Civista Bancshares, Inc. (NASDAQ: NASDAQ:CIVB) reported a net income of $6.4 million for the first quarter of 2024, a decline from the previous year's figures. The company attributed the decrease to several factors, including the discontinuation of a third-party income tax refund processor, the absence of a one-time bonus, and changes in overdraft processing.
Despite the lower non-interest income and pressure on the net interest margin, Civista Bancshares remains optimistic about its future, citing strong loan growth and credit quality, and ongoing initiatives to increase revenue and reduce expenses.
Key Takeaways
- Civista Bancshares reported a Q1 net income of $6.4 million, a year-over-year decline.
- The company saw a decrease in non-interest income and net interest margin.
- Total loans and leases grew by $36.4 million, with significant increases in certain types of loans.
- Loan growth is expected to continue in the mid-single-digit range for the rest of 2024.
- Core deposit balances declined, but the company is focused on gathering core funding.
- The company reported strong credit quality and a stable Tier 1 leverage ratio of 8.62%.
- Civista Bancshares has authorized a new stock repurchase program of $13.5 million.
Company Outlook
- Civista Bancshares aims to rebuild the tangible common equity ratio to between 7% and 7.5%.
- The company is optimistic about creating shareholder value through solid earnings.
- Loan growth guidance for the year remains at mid-single digits.
Bearish Highlights
- The company faced a decline in net income due to the discontinuation of certain services and changes in overdraft processing.
- There was pressure on the net interest margin due to the migration of deposits to higher-rate accounts.
- Total deposits remained mostly flat, with a slight decline in core deposit balances.
Bullish Highlights
- Loan and lease growth is strong, particularly in non-owner-occupied CRE loans, residential real estate loans, and real estate construction loans.
- The company's low-cost deposit franchise significantly contributes to net interest margin and overall profitability.
Misses
- Non-interest income was lower compared to the previous year.
- The interest rate environment led to unrealized losses in the bond portfolio.
Q&A Highlights
- Executives expressed caution about mergers and acquisitions due to the challenging environment.
- The loan pipeline is strong, with a focus on the multifamily sector.
- Potential fee income drivers include mortgage banking and leasing, with a quarterly run rate projected at $8.5 million.
- The company is implementing strategies to improve fee income and reduce funding costs.
Civista Bancshares continues to navigate a challenging financial landscape with a disciplined approach. The company's efforts to optimize its loan portfolio and core deposit franchise, paired with initiatives to manage expenses and revenue, reflect a strategic response to the current economic conditions. Civista's management remains committed to strengthening the company's financial position and is confident in its ability to generate shareholder value in the coming quarters.
InvestingPro Insights
Civista Bancshares, Inc. (NASDAQ: CIVB) is navigating through a complex financial period, as reflected in their recent earnings report. To provide a deeper understanding of the company's financial health and market position, let's consider some key metrics and insights from InvestingPro.
InvestingPro Data:
- The company has a market capitalization of $224.01 million, indicating its size relative to other companies in the sector.
- Civista Bancshares is trading at a low earnings multiple with a P/E ratio of 5.21, suggesting that its stock may be undervalued compared to its earnings.
- Despite challenges, the company has achieved a revenue growth of 15.05% over the last twelve months as of Q4 2023, highlighting its ability to increase sales.
InvestingPro Tips:
- Civista Bancshares has demonstrated a commitment to returning value to shareholders, raising its dividend for 13 consecutive years.
- However, it's important to note that 2 analysts have revised their earnings downwards for the upcoming period, which could indicate potential headwinds for profitability.
For investors looking for a more comprehensive analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/CIVB. These tips provide valuable insights that can help investors make informed decisions. For those interested in accessing these insights, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
Civista Bancshares' track record of profitability over the last twelve months and its ability to maintain dividend payments, now for 14 consecutive years, may appeal to investors seeking stability in their portfolios. Nevertheless, the recent revisions by analysts and the company's expected net income drop this year should be carefully weighed. With the company trading near its 52-week low, it may also present a potential entry point for value investors, as highlighted in the additional 9 InvestingPro Tips available for Civista Bancshares.
