Civista Bancshares - Q3 2023
October 27, 2023
Transcript
Operator (participant)
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 this 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. If you require operator assistance, please press Star then zero. At the conclusion of Mr. Shaffer'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.
Dennis Shaffer (President and CEO)
Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our Q3 2023 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 Q3 of $10.4 million or $0.66 per diluted share, which represents a 6.5% decrease from the Q3 in 2022, and net income of $33.3 million or $2.12 per diluted share for the nine months September 30th, 2023, which represents a 22.1% increase over our first nine months of 2022's performance. Our strong Q3 and year-to-date performance were set up by continued growth in our loan and lease portfolios, which grew at an annualized rate of 18% for the quarter and 10.9% year to date. This was organic growth, and I believe is indicative of the strength of our markets and our organization.
While we do not anticipate continuing to grow at this pace, we do anticipate continued growth at a single-digit pace for the balance of the year and into 2024. This growth in the higher rate environment led to higher net interest income for the linked quarter and year to date, which translated into record net earnings, which were up 22% over the same period in the prior year. In the face of funding pressures, our margin compressed, albeit at a slower pace than the previous quarter, coming in at 3.69% for the quarter and 3.88% year to date. Our yield on earning assets increased by 3 basis points during the quarter to 5.34% and was 5.29% year to date.
However, the cost of funding our balance sheet increased by 21 basis points during the quarter to 1.72% and was 1.47% year to date. During the quarter, we continued our measured approach to increasing rates paid on some of our higher-tiered demand deposit accounts and select CDs. This led to an increase in our cost of deposits, excluding brokered, by 18 basis points to 0.67% during the quarter. All in, our funding costs increased by 21 basis points from our linked quarter to 1.72%. During the quarter, we experienced what has become our typical decline in total deposits, which were down $147 million for the linked quarter.
I say typical because the decline was due to the seasonality of the deposits related to our tax business, which were down $187 million for the linked quarter. As we noted in our earnings release, we made the decision during the quarter to step away from our income tax refund business for 2024. Since the Q1 of 2021, when we mistakenly received $5.6 billion in stimulus payments from the U.S. government, we began receiving an increased volume of complaints from taxpayers looking for their stimulus payments. Since then, the amount of information required by our regulators to close out each complaint has increased.
While our business partner, TPG, handled the brunt of the research related to these requests, it has become apparent that our regulators' view of the program is changing, and we felt it better to step away before it became something that might inhibit future M&A activity. We will look to our new leasing division, other revenue opportunities and tighter expense controls to help us replace this lost revenue next year and into the future. Yesterday, we announced a quarterly dividend of $0.16 per share. This is consistent with our prior quarter dividend and represents a 24.2% dividend payout ratio based on our year-to-date earnings. Our efficiency ratio for the quarter was 66.5%, compared to 67.9% for the linked quarter, and 65.5% year to date.
However, if we were to back out the depreciation expense related to our operating leases from our new leasing company, our efficiency ratio would have been 62.6% for the quarter and 61.7% year to date. Our return on average assets for the quarter was consistent with our linked quarter at 1.12%, and our return on average equity was 11.83% for the quarter, compared to 11.58% for the linked quarter. Year to date, our return on assets was 1.24% and our return on equity was 12.88%.
During the quarter, non-interest income declined $1 million or 11.2% in comparison to the linked quarter and increased $2.4 million or 41.7% in comparison to the prior year Q3. The primary drivers of the decrease from our linked quarter were declines in lease residuals, fees from our income tax refund processing program, and other non-interest income. Consistent with prior years, income from our tax program is earned during the first and Q2s. The primary driver for the increase over the prior year's quarter was $1.9 million in lease revenue and residuals generated by our leasing division. Our leasing division and that revenue stream were not a part of Civista until the beginning of the Q4 in 2022.
Year to date, non-interest income increased $9.3 million or 49.1% in comparison to the prior year. The primary drivers of this increase were $6.2 million in lease revenue and residual fees from the addition of our leasing division in 2022. These fees are primarily made up of operating lease payments and gains on the sale of equipment at the end of the lease term. Also included in other non-interest income was the $1.5 million dollar bonus we received for entering into a new debit brand agreement during the Q1, and $707,000 in interim rent payments generated by our leasing division that we did not have in the prior year.
