, but we’re not seeing any deterioration in office. From a growth perspective with Columbus, with the intel announcement and the university, et cetera, that market continues to develop very strongly. We’ve had great growth so far this year in both Cleveland and in the Cincinnati metro areas. So we feel really good about our markets. We’re not seeing much decline and knock on wood. Hopefully that continues into next year.
Dennis Shaffer
And we’ve always stressed our rates, Terry. I mean even when rates were low, we did 100, 200, 300 up environment. So we do stress those. I think we do a pretty good job of looking at how liquid our borrowers and co-borrowers are. We look at leverage. We look at cap rates. Cap rates have been historically low. So when we’re looking at a deal and we say, geez, this is a 65% loan to value based on what the appraisal is coming in at. Well, if that cap rate was 5.5, what is it, at 6.5, okay, it’s instead of 65.5%, it’s 74% or something. We want to know that as we go in. And I think we do a pretty good job in the underwriting. And that’s why I feel pretty good if we do go into recession because not only us, but I think all banks have really beefed up the way they underwrite credits and stuff. And just to remind you, we don’t have a lot of office. We have about 5.5% in hotels, 6% in office. And we don’t have any tall office buildings, big downtown office buildings. Most of ours are either single-storey office buildings or a couple of storey office buildings and stuff. So in those right now, the occupancies are really good, but we are doing a very good job. And I think stressing rates and stressing cap rates and some of the other underwriting in cash.
Chuck Parcher
Well, not only in the underwriting, as you said, but also we do kind of a bottom-up top down of our existing portfolio after the fact. So I haven’t really seen anything jump out that we’re really concerned about. But there’s a lot of noise out there from the standpoint of increased costs. But nothing has really hit so far.
Rich Dutton
Yes. And, I guess, one last, I guess, thing that I watch relatively closely, Terry, is what’s our outstandings on revolving lines of credit. Obviously almost all of our commercial revolving lines of credit got paid way down during all of the governmental stimulus money that came in. We used to run closer to 50%, 60% on those revolving lines. We’re running right now in the mid to low 30s. I think at quarter end, I think we were at 36%. It actually went down a little bit even when we brought Henry County. And I think the last I looked a couple of days ago, it was about 33%. So we’re not seeing any stress on our, what I would call, our core corporate customers to be drawing on their lines of credit.
Operator
With no remaining questions, we will conclude our question and answer session. I’d like to turn the conference back over to Dennis Shaffer for any closing remarks.
Dennis Shaffer
Thank you. In closing, I just want to thank everyone for joining and those who participated in today’s call. Again we are extremely pleased with our third quarter results. I do believe that our strong low-cost core deposit base positions us well as we move forward. I look forward to talking to all of you in a few months to share our year-end results. So thank you for your time today.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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