Full transcript - First Citizens Banc Corp (CIVB) Q1 2024:
Operator: Ladies and gentlemen, 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 that involves 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 measure, sorry, the reconciliation of the GAAP measure 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. Schafer's remarks, he and the Civista management team will take any questions you may have. Now I will turn the call over to Mr. Shaffer. Please go ahead.
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 first quarter 2024 earnings call. I am joined today by Rich Dutton, SVP of the Company and Chief Operating Officer of the Bank; Chuck Parcher, SVP of the Company and Chief Lending Officer of the Bank; and other members of our executive team. This morning, we reported net income for the first quarter of $6.4 million or $0.41 per diluted share, which represents a $6.5 million decline from our first quarter in 2023 and a $3.3 million decline from our linked quarter. While we are disappointed in our results, we knew there would be headwinds as we stepped away from the third-party processor of income tax refunds and we did not have the benefit of a $1.5 million one-time bonus that we received from the renegotiation of our debit brand agreement. In addition, in late 2023, we implemented changes in the way we process overdrafts, which reduced service charge income. As a result of these three items, non-interest income was approximately $3.8 million less in this quarter than in the previous year. While we continue to reduce rates on our CD specials and select money market accounts, the migration from our non-interest-bearing and lower-rate checking accounts into higher-rate money market accounts and CDs continues to put pressure on our net interest margin. We also experienced an increase in our allowance for credit losses as our CECL model requires higher reserves, based on our individually analyzed loan and lease portfolio and loan growth. During the third quarter of '23, we announced that Civista would be stepping away from the third-party processor of tax refunds due to increased scrutiny from our regulators. This turned $1.9 million and $475,000 respectively, during the first and second quarters of 2023 related to this program. Like many in the industry, we have been analyzing the way we process overdraft accounts and the fees associated with those services. Late in December, we discontinued assessing a charge on represented overdrafts, represented overdrafts and reduced our NSF charge from $37 to $32. We are also enhancing how we communicate with our customers on the use of their deposit accounts. Our overdraft fees, which are included in service charges, declined $375,000 compared to our first quarter of 2023. We anticipate these changes will reduce service charge revenue by $1.2 million over the course of 2024. In anticipation of this lost revenue, we implemented a number of initiatives to reduce our reliance on wholesale and borrowed funding to increase revenue and to reduce expenses. Although we have seen some immediate impact, most of the benefit from these initiatives will occur over the balance of the year. I'm encouraged by the early results and I'm optimistic that, we are headed in the right direction. We anticipated pressure on our margin, as we exited the tax program and the need to replace the significant interest-free funding balances it provided during the first and second quarters. However, it is difficult to model the impact of the depositors migrating from non-interest-bearing into interest-bearing accounts, which was evident during the quarter. During the quarter, our cost of funding increased by 35 basis points to 2.54%, while our yield on earning assets increased by 12 basis points to 5.64%. This resulted in our margin contracting by 22 basis points coming in at 3.22% for the quarter. During the quarter, we continued our measured approach to decreasing rates paid on some of our higher-tiered demand deposit accounts and CD specials. In spite of lowering these rates, our cost of deposits excluding broker deposits increased by 21 basis points to 1.22% during the quarter. We have a number of initiatives in progress to reduce costs and our reliance on broker and wholesale funding. The State of Ohio announced its Ohio Home Buyers Plus Program to encourage Ohioans to save for the purchase of homes in Ohio by offering tax incentives to the depositors and subsidizing participating banks. As part of the program, the state will deposit up to $100 million in low-cost funds at the current rate of 86 basis points into participating banks. We also have historically maintained the cash balances of our wealth management clients and other financial institutions. However, we are currently taking steps that will allow us to hold the cash deposits of our wealth management clients at the bank. We anticipate the rates to approximate Fed funds less 20 to 25 basis points. Based on the current cash positions, we anticipate being able to move $75 million of these funds into the bank by the end of third quarter. Our loan and lease portfolios grew at an annualized rate of 5% for the quarter. This was organic growth and we believe, it is indicative of the continued strength of our markets