Wealth management revenues for the quarter were consistent with the linked quarter and declined slightly year to date compared to the prior year. While we anticipate that market uncertainty will continue for some time, we continue to view the expansion of these services across our footprint as an opportunity to diversify and grow non-interest income. Non-interest expense for the quarter of $26.8 million represents a 4.2% decline from our linked quarter, as we experienced improvement in nearly every line item of non-interest expense. Year to date, non-interest expense increased $19.1 million or 30.2% over the prior year. Much of this increase is attributable to growth from our acquisitions of Communibanc and VFG in the third and Q4s of 2022.
Our compensation expense increased $7.5 million or 20.4% over the prior year. The bulk of the increase is due to $6.1 million in additional salary, commissions, and benefits attributable to new employees from last year's acquisitions. The balance of this increase is attributable to normal benefit and merit increases. While we do have seven additional branch offices as a result of our Community Bank acquisition, the $7.2 million increase in occupancy and equipment expense was primarily due to an increase in depreciation expense on equipment related to our new leasing division. Equipment under an operating lease is owned and depreciated by Civista until the end of the lease term. Depreciation related to operating leases was $6.1 million year to date.
The increase in other non-interest expense was primarily due to a $595,000 provision for credit losses on unfunded loan commitments. That was a new expense category resulting from our adoption of CECL in January. Like many in the industry, we experienced an increase of $353,000 in bad check losses year to date. We also experienced $608,000 of increases in a number of other expense categories related to our new leasing division. Turning to the balance sheet. Year to date, our total loans have grown by $208.2 million, which includes $32.9 million of loans and leases originated by our leasing division. This represents an annualized growth rate of 10.9%....
A number of banks in our markets have curtailed their lending active efforts, which we view as an opportunity. Opportunity for new and expanded lending, opportunity to increase our spreads on those loans, and opportunity to require new and increased compensating deposit balances. While we experienced increases in nearly every loan category, our most significant increases were in non-owner occupied CRE, residential real estate loans, and lease financing receivables. The loans we are originating are virtually all adjustable rate loans, and our leases all have maturities of five years or less. Loans secured by office buildings make up 5.5% of our total loan portfolio. These loans are not secured by high-rise office buildings, rather they are predominantly secured by single or two-story offices located outside of central business districts.
Along with year-to-date loan production, our undrawn construction lines were $239.5 million at September 30th . We anticipate loan growth to moderate to a low single digit rate for the balance of 2023 and into 2024. On the funding side, total deposits increased to $175.8 million, or 6.7% since the beginning of the year. However, if we were to back out noncore tax program and brokered deposits, our deposit balances declined 1% year-to-date. When compared to what we are seeing across the industry, we believe this illustrates the strong relationships we have with our commercial and retail customers. Our deposit base is what we would term as fairly granular, with an average deposit account excluding CDs, approximately $26,000. Non-interest bearing demand accounts continue to be a focus.
Excluding tax-related and brokered deposits, non-interest-bearing deposits made up 30.2% of the remaining total deposits September 30th. With respect to FDIC-insured deposits, excluding Civista's own deposit accounts and those related to the tax program, 14.5% or $404.5 million of our deposits were in excess of the FDIC limits September 30th. Our cash and unpledged securities September 30th were $430 million, which more than covered these uninsured deposits. Other than $361.1 million of public funds with various municipalities across our footprint, we had no concentration in deposits September 30th. September 30th, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program, was 101%.
As I mentioned, we are having success requesting additional deposits and compensating balances from our commercial customers, and we will continue to be disciplined in how we price our deposits, and we will take advantage of brokered funding, funding when we think it makes sense. We believe our low-cost deposit franchise is one of Civista's most valuable characteristics, contributing significantly to our strong net interest margin and overall profitability. At September 30th, all of our $595.5 million in securities were classified as available for sale and had $93.1 million of unrealized losses associated with them, which puts pressure on our tangible common equity. At quarter end, our tangible common equity ratio had declined to 5.5%, as compared to 5.83% at December 31st, 2022.
Despite this decline, our Tier 1 capital ratio at September 30th was 8.79%, which is well above what is deemed well capitalized for regulatory purposes. Civista's strong earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic growth and potential acquisition. We continue to believe our stock is a value, and as such, we resumed our repurchase program during the Q3. During the quarter, we repurchased 84,230 shares of common stock for $1.5 million, with an average price of $17.77 per share. This represents all of our repurchase activity year to date. We have an authorization of approximately $12 million remaining in our current repurchase program.
