Civista Bancshares - Q4 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 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 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 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, Inc. I would like to thank you for joining us for our fourth quarter 2023 earnings call. I am joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank, and 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 fourth quarter of $9.7 million or $0.62 per diluted share, which represents a 20.5% decrease from our fourth quarter in 2022. Our full-year net income represented record earnings of $43 million or $2.73 per diluted share, which represents a 9% increase over our 2022 performance.

Our fourth quarter and year-to-date performance was set up by continued strong growth in our loan and lease portfolio, excluding the participation adjustment, which grew at an annualized rate of 15.5% for the quarter and 12.4% year-to-date. We added new and renewed commercial loans at a yield of 7.94% during the quarter and new equipment finance loans and leases at a yield of 9.80% during the quarter. Demand came from all areas of our footprint as we continue to strengthen market share in most of our markets and add new customers in our urban markets. While we do not anticipate continuing to grow at this pace, we do anticipate continued growth at a single-digit pace in 2024. Net interest income declined compared to our linked quarter but increased 13.9% for the year in comparison to 2022.

Competition for deposits is becoming a little bit more rational but is still very intense. This led to a 5 basis point increase in our cost of deposits, excluding brokered, to 72 basis points for the quarter. During the quarter, we began a measured approach to decreasing rates paid on some of our higher-tiered demand deposit accounts and select CDs. Excluding brokered and tax-related deposit accounts, our deposit balances were consistent compared to the linked quarter. All in, our funding cost increased by 47 basis points from our linked quarter to 2.19% as we funded much of our growth with wholesale funding. In the face of funding pressures, our margin compressed at the same pace as it did during the previous quarter, coming in at 3.44% for the quarter and 3.7% year-to-date.

Our yield on earning assets increased by 18 basis points during the quarter to 5.52% and was 5.35% year-to-date. However, the cost of funding our balance sheet increased by 47 basis points during the quarter to 2.19% and was 1.72% year-to-date. Non-interest income was up 8.6% for the linked quarter, primarily on higher swap fee income, and it was up 27.8% year-to-date, primarily on lease revenues. While we continue to complete our integration of our leasing division, we view them as a significant contributor to our non-interest income as we move into 2024 and beyond. Our tangible book value grew to $15.10 compared to $12.60 at September 30th and $12.61 at December 31st, 2022. Our TCE ratio increased to 6.36% from 5.49% at September 30th and 5.66% at December 31st, 2022.

This growth came from continued solid core earnings and a marked reduction in unrealized losses related to our securities portfolio. We will continue to focus on growing our TCE ratio during 2024. Last week, we announced a quarterly dividend of $0.16 per share. This is consistent with our prior quarter dividend and represents a 23% dividend payout ratio based on our 2023 earnings. Our efficiency ratio for the quarter was 64.1% compared to 66.5% for the linked quarter and 65.2% year-to-date. However, if we were to back out the depreciation expense related to our operating leases, our efficiency ratio would have been 59.8% for the quarter and 61.3% year-to-date. Our return on average assets was 1.02% for the quarter compared to 1.12% for our linked quarter, and our return on average equity was 11.34% for the quarter compared to 11.83% for the linked quarter.

Year-to-date, our return on assets was 1.16%, and our return on equity was 12.5%. During the quarter, non-interest income increased $698,000 or 8.6% in comparison to the linked quarter and decreased $1.2 million or 12.3% in comparison to the prior year fourth quarter. The primary drivers of the increase from our linked quarter were $454,000 in swap fees as borrowers took advantage of the inverted interest rate curve to lock in what they viewed as favorable rates. We also earned an annual $225,000 bonus from our debit brand partner that contributed to the increase. The primary driver for the decrease from the prior year's quarter was an $874,000 decline in lease revenue and residuals as the higher interest rate environment put pressure on our leasing division's production.

In addition, we recorded $345,000 less in gains on the sale of loans and leases originated by our leasing division as our buyers paid lower premiums as their balance sheets became less liquid. Year-to-date, non-interest income increased $8.1 million or 27.8% in comparison to the prior year. The primary drivers of this increase were $5.3 million in lease revenue and residual fees. This was the result of a full year's income from our leasing division, which we acquired in October 2022. These fees are primarily made up of operating lease payments and gains on sale of equipment at the end of the lease term. Also included in other non-interest income was a $1.5 million bonus we received for entering into a new debit brand agreement during the first quarter and $12.2 million 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 lease services across our footprint as an opportunity to diversify and grow non-interest income. Non-interest expense for the quarter of $25.3 million represents a 5.4% 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 $17.1 million or 18.9% over the prior year. Much of this increase is attributable to growth from our acquisitions of Comunibanc and VFG in the third and fourth quarters of 2022. Our compensation expense increased $7.2 million or 14.2% over the prior year.

The bulk of the increase is due to $5.2 million in additional salaries, commissions, and benefits attributable to new employees from last year's acquisition. The balance of this increase is attributable to normal benefit and merit increases. While we do have an additional seven branch offices as a result of our Comunibanc acquisition, the $6.7 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 $6.5 million year-to-date. The increase in other non-interest expense was primarily due to a $515,000 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 $400,000 in bad check losses year-to-date. Turning to the balance sheet, year-to-date, our total loans, excluding the participation adjustment, grew by $315.1 million, which includes $42.1 million of loans and leases originated by the leasing division. This represents an annualized growth rate of 12.4%. During our last call, I noted that a number of banks in our markets had curtailed their lending efforts, which created some opportunities for us to expand existing relationships and enter into some new relationships. As we move into 2024, we have noticed that the larger regional banks in our markets are becoming more active. We do not expect the rate of loan growth we experienced during the quarter to continue into 2024.