in our organization. While this is slower, we have focused on holding rates at higher levels. We anticipate continuing to grow at a mid-single-digit pace for the balance of 2024. While our overall credit remains solid, as I previously mentioned, we experienced an increase in our allowance for credit losses as our CECL model required higher reserves, based on our individually analyzed loan and lease portfolio. This was primarily attributable to a hospitality credit and a cellular tower credit that have both been classified for several quarters. Both borrowers continue to be cooperative. However, new information became available during the quarter, it was necessary to adjust the collateral values and to increase our reserve. Earlier, we announced a quarterly dividend of $0.16 per share. Based on our March 29th share price, this represents a 4.16% yield and a dividend payout ratio of 42.11%. Our efficiency ratio for the quarter was 73.8%, compared to 64.3% for the linked quarter. However, if we were to back out the depreciation expense related to our operating leases from our leasing group, our efficiency ratio would have been 70% for the quarter and 60% for the linked quarter. During the quarter, non-interest income declined $319,000 or 3.6% in comparison to the linked quarter and $2.6 million or 23.2% in comparison to the prior year first quarter. The primary drivers of the decrease from our linked quarter were declines in service charges due to the previously mentioned changes to how we were processing overdrafts and a $418,000 decline in swap fee income. These declines were offset by increases in other non-interest income, which included increases of $182,000 in fees related to leases and $289,000 in income from our captive insurance subsidiary. The primary drivers for the decline for the prior year's first quarter were $1.9 million in tax refund processing fees, earned in the prior year that I mentioned earlier and a non-recurring $1.5 million signing bonus that we recognized in the first quarter of 2023 related to a new debit brand agreement. These declines were partially offset by increases in the same other non-interest income items, a $584,000 increase in fees related to leases and a $453,000 increase in income from our captive insurance subsidiary. Non-interest expense for the quarter of $27.7 million, represents a $2.3 million or 9% increase from our linked quarter. This increase is primarily attributable to increases in compensation-related expenses, including salaries, which were up $139,000 payroll taxes, which increased $434,000 as the beginning of the year full payroll tax load resumed and an increase in health insurance expense of $346,000. You will recall that Civista is self-insured for our employee health insurance. As has been our practice, we begin each year by accruing our health insurance expense at the rate computed by our actuaries. Thankfully, as has often been the case, we were able to reduce that accrual in the third and fourth quarters of the prior year. In addition, the combination of truing up our marketing accrual in the previous quarter and the resumption of our monthly marketing accrual in the current quarter accounted for $669,000 of the increase. Compared to the prior year's first quarter, non-interest expense increased $257,000 or 1%. The increase is attributable to our normal annual merit increases, which take place each April and software expenses related to our digital banking platform that were mostly offset by declines in depreciation related to operating leases and professional fees that were paid to the consultant, who assisted us with our debit card brand renewal in the prior year. Turning our focus to the balance sheet. For the quarter, total loans and leases grew by $36.4 million. This represents an annualized growth rate of 5%. While we experienced increases in nearly every loan category, our most significant increases were non-owner-occupied CRE loans, residential real estate loans, and real estate construction loans. The loans we are originating for our portfolio are virtually all adjustable rate loans and our leases all have maturities of five years or less. New and renewed commercial loans were originated at an average rate of 7.92% during the quarter. Loans secured by office buildings make up about 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-storey offices located outside of central business districts. Along with year-to-date loan production, our pipelines are fairly strong and our undrawn construction lines were $244 million at March 31st. Again, we anticipate loan growth to continue to be in the mid-single-digit range for the balance of 2024. On the funding side, total deposits were mostly flat, declining just $4.3 million or negative 0.1% since the beginning of the year. However, if we back out non-core tax program and broker deposits, our deposit balances declined to $29 million or 1% year-to-date. As I mentioned, we have a number of initiatives in progress, aimed at gathering core funding. Our deposit base is fairly granular with our average deposit account excluding CDs approximately $25,000. Non-interest-bearing demand accounts continue to be a focus. Excluding tax-related and broker deposits, non-interest-bearing deposits made