While our capital levels remain strong, we recognize our tangible common equity ratio screens low and will balance our repurchases and the payment of dividends with building capital to support growth. Despite uncertainties associated with the economy and the expense pressures our borrowers face, our credit quality remains strong and our credit metrics remain stable. We did make a $630,000 provision during the quarter, which was primarily attributable to loan and lease growth.
Our ratio of allowance for loan losses to loans improved from 1.12% at December 31st, 2022, to 1.28% at September 30th, reflecting growth and our adoption of CECL during Q1. in addition, our allowance for loan losses to non-performing loans increased from 261.45% at December 31st, 2022, to 308.52% at September 30th. In summary, although we experienced margin compression, we continued to generate strong earnings, and our margin remains strong. While we experienced exceptional organic loan growth during the quarter, we anticipate a slowdown in loan growth as we finish out the year. While we continue to examine and stress our portfolios, we have seen no material deterioration in our credit quality.
Our focus continues to be on creating shareholder value, which is evidenced by the year-over-year increase in our earnings per share, and hopefully will eventually be rewarded. Thank you for your attention this afternoon, and now we will be happy to address any questions that you may have.
Operator (participant)
We will now begin the question and answer session. To ask a question, you may press Star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Nick Cucharale with Hovde Group. Please go ahead.
Nick Cucharale (Director of Equity Research)
Good afternoon, everyone. How are you?
Dennis Shaffer (President and CEO)
Good. Hi there.
Richard Dutton (SVP and COO)
Welcome back, Nick.
Nick Cucharale (Director of Equity Research)
Thank you. Just wanted to clarify the loan growth outlook. Are you suggesting that early indications are for a slowdown in loan growth for 2024 to a low single digit pace? Did I hear that correctly?
Chuck Parcher (SVP and Chief Lending Officer)
Yeah, I'd say low to mid single digits. I mean, I would say, you know, ballpark 5% maybe, Nick, from that perspective, you know, somewhere in that range, I would think. We're seeing... Obviously, loan growth has been great. Our pipelines are really strong right now, but we just, we're starting to see some slowness from the economy.
Dennis Shaffer (President and CEO)
And Nick, I think some of it will be us being a little bit more selective. You know, we have to push our interest rates. We got to get our spread, because, you know, our loan to deposit ratio is so high, so we have to push our spread and, you know, those spreads are widening for us, so we anticipate that higher rate environment will slow lending activity as well.
Nick Cucharale (Director of Equity Research)
Yeah, makes sense. Just, just to pivot over to expenses, was there anything irregular in the results that drove the outperformance relative to the guidance and any sense of where that may shake out in the Q4?
Richard Dutton (SVP and COO)
I don't know if I'd use the term irregular, but yeah, I think in the Q4, what we did, we had, I think it was, we're self-insured for health insurance, and it's hard for us not to do what the actuaries tell us to do until we get close to the end of the year, and our employees tend to be a little more healthy, I guess, than what the actuaries thought they were going to be. So we backed down. That was the big, I guess, decline in the compensation number in the Q4, was that we kind of reduced the accrual, Nick, on health insurance. I think I told you guys $28 million would be a run rate last quarter. It looks like you guys heard me.
I would tell you that a good run rate for the Q4 is probably $27.5 million. I don't know that I would want to go into next year. It, there's a couple things moving around, but, but I think that's a good number for the Q4, and it won't be a whole lot different than that. Again, we do raises, merit raises the first part of April, so that they're not really impacting the Q1. And we've gotten some pretty favorable pricing on our health insurance, the reinsurance piece of it, that we use to kind of base our expense on. In fact, we had no increase during that renewal, which I thought was kind of phenomenal. But anyway, those are the big things, Nick.
Nick Cucharale (Director of Equity Research)
Yeah, that's great color. Historically, the Q4 is an especially strong period for the leasing business. Is your expectation that you see a material pickup in sales and lease revenue during the Q4 relative to the September period? And if so, can you help us quantify that impact?
Dennis Shaffer (President and CEO)
We do anticipate it to increase. You know, we were just on a call with them yesterday, Chuck. It looked like, you know, they're going to double what they did in September. So,
Chuck Parcher (SVP and Chief Lending Officer)
Yeah, I think we probably need to get back with you, Nick, on a quantification number, but we do expect, you know, higher production and output for the leasing division in the Q4.
Nick Cucharale (Director of Equity Research)
Appreciate that. And then lastly, do you expect to take any charge, given your announcement that you're going to be exiting the tax business?
Dennis Shaffer (President and CEO)
No.
Richard Dutton (SVP and COO)
No charge.
Dennis Shaffer (President and CEO)
No, yeah.
Richard Dutton (SVP and COO)
I mean, it'll just be that the revenue that we incurred, you know, or earned, I guess, in each of the first two quarters for the last number of years, that just goes to zero.
Nick Cucharale (Director of Equity Research)
Yep. It's the income statement effect then. Okay.
Dennis Shaffer (President and CEO)
Yeah. In order to replace that income, I think we've got, we think we have opportunity through our leasing division, as well as, we have current revenue. We've identified a few revenue opportunities within our existing products and services. And then I think, you know, we'll, we'll have, you know, we're, we're higher expense controls as we move into next year. So we're still working through the budget, so we really can't quantify any numbers there, but we're looking to, you know, kind of make it a neutral, as neutral of an impact as possible.
Chuck Parcher (SVP and Chief Lending Officer)
Thank you for taking my questions.
Dennis Shaffer (President and CEO)
You bet. Thank you, Nick.
Operator (participant)
The next question comes from Terry McEvoy with Stephens. Please go ahead.
Terry McEvoy (Managing Director and Research Analyst)
Hey, guys. Good afternoon.
Dennis Shaffer (President and CEO)
Good afternoon.
Terry McEvoy (Managing Director and Research Analyst)
Dennis, I think your comments on the income tax refund business and the press release were pretty clear, as is the $2.4 million of fees. What amount of deposits do you still have on the balance sheet connected to this program, and when do you expect them to completely run off? And, that runoff, I noticed the uptick in FHLB or short-term debt. Will that level kind of be consistent or potentially grow from here?
Dennis Shaffer (President and CEO)
Yeah, we'll maintain some of those deposits. There's just a certain percentage that sticks around, you know, that we'll have to shed over the next five, you know, five years or so. But, Rich, do you have the balances there? Yeah. At September 30th, Terry, we had $73.4 million on our balance sheet. And I think at the beginning of the year, that number was... I want to say $40 million. I might not be exactly right, but it's close. And that's that number that Dennis said that, you know, for whatever reason, and it's a small percentage of folks that ask for us to give them their refund via check.
And then I don't know if they died or lost the check or whatever, but those checks, percentage of just don't ever get cashed, and those will remain on our balance sheet again for what is typically five years. Each state's a little different, but I'd say for the most part, that'll, that'll run out or spin down over the next five years.
Terry McEvoy (Managing Director and Research Analyst)
Where were the peak imbalances this year? Where did they peak out? Any guess or any feel there?
Dennis Shaffer (President and CEO)
Oh, yeah. I mean, I, I think the average, you got me flipping through my notes here. We had about $174 million in reduction, I think, in, in tax deposits for the quarter so-
Terry McEvoy (Managing Director and Research Analyst)
Yeah.
Dennis Shaffer (President and CEO)
So the year-to-date average, Terry, was $169 million through the first three quarters. It peaks, as you would think, in the middle of the Q2, right after, you know, March-ish kind of thing. That's when most of it comes through. But then that money, Terry, was moving in and out much quicker the last two years than it had the previous, say, five years, for whatever, for whatever reason. We really didn't know, but, you know, our funding as we move forward is going to have to rely on more brokered and, you know, FHLB borrowings and things like that. And we hope to offset that funding by pushing our loan yields higher. We think we can do that just because there's been a number of banks that have gone to the sidelines.
You know, the big banks generally fear recession, so they kind of go to the sidelines, and then there's a number of other banks that I think are in the same situation. The balance sheets are pretty levered up, and they've chosen to stop lending. We're not going to stop lending, but our lending will probably slow just because we've got to push rates, those spreads higher in order to do some of those deals. But we view it really as an opportunity to pick up core deposits, and other deposit relationships, because if we're going to do the loans and no one else is lending, we're going to require, you know, much more of those deposits or all of those deposits.
Terry McEvoy (Managing Director and Research Analyst)
Makes complete sense. The bad check loss, is that just a one-off situation? Is that just what you're seeing across the bank, which I think is consistent with the industry, and/or, and do you think that level continues from here on the expense side?