up 29.5% of our total deposits at March 31st. With respect to FDIC-insured deposits, excluding Civista's own deposit accounts and those related to the tax program, 13.1% or $392.3 million of our deposits were in excess of the FDIC limit at quarter end. Our cash and unpledged securities at March 31st were $452 million, which more than covered these uninsured deposits. Other than the $369.5 million of public funds with various municipalities across our footprint, we had no deposit concentration at March 31st. At quarter end, our loan-to-deposit ratio was 98.3%. Our commercial lenders, treasury management officers, and private bankers continue to have some success requesting additional deposits and compensating balances from our commercial customers and we will continue to be disciplined, in how we price our deposits. We believe our low-cost deposit franchise is one of Civista's most valuable characteristics contributing significantly to our solid net interest margin and overall profitability. The interest rate environment continues to put pressure on bond portfolios. At March 31st, all of our securities were classified, as available for sale and had $62.5 million of unrealized losses associated with them. This represented an increase of unrealized losses of $7.9 million since December 31, 2023. Over the past few quarters, we have reduced our security portfolio by using its cash flow to fund our balance sheet. At March 31st, our security portfolio was $608.3 million, which represented 15.7% of our balance sheet. We ended the quarter with our Tier 1 leverage ratio at 8.62%, which is seen as well-capitalized for regulatory purposes. Our tangible common equity ratio was 6.26% at March 31st, down slightly from 6.36% at December 31st, 2023. Civista's earnings continue to create capital and our overall goal remains to maintain adequate capital to support organic loan growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is a value. While our capital levels remain strong, we recognize our tangible common equity ratios spring low. Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7% and 7.5%. To that end, we will continue to focus on earnings and will balance any repurchases and the payment of dividends with building capital to support growth. As we stated in an earlier 8-K, the Board re-authorized a new stock repurchase program of $13.5 million during its April meeting. Despite the uncertainties associated with the economy and the expense pressures on borrower space, our credit quality remains strong and our credit metrics remain stable. As I previously mentioned, we did make a $2 million provision during the quarter, which was primarily attributable to higher reserves required by our model, based on individually analyzed loans and leases, which was driven by two credits. A $2.3 million hospitality credit, which we expect to resolve via the sale of the properties and have a substantial guarantor backing, and a $4 million cellular tower credit, which we expect to resolve in the next six months. I would note that neither of these credit issues were related to underwriting weakness. The hotel had an issue with inspire suppression system during the pandemic that prevented it from operating for 17 months and continues to limit operations. The cellular power business suffered an internal fraud, where an employee caused significant damage to the company for personal gain. Our ratio of a balance from credit losses improved from 1.3% at December 31st, 2023 to 1.34% at March 31st. In addition, our allowance for credit losses to non-performing credits increased from 245.67% at December 31, 2023, to 247.06% at March 31st. In summary, although our margin compression was more than we anticipated, our margin remains strong and we are taking steps to generate more lower-cost funding. Our loan growth during the quarter should remain at a mid-single-digit pace for the balance of 2024. While we experienced some isolated credit issues, we have seen no systemic deterioration in our credit quality. Overall, Civista continues to generate solid earnings and our focus continues to be on creating shareholder value. Thank you for your attention this afternoon and your investment and now we will be happy to address any questions that you may have.
Operator: Thank you. We will now begin the question-and-answer session [Operator Instructions]. Your first question is from Brendan Nosal from Hovde Group. Please ask your question.
Brendan Nosal: Hey, good afternoon folks. Hope you're doing well.
Dennis Shaffer: Hi, Brendan.
Brendan Nosal: Maybe just to start off here. I think you folks have historically had the CFO position vacant for quite a long time. Just maybe talk through the decision to formally fill that CFO position with your announcement earlier today and why now is the right time.
Dennis Shaffer: Well, I think that Todd Michael has filled that role for us for the last 30 years and he's done a great job at that. But Todd is approaching retirement age. He'll be retiring over in the next couple of years and we wanted to have sufficient time. Todd has a lot of institutional knowledge and we think he'll bring value working with our new CFO. But we just thought the timing of that was right now, given his plans for the future.