Dennis Shaffer (President and CEO)
We wish it was one. There are no big ones, but there, yeah, it's just a phenomenon that I think we're all in the industry trying to figure out. I mean, if we could get everybody to switch over to Positive Pay, that would be a huge help for us. And our treasury management folks, I tell you what, they've been selling the heck out of them, but apparently, they're just not selling fast enough. Well, we just, we're trying. We have a big campaign, awareness campaign, that we're doing on social media. We're doing it through our digital site, our online banking, just to make our customers aware. But fraud is really prevalent. We are working along with a number of other banks, with our banking associations here in Ohio, and our regulators.
I was at a regulatory meeting three weeks ago, and this was a topic of discussion, but you know, we just got to raise the level of awareness, you know, for all of our customers, because the fraud piece of it is really picked up throughout, you know, throughout our industry.
Terry McEvoy (Managing Director and Research Analyst)
Maybe one last one. The decision to exit the income tax refund business, as you mentioned in the release, might get in the way of a future bank, bank M&A. So it sounds like that was part of the decision, on top of the number of complaints. So level maybe, Dennis, conversations you're having with potential partners. Clearly there's some interest rate marks and financial obstacles to get over, but what's your outlook for bank M&A for Civista?
Dennis Shaffer (President and CEO)
Well, I think, you know, I think it's tough right now, just as you mentioned, just, you know, to do any type of M&A, given where stock prices are and, and, you know, loan marks and, and marks on security portfolios and, and things like that. So, you know, it's just tough to make that math work. We are continuing to have dialogue, and we're meeting with potential partners. You know, so, you know, those discussions are ongoing. I just think it makes it, whether you're a buyer or a seller, the math is really hard to do right now. We have looked at a couple of smaller deals that were announced earlier in the year. We just couldn't make those, you know, the math work. And, you know, I don't see that easing up.
You know, in the near term, but we have to continue with the discussions because, you know, the minute you stop, you kind of lose that, you know, a little bit of that relation, you know, maybe, you know, that relationship and, and stuff. So I just think you have to continue those discussions and because, you know, certain banks are going to be under more pressure than we are. And, you know, they're gonna want, you know, want to partner up, and we want to make sure we're top of mind. So we'll continue to have meaningful discussions with people that we view as good partners. Great. Thanks for taking my questions. Have a nice weekend. Okay. Thanks, Terry.
Operator (participant)
Again, if you have a question, please press star then one. The next question comes from Tim Switzer with KBW. Please go ahead.
Tim Switzer (VP and Equity Research Analyst)
Hey, good afternoon. I'm on for Mike Perito. Thanks for taking my question.
Dennis Shaffer (President and CEO)
Hi, Tim.
Tim Switzer (VP and Equity Research Analyst)
First off, do you guys have what the purchase accounting impact was to the margin this quarter? I think last quarter was around 8 basis points, and had some, like, prepayments. I'm wondering if that settled down at all.
Dennis Shaffer (President and CEO)
It's almost identical. We computed it at seven basis points this quarter, Tim.
Tim Switzer (VP and Equity Research Analyst)
Okay. Is that, like, kind of a good run rate going forward, or should it move back down once prepayments moderate?
Dennis Shaffer (President and CEO)
You know, I would use that until we tell you different. How about that? So if you're wrong, you'll only be wrong for a quarter.
Tim Switzer (VP and Equity Research Analyst)
Sounds good. And could you guys talk about your expectations for the NIM going forward? You know, I'd expect a little bit of, you know, moderation on the compression still next quarter or two, but, like, when do you think you could really trough here?
Dennis Shaffer (President and CEO)
Well, I think one thing I'd like to say, and to kind of set the table, is that I think as we've increased our funding, a little more reliant, not reliant, but we've not reduced the deposits that we have. I mean, they've only down, like, $0.10, 1%, but we've got more overnight borrowing, and we've got more brokered, short-term brokered CDs. Our balance sheet has gotten more neutral than it was. We used to talk about being asset sensitive. It's really pretty well balanced. When we ran our model at the end of Q3 and looked out, rates up, it's really flat, you know, for the first at least 100 basis points movement. I'd be surprised if you think rates are going to go up more than a 100 basis points.
And rates down, for each quarter point down, our model shows our NIM compressing at something less than 5 basis points for every quarter point move. So again, are we at the trough? I guess the model says we are. I guess the other thing I would say is if our margin for the quarter was 3.88, or well 3.60. 3.69, and our margin year to date was 3.88, I mean, that would indicate that maybe there's still some room for it to kind of compress a little bit, but nothing like we've experienced, I don't believe, in the first, or the last two quarters. Yeah, we may see similar impact in the Q4, just because of that reliance on the, the brokered and stuff.