Brendan Nosal: Great. Thanks. Maybe one more from me, moving to the expense base. Even though costs were up sequentially, they still came in quite a bit better than I was expecting. I think on the last earnings call, you folks pinpointed like $28.7 million of expenses per quarter for the final three quarters of the year. Just kind of curious to hear your updated thoughts on the expense base and how you expect that to trend going forward.
Rich Dutton: Brendan, this is Rich. We did guided last quarter I think during the call the $28.4 million and I would say that's a good number for the rest of the year and the big difference that we're going to have between the first quarter and the rest of the year is, as you'll recall, our merit increase is going to affect April 1st every year and that's really the only significant, I think, additional cash expenditure that we've got slated in our budget between now and the end of the year.
Dennis Shaffer: Yes. We've really focused on expense control here near the end of last year and going into this year, just knowing the lost revenues that we would have. So, I think that's really good if we're guiding to the because I think we're starting to see some of the expense control initiatives that we put into place. So, I think that number Rich gave, if we guided last quarter, our merit increases went into effect in the second quarter. I think that's showing that I think we are controlling other expenses.
Operator: Thank you. Your next question is from Justin Reilly from Piper Sandler. Please ask your question.
Justin Reilly: Hi, good afternoon, guys. Wanted to hit on the net interest margin for the quarter. Given some of the dynamics you discussed in the prepared remarks, can you unpack a little more just what you're seeing, as far as lingering upward pressure on the funding side? Where we may be on that? When you get to a spot, where asset repricing allows for margin stabilization and let's call it a flat rate environment?
Rich Dutton: Hi, Justin, this is Rich again. I can't remember if you were on the call last time or not, but I don't have a great track record of predicting what our margin is going to do. But I think even with the contraction, I mean, our margin is respectable and I think the initiatives that Dennis discussed, the Ohio homebuyers where we feel pretty confident we're going to be able to bring in $100 million pretty low-cost funding related to that and the opportunity to move some of the cash balances that our wealth management group has that are off-balance sheet, on to our balance sheet are two opportunities to kind of reduce funding and again I think absent growth and probably the bigger wild card is absent a migration from the non-interest bearing deposits into higher whether they're money market or even CDs. I mean, that's the thing that I think we continue to -- it's just I don't know if it's impossible to model, but we haven't figured out how to model that. I think our models tell us that, if nothing changes and we don't have any significant crazy movements in interest rates, that, again, it will contract by basis points. But I've said that two quarters in a row and I've been wrong two quarters in a row.
Dennis Shaffer: The big difference I think, Justin is, we are starting to see some positives. We were able to reprice some broker near the end of March. Some of the broker deposits, we did see some improvement there. We were able to get that funding at 22 basis points less than we got where we had it on the books for. A lot of our CD specials are starting. Rates haven't moved. So, those rates were high back mid-year last year and into third quarter. Those rates will adjust downward at their next re-pricing here over the next -- the ones that are coming due over the next quarter or so. So, there are some positive signs. But I do think as Rich alluded to, it all comes down to loans -- how fast we grow loans because we're going to need funding for that and we may not get the benefit of like the wealth program and the tax money that may be a third quarter thing. We're starting to implement and we'll be able to start taking those homebuyer plus deposits here in the first week of May here. But how quickly we put those on the balance sheet will really depend on, where our margin goes in that second quarter. But the third quarter, I think we should see good improvement because we also have more loans and assets repricing than we have the first half of the year. So, there's a couple of factors. I think at least some positive signs that we see that the margin might start stabilizing.
Justin Reilly: That's helpful. I guess just dovetailing off some of that. What do you have, I'm not sure if you're able to quantify just in terms of brokered funding that's maturing through the balance of the year. What does that repricing look like, looking forward here?
Dennis Shaffer: That is all in the fourth quarter. The remainder of it, we have nothing repricing. We had a slug of $151 million that repriced March 20th. We really didn't get much benefit of that in the first quarter. And the next two slugs of our brokerage stuff is really in the fourth quarter, late in the fourth quarter that we'll reprice.
Rich Dutton: That's right, Brendan. We've got $500 million and that's been constant of brokered CDs. As Dennis said, we've got $200 million of that will come due or mature in November of this year. The rest of it goes into '25. That's really been with TCE.
Justin Reilly: Okay. That's helpful. Just shifting gears a little. I know the focus here has been rebuilding capital levels, getting TCE back to 7%, 7.5%. But just looking for any high-level commentary on the environment, for M&A, which, of course, has remained fairly quiet, but just more so trying to get a sense of just where your capital priorities stand over maybe the medium or longer-term.
Dennis Shaffer: Yeah, I mean, there's a lot of dialogue happening around M&A. I just think it's really tough environment to do an M&A right now, whether you're a buyer or a seller. The loan marks we are trying to figure that out in this environment with a lot of times you really have to dive into how buyer or sellers loan books are repricing. What's the effect of higher rates going to have on those books and things like that? So I think the marks that you're doing are pretty heavy. So I just for us, we, we're focused on, building our capital base right now because we just think it's too tough an environment right now to do any type of M&A.
Justin Reilly: Okay, got it. Thanks for taking my questions guys. Appreciate it.
Operator: Your next question is from Terry McEvoy from Stephens. Please ask your question.
Terry McEvoy: Hi, thanks, good afternoon everybody. Maybe you can just talk about loan pipeline, confidence in that mid-single-digit growth rate over the remainder of the year and do you think that growth will continue to come from multifamily and metro Ohio markets and some of the other categories that Dennis talked about earlier?
Chuck Parcher: Yeah, Terry, this is Chuck. Pipelines are actually pretty good right now. When I compare it to last year, our pipeline right now is actually higher than it was last year sitting at the same time. Now I would tell you that, our pull-through rates have not been quite as strong as they were in the past just because we're really trying to be very mindful of margin and holding rates well above eight as far as new originations on most especially real estate deals. So, our pullover rate hasn't been where it has been. We're still seeing really good strong demand, especially in the multifamily area. Obviously, Columbus can't build the unit fast enough, but we're seeing really good growth in Cincinnati and Cleveland too as far as the metro markets with some and we've got some stuff coming on both in Toledo and [indiscernible] too. I would say that the five major metro markets are doing well on the multifamily side. We really haven't seen really any what I would call rate concessions or rate pressures across any of our categories so far and we're really seeing especially in a multifamily area, most stuff as it's coming on and efforts being built, the rents are actually higher than what's being projected in the appraisal. So, we feel pretty good about, where we sit here in Ohio and Southeast Indiana, and Northern Kentucky. We feel like the demand is still pretty strong. The one thing is that I think we talked about last call, it's taken a little bit more equity in these projects, to get them to work from a cash flow perspective, but the bigger developers are willing to put that extra cash in and make them work.
Terry McEvoy: That's great. Thanks for the color there. As a follow-up, I know that's a tough question. How are you thinking about the non-interest-bearing funds coming out of the tax refund processing program that was $19.5 million last quarter? Should we kind of model out $20 million per quarter going forward or was the first quarter a bit outsized in your view?
Dennis Shaffer: No, that's probably fair. I think at the end of the March, we had about $31 million left in there, Terry. We're kind of at the mercy, if you will of the tax processing partner that we have. I mean, they're going to at some point going to move that money out. But we thought that was going to happen in December and I guess we're fine if they want to leave it because it's free money to us. But right now the conversation is that would be gone sometime in second quarter.
Terry McEvoy: And then just one last quick one. The $1.2 million of overdraft service charge revenue, is that fully captured in the 1Q run rate, or is there incrementally more to come down a bit in the remainder of the year?
Dennis Shaffer: I would say that our first quarter is typically our highest NSF quarter post-holidays. So if we had $375,000 less of NSF income in the first quarter, it's going to be something less than that. I know over the course of 12 months, we are kind of projecting the 1.2.
Terry McEvoy: Okay. Thanks for taking my questions. Have a good day.
Operator: Thank you. Your next question is from Tim Seltzer from KBW. Please ask your question.
Tim Seltzer: Hey, good afternoon. Thanks for taking my question. I had a follow-up on your loan commentary. I think you guys raised your guidance expectation from low single digit last quarter to mid-single-digits. And I think I remember you guys mentioning something about -- it sounds like the competitive environment was getting a little bit more intense last quarter. Have you seen that moderate a little bit? And is that maybe what drove the upside to guidance here?