But we really don't, you know, as we get through that, we think it's trough. We, I'm surprised, you know, as I talk to other banks, we haven't given up all the margin. You know, if you look back at the end of 2021, our margin was 3.47. So, you know, I think we haven't given all that margin back up, so, you know, we may, you know, I think we were, our deposit beta didn't move as quick the first two quarters as it did last, the last quarter and, or I'm sorry, the Q4 of 2022 and the Q1 of 2023, our deposit beta didn't move like other banks did.
It did then start moving much more rapidly in the second and Q3, and we will probably have further compression here into the Q4.
Tim Switzer (VP and Equity Research Analyst)
Okay. Okay, so at least another quarter or two of compression and possibly-
Dennis Shaffer (President and CEO)
Right.
Tim Switzer (VP and Equity Research Analyst)
-stabilize. Okay. Yeah, that makes sense. And the last question I had was, you guys stepped back in and started doing repurchases again. You made the comment that you like the value of your stock here. You know, any insight you can give us on if you'll continue to do that and use the rest of your authorization over the rest of the year and into 2024?
Dennis Shaffer (President and CEO)
Well, you know, I think as I mentioned in the comments, you know, we just recognize that that Tangible Common Equity ratio is, you know, it just, it just screams low, and the ratio is lower this quarter than it was the previous quarter. So I think, you know, it makes, you know, repurchasing your stock a little bit tougher. But we'll continue to, you know, be mindful of that and try to balance the repurchases and the payment of dividends with building capital and support growth. We, you know, I don't anticipate repurchase activity to really, you know, out of the levels it has been for the last couple of years. Yeah. So I think it'd be tough to burn through that authorization. Tim, I want to make one clarification.
Dennis said he thought it was of value. He did not say he liked where our stock price was. That's right.
Tim Switzer (VP and Equity Research Analyst)
Understood. Understood. Well, that's all for me. Thank you, guys. Have a good weekend.
Dennis Shaffer (President and CEO)
Okay. Thanks, Tim.
Operator (participant)
The next question comes from Manuel Navas with D.A. Davidson. Please go ahead.
Manuel Navas (SVP and Equity Research Analyst)
Hey, thanks for the comments today. Just wanted to follow up on the NIM a little bit. Are you seeing similar compression to the Q3 and the Q4 or Q1, or is that compression going to become a little less as you pursue other deposit opportunities? Can you just kind of clarify that a little bit, that progression?
Richard Dutton (SVP and COO)
Well, I think the compression was a whole lot more from one to two than it was from two to three. And I think what we're saying is probably that 17 basis points of compression that we saw in Q3 or over the course of Q3 is probably a good barometer of what we might anticipate.
Dennis Shaffer (President and CEO)
For Q4.
Richard Dutton (SVP and COO)
For Q4.
Manuel Navas (SVP and Equity Research Analyst)
Right. And then perhaps a little bit less compression into next year?
Richard Dutton (SVP and COO)
Correct.
Manuel Navas (SVP and Equity Research Analyst)
Is that-
Richard Dutton (SVP and COO)
Correct.
Manuel Navas (SVP and Equity Research Analyst)
And then at the point, if we have no more hikes and we're staying at 5.50 Fed funds for into 2024, is there a point in 2024 where you could start to see the NIM inflect, or would it just stay stable after it's done compressing?
Richard Dutton (SVP and COO)
I think it'd be more of a stable kind of a scenario, Manuel. We're, you know, 100% loaded up-ish, so that makes it, there aren't a whole lot of levers to pull, and we're every bit of growth that we have, incrementally, we got to go out and fund it, and that makes it hard to expand.
Dennis Shaffer (President and CEO)
For sure. And our modeling kind of shows that rates up, rates down, it's pretty neutral.
Richard Dutton (SVP and COO)
The only positive part right now, Manuel, is that, you know, we are slowly seeing, as mentioned earlier, we're slowly seeing our loan rates increase, you know, month-over-month from a production perspective. And obviously, all the ones that roll right now are rolling at significantly higher prices.
Manuel Navas (SVP and Equity Research Analyst)
Okay. Can you talk a little bit about kind of where you're focusing on for deposit gathering? Because I'm sure that's kind of a wild card for you, that you could have less wholesale funding if all the focus initiatives that you have out there on the deposit side will outperform.
Dennis Shaffer (President and CEO)
Yeah, a couple of things there. You know, one, the commercial deposits that we mentioned, you know, we're really pushing hard to say, look, we're, you know, with certain banks not lending, we're saying, if we're going to do your deal, we got to have all these deposits. So, you know, we need those compensating balances.
Richard Dutton (SVP and COO)
And we're having success.
Dennis Shaffer (President and CEO)
Yeah, and we're having pretty good success with that. We're having pretty good success with that. So, you know, that's one, that's one focus. We have streamlined our small business, the way we process small business loans. And, that is set to kick off here in the Q4, and we think that will make it easier for our people to, you know, kind of process, you know, go after those loans and process those loans. We'll also look to almost check out a micro, a micro loan out through our retail division, which we don't have, because a lot of those small business loans are self-funding.
So, you know, those are two areas where we're really focusing on, and then we continue to work on our digital app to get you know, we're not fully maximizing its capabilities yet. But we'll continue to work on that to add differentiating services that may drive people to that app. And, you know, we can open accounts through that app and things like that. So those are a couple of things that we're working on to try to gather additional deposits.
Manuel Navas (SVP and Equity Research Analyst)
That's, that's great. Just shifting over, the equipment leasing growth seemed to be a little bit less this quarter. Just, is that still coming on at 9% yields? And are the expectations pretty much unchanged for the year?
Dennis Shaffer (President and CEO)
The yields are higher. The yields for at least September were 10%.
Manuel Navas (SVP and Equity Research Analyst)
Great.
Dennis Shaffer (President and CEO)
You know, as Chuck indicated on the commercial side, you know, even yields that are going on in October have made an increase since the September thirtieth rate. So, yeah, volume was a little bit less than we had anticipated for that Q3, but pipelines are really good. So we do, you know, we do anticipate that volume in the leasing group to be up quite a bit in the Q4.
Richard Dutton (SVP and COO)
Probably just a little bit less, but probably just a touch less, Manuel, than what we probably guided for the full year, but we think we'll close the gap here in the Q4.
Manuel Navas (SVP and Equity Research Analyst)
You can always choose to sell more of that if you have any balance sheet constraints.
Dennis Shaffer (President and CEO)
Right. That's, that's exactly right. You know, we are getting paid less on it, for the, you know, the people purchasing it, so we try to weigh that. But, you know, yeah, we, you know, we may end up having to do that. Right now, we modeled it going in and keeping 50% and selling 50%. That's kind of what made the earn back numbers work. You know, we felt made it work, and so far, we've been sticking to that, but we may have to shift course depending on liquidity needs.
Manuel Navas (SVP and Equity Research Analyst)
Okay. I appreciate the comments. Thank you very much.
Dennis Shaffer (President and CEO)
Thank you.
Operator (participant)
The next question comes from Daniel Cardenas with Janney. Please go ahead.
Daniel Cardenas (Director and Equity Research Analyst)
... Hey, good afternoon, guys.
Dennis Shaffer (President and CEO)
Hey, Dan.
Daniel Cardenas (Director and Equity Research Analyst)
You had mentioned on the call that, that $2.4 million revenue hole was gonna be plugged through increasing your leasing and some revenue opportunities within your, your current products and services and, and some expense controls. I guess, if you had to assign percentages, how, how would that work out, and how quickly do you think you can, you can fill that, that hole?
Dennis Shaffer (President and CEO)
Well, we hope to gain a chunk of it through the leasing group because as they became, you know, they were an unregulated, privately held company, and so we had additional expenses in there, you know, consultants that we've had to hire. We had to, you know, have, like, you know, some of, you know, which included accountants and IT people and different things. That, you know, that should be, you know, behind us for the most part. So we hope to pick up some there. We hope to build a little bit more cadence now. You know, I can tell you the activity the last four or five months has been much better than the first four or five months of the year, Dan.
You know, if we just continue now to do what we're doing, we're gonna make up those first four or five months where we weren't really extremely profitable in that, with that group. Just because we were, you know, they were kind of sidetracked on other things, and we had additional expenses, and the rates were moving up and, you know, just getting everybody on board. We do think we'll be able to make up a good chunk of that with the leasing group. There's some expenses that go away on that side. We've identified some expenses on our side, you know, things like overtime and things like that, that we think we can control a little bit more.