Dennis Shaffer: I think all along, Tim, we were projecting mid-single-digits, that 5%, 6% range, 5% I think is what we really focused on. We have seen a little bit of relief, not a lot. There's a lot of competitors out there. As we talked about I think last call we saw we've seen a lot of competitors come back, bidding treasury plus as compared to really looking at the cost of funds more so, with the inverted yield curve that put us on a little bit competitive disadvantage but all-in-all as you know that the 5% and 10% have actually come back up a little bit this first quarter and into the second quarter. So that treasury plus has got a little closer to what we're offering. But I just feel like we really haven't changed our guidance thing. At least I don't feel that way after first quarter results.
Rich Dutton: The only thing I'd add to that, Tim, is that, I mean the governor really on our loan growth is our ability to fund that loan growth. Again, we're disciplined in how the loan guys price those. But as big a impediment to grow our balance sheet as competition is our ability to fund that, right.
Tim Seltzer: Can you guys remind us, what percent of your loans are floating rate and how you'd expect loan yields to trend in a downward rate environment? And then maybe what the overall impact on the NIM would be if we just got maybe one or two basis cuts towards the end of the year?
Dennis Shaffer: Well, we think that will benefit us. The rate cuts probably benefit us a little bit because again we've been funding some of that with overnight borrowings. So, those have been trending kind of upwards. I think they were up $30 million from 12/31 to 3/31. So, we would benefit from that and we also have more loans repricing. A lot of our loans are tied to 75% of our book or more is tied to treasuries and those even short-term rates come up, it looks like the yield curve is trying to correct itself a little bit and those treasury rates are higher. So as that book re-prices, we should benefit.
Rich Dutton: So, just to kind of give you some raw numbers, a little over 25% of our book is floating daily, Tim. So then, and we started out the year we did a deep dive and we had about $140 million that we're going to reprice in 2024, of which only 15 million of that was repricing in the first quarter. So when Dennis mentioned earlier that we feel good about some of the repricing and some of the margin help in the second half of the year, out of that 140 million, 93 million of them is going to be moving in the second half of the year.
Operator: Your next question is from Manuel Navas from D.A. Davidson. Please ask your question.
Manuel Navas: I think a lot of my questions have been answered, but could you help to quantify the potential size of the wealth management opportunity? You said it was $75 million in the third quarter. Is there more after that or is it just that amount?
Rich Dutton: Manuel, this is Rich. Yes. It's just a transaction. Those deposits are sitting in our wealth department now. Once we get the mechanics of that squared away, we'll just move that money over to the bank. It's not going to be super cheap money, but it will be certainly less than what we borrow overnight at. I would add that, we mentioned those two initiatives, but there are a number of other initiatives that we think that we'll be able to add deposits. So we have a -- we're looking at all our public funds in the markets where we have branches. We're looking at schools and libraries and municipalities and county money and stuff. And we're proactively going to be reaching out and get a little more ground to be more aggressive get a little bit more of that funding. We have pulled a number of reports, for instance, with customers with lending with no or little loan or deposit relationships. We'll be targeting those customers and stuff. I think there's a number of initiatives underway in addition to the State of Ohio's Homebuyer Plus Program and that Wealth Program that we think can have an immediate impact on our funding costs.
Unidentified Company Representative: I wouldn't say immediate.
Dennis Shaffer: Over time, over the next year, I would say, as I mentioned in my remarks, over the next year.
Operator: [Operator Instructions]. Your next question is from Daniel Cardenas from Janney Montgomery Scott. Please ask your question.
Daniel Cardenas: Yes, good afternoon, guys. A couple of questions, on the fee income side. I mean, I appreciate all the color that you guys have given, and it sounds like you're working to try to patch up some of the holes that have been created. But should we think of a good run rate for you guys on a go-forward basis?
Dennis Shaffer: So, if we had $8.5 million for the quarter, again I think the wild card in there right now for us is mortgage bank. Again, we're coming into probably the best time for that. I'll let Chuck talk about it, but I guess the other wild card is at least the fees related to our leasing and again, more. I guess we're a year into it, but we're still, those are some pretty lumpy revenues depending on when pieces of equipment get sold and whatnot but I'll let Chuck talk about mortgage banking a little bit.