So we've identified, you know, some expense things and then, you know, just, you know, through normal, you know, products and services that we have, Chuck has led a revenue enhancement project team that. And they've come up, you know, we've had people from all over the bank, and they've come up with some dollars there as well. So, you know, I would say, you know, maybe half of it's gonna come from the leasing side, and then the other half from revenue enhancements and from expense saves. And that's my best guess right now. Again, we're working through the budget, so, but, you know, that's our best guess right now.
Daniel Cardenas (Director and Equity Research Analyst)
Right. Right. And do you think that this is, that the timing on this, that this can be done in 2024? Or do you think that's gonna take until 2025 before you kind of hit full stride there?
Dennis Shaffer (President and CEO)
No, we think we can get that, we want to, you know, you know, some, some of the things involve sending disclosures and things like that. Those are, those are really set to go out in December, so, we hope to be hitting the ground running in, in January with a lot of this.
Daniel Cardenas (Director and Equity Research Analyst)
Wonderful. Good, good. And then, just jumping over to the balance sheet quickly. Can you give me some color as to how much of your securities portfolio is scheduled to mature here in the Q4? And how would those proceeds be put to work, on the lending side, or do those get put back into the securities portfolio?
Dennis Shaffer (President and CEO)
A little bit of both. I'm trying to get to the page. So we're scheduled for, what? almost $30 million that'll mature in the next quarter, in the Q4. And probably two-thirds of that is at our investment subsidiary. Those proceeds, when they mature, probably stay in the investment portfolio. We've got another third of that that's in the bank, and when those mature, they have been maturing over the course of the year. And as those mature, those are used to fund loans and/or pay off borrowings. And Rich and I were just talking about some of that, Dan, too, even at the investment sub, you know, there are certain tax implications.
We're gonna run the math to see what those tax implications are because, you know, it may, it, you know, it may be better for us just to utilize those funds to fund some of this loan growth and stuff, or to pay down borrowings or stuff like that. So we're running, you know, we're working on that as well. We just don't have an answer for you there. But Rich is right. So far, we've said, "Hey, let's just reinvest those because of the tax implications," but we're rerunning the math on that.
Daniel Cardenas (Director and Equity Research Analyst)
Got it. Okay. Good, good. And then, on your credit, I mean, credit quality looks good. How are watchlist trends, directionally, what were they looking like here in Q3? And what areas are you guys kind of watching a little closer today than you were, say, you know, two or three quarters ago?
Chuck Parcher (SVP and Chief Lending Officer)
Yeah, Dan, this is Chuck. I mean, knock on wood, our metrics continue to be really stable, and we really feel really good about the portfolio. Obviously, kind of like everybody else, we're really watching office. You know, we don't really have any, per se, any concentration in downtown office. Most of our offices is suburban office, you know, that one, two, three-story building in Suburbia. So we're not really seeing a lot of strain there yet, but we're watching it closely. You know, what we're really seeing a lot of really nice growth is the multifamily piece across, you know, our major metropolitan areas in Ohio, and they can't build units fast enough in Columbus, et cetera. So we feel good about that piece of it.
You know, all in all, I would tell you that we don't have a lot of concern right now, but, you know, like everybody else, we're watching a little closer.
Dennis Shaffer (President and CEO)
Yeah, the watchlist has been fairly, you know, the migration there. It's been pretty neutral because, you know, we've added a couple, but then a couple have either paid off or upgraded. So it's been, you know, from a, from a number of loans and from a dollar standpoint, it's pretty neutral.
Daniel Cardenas (Director and Equity Research Analyst)
Okay, good. And then, last question for me. How should we be thinking about your tax rate here on a go-forward basis?
Chuck Parcher (SVP and Chief Lending Officer)
The effective tax rate for the, I guess, year to date was 15.4%, and for the quarter was fifteen point two percent. So I, I'd say 15% would be what I'd put in my model.
Daniel Cardenas (Director and Equity Research Analyst)
All right, great. I'll step back. Thanks, guys.
Dennis Shaffer (President and CEO)
You bet. Thank you.
Operator (participant)
This concludes our question-and-answer session. I would like to turn the conference back over to Dennis Shaffer for any closing remarks.
Dennis Shaffer (President and CEO)
Well, thank you. In closing, I just want to thank everyone for joining and those that participated in today's call. The interest rate environment continues to be a challenge. However, our earnings do remain strong, our margin remains solid, and I remain optimistic that our disciplined approach to pricing and our solid core deposit franchise will continue to produce superior results. And I look forward to talking to you in a few months to share, share our year-end results. So thank you for your time today.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.