Chuck Parcher: Well, Dan, our first quarter production and mortgages, even though it doesn't show as well on that gain on sale, we did about 10 million more dollars in production in the first quarter this year as compared to the first quarter last year. We feel like we've got a really solid pipeline there. Again, I guess we're a year into it, but still those are some pretty lumpy revenues depending on when pieces of equipment get sold and whatnot. But I'll let Chuck talk about mortgage banking a little bit. We're still limited a little bit in Ohio and just the amount of inventory that's out there, it's just we've got a lot of pre-approvals, and people can't still buy houses. But we have put a concerted effort going into this year about getting more of our production being saleable as compared to our portfolio. Obviously, the construction piece and our CRA piece have to go on the books, but the rest of the stuff, we're really pushing toward more of a saleable product. And it seems like the consumer is getting a little bit more adjusted to having higher rates. I mean, a lot of people still are going to want to come off a 3% rate to get to a 7% rate, but people that actually have been holding off making a move or starting to come into the marketplace because they need to, and it doesn't look like the rates are going to come down in the real near distant future.
Dennis Shaffer: Well, in the spring and summer months, volume should be up. So optimistic there. Also, we did create a syndication desk at our leasing company, which I think will help us with some of that gain on sale because we'll be in a, that's going to be their sole function, to work our relationships and get us the best pricing so that our gains improve. The cadence will happen, get us in some sort of cadence where that's happening a little bit quicker and things. So that was another one of our initiatives that we looked at was, how do we maybe do a little bit better? We're going to incentivize who's running that area based on the bigger gains that he can get. He'll have a chance to earn a little bit of income and stuff. But that was another initiative that we undertook in the first quarter.
Rich Dutton: The only thing I'd add, we talked about the NSF fees being down $375,000, but our service charges were only down about $300,000. We made that up with higher service charges. That's something we put in place during the quarter.
Dennis Shaffer: We only had one month of benefit on our service charge. We did increase some service charges across the board and we really only had one month of March was the only real month of benefit there. So, we are trying to offset some of that lost revenue in various ways.
Daniel Cardenas: It sounds like maybe you can stay flattish in Q2 and then start building up from there modestly.
Dennis Shaffer: Yes.
Daniel Cardenas: Okay. And then how should we...
Chuck Parcher: I'm sorry. Dan, I can say the wild card on that a little bit too is just our swap income. It kind of bounces up and down depending on our borrower's appetite for. We did quite a few what I would call mid to short-term swaps in the fourth quarter. I think we generated $475,000 in the fourth quarter, a lot of people jumping on a three-year swap at that time. The way the yield curve has been bouncing around, it hasn't been as appealing to some of our borrowers. But depending on how the inversion of the yield curve goes over the next few months, we might be able to pick up a little more swap income too.
Daniel Cardenas: That can be lumpy, right?
Unidentified Company Representative: Yes.
Daniel Cardenas: Got it. All right. And then, tax rate for you guys, how should we be thinking about that?
Dennis Shaffer: We came in a lot lower than we thought it would this time. Our effective rate was just under 12% this quarter. But we've always kind of said 15% or 16%, and I think that's what I love. I don't know what the tax preference items were and I should, that they drove that down this quarter, but that's about as low as I we've ever seen. I should know the answer to that. If you wait until the very last, the question to ask me is one I didn't know the answer to.
Daniel Cardenas: No problem. I'll stop there and step back. Thank you guys.
Operator: There are no further questions at this time. I will now hand the call back to Dennis Shaffer for the closing remarks.
Dennis Shaffer: In closing, I just want to thank everyone for joining and those that have participated in the call today. Again, while we are not pleased with our first quarter, we are confident that our strong core deposit franchise and just our disciplined approach to pricing deposits and managing the company positions us well for future success. I look forward to talking to you all again in a few months to share our second quarter results. Thank you for your time today.
Operator: Thank you, ladies and gentlemen. The conference has now ended. Thank you all for joining. You may all disconnect.
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