While we experienced increases in nearly every loan category, our most significant increases were in C&I, non-owner-occupied CRE loans, residential real estate loans, and lease financing receivables. The loans we are originating are virtually all adjustable-rate loans and leases, and all have maturities of five years or less. Loans secured by office buildings make up about 5.2% of our total 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. Our CRE portfolio remains well-diversified with no concentration risk by property type or by geography. Along with year-to-date loan production, our undrawn construction lines were $237.3 million at December 31st. W-e anticipate loan growth to moderate to a low single-digit rate in 2024. On the funding side, total deposits increased $365 million or 13.9% since the beginning of the year.

However, if we were back out non-core tax program and brokered deposits, our deposit balances declined 5.8% year-to-date. Our core deposit balances remain consistent from the linked quarter. Our deposit base is what we would term as 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 brokered deposits. Non-interest-bearing deposits made up 33.2% of the remaining total deposits at December 31st. With respect to FDIC-insured deposits, excluding Civista's own deposit accounts and those related to the tax program, 14.1% or $421.4 million of our deposits were in excess of the FDIC limits at December 31st. Our cash and unpledged securities at December 31st were $462.5 million, which more than covered these uninsured deposits. Other than the $336.5 million of public funds with various municipalities across our footprint, we had no concentrations in deposits at December 31st.

At December 31st, our loan-to-deposit ratio, excluding deposits related to our tax refund processing program, was 97.6%. Our commercial lenders, our treasury management officers, and private bankers are having success requesting additional deposits and compensating balances from our commercial customers. We will continue to be disciplined in how we price our deposits, and we will take advantage of brokered and wholesale funding sources 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 December 31st, all of our $620.4 million in securities were classified as available for sale. At year-end, the unrealized losses associated with our security portfolio improved from $93.1 million at September 30th to $54.5 million. At year-end, our tangible common equity ratio had improved to 6.36%, which was an 87 basis point improvement over September 30th.

Our Tier 1 leverage ratio at year-end was 8.75%, 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 acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is of value. During the year, we repurchased 84,230 shares of common stock for $1.5 million for an average price of $17.77 per share. All of our 2023 repurchase activity occurred during the third quarter. We have an authorization of approximately $12 million remaining on our current repurchase program. While our capital levels remain strong, we recognize our tangible common equity ratios scream low. We have stated publicly 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. Despite the 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 $2.3 million provision during the quarter, which was primarily attributable to our strong loan and lease growth. Our ratio of allowance for loan losses to loans improved from 1.08% at December 31st, 2022, to 1.30% at December 31st, reflecting growth in our adoption of Cecil during the first quarter. In addition, our allowance for loan losses to non-performing loans declined slightly from 261.45% at December 31st, 2022, to 245.66% at December 31st, 2023. As I conclude my remarks, I would like to thank our entire Civista team.

2023 was another challenging year, and once again, they showed me what it means to be a part of a team that cares about our customers, our communities, our shareholders, and most importantly, each other. I could not be more proud. Although our margin continues to be under pressure, we continue to generate strong earnings, and our margin remains relatively strong. 2023 was a year of exceptional organic loan growth, and while we do not anticipate growth at a similar pace in 2024, our markets do remain vibrant, and we expect to grow at a mid-single-digit pace. We will continue to examine and stress our portfolios, but so far, we have seen no material deterioration in our credit quality. In 2024, our focus will continue to be on creating shareholder value.

For 2023, in a tough interest rate environment, our earnings per share increased 5%, which we believe is indicative of our disciplined approach to managing the company. Thank you for your attention this afternoon, and now we will be happy to address any questions you may have.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Nick Cuchiarelli with Hovde. Please go ahead.

Speaker 8

Hey, guys. Good afternoon.

Rich Dutton (SVP and COO)

Hi, Nick Cuchiarelli.

Speaker 8

Just to start on the net interest margin, can you help us quantify the near-term outlook and then longer-term how your balance sheet reacts once the Fed starts cutting rates?

Rich Dutton (SVP and COO)

Well, Nick, this is Rich. The way our model projects it, rates down and rates up, really, it doesn't move much. I mean, I guess we've kind of hit that trough. The model says that for each 25 basis point cut in rate, we would anticipate about a two basis point contraction in our margin. And again, I guess our model has got it loaded the second half of the year, and I think we use the Blue Chip forecast to kind of run that model. And that's three rate cuts, I think, maybe I'm looking at Todd, maybe Q2, Q3, and Q4. There you go. Q2, Q3. That's a better answer, Nick. I will say, just to kind of give a little color, we did have a bucket of brokered CDs, $150 million-ish of CDs that matured or came due in December.

The cost of those CDs was about $530. We replaced those in December with a like amount, $150 million of CDs at a cost of $508. So we picked up about 22 basis points there. We've got another similar tranche or group of about $150 million of CDs that will roll off in March. The cost on those was $540. And if we were going to replace those today with one-year brokered CDs, it'd be at 5%. So we'd pick up another 40 basis points there. So if nothing changes and we didn't grow much, those are two real positive, I think, kind of impacts on our margin.

Dennis Shaffer (President and CEO)

Well, and then new loans are going on the books at higher rates. Existing loans are repricing at higher rates. And we have started to inch down some deposits, some of our CD specials, some of our just general money market rates and stuff. And we saw no real impact from that. We started that, oh, sometime mid-November. And we've done a couple of moves there, just small things to see if there'd be any impact. And so far, have not seen any real impact. So we'll continue to watch that, but I do think there's going to be some opportunity there.

Speaker 8

Okay. Great. And then in that same vein, you saw the opportunity on the loan side. And to your point, you utilized the brokered CDs. At the end of the year, this was pretty high historically relative to where you are, close to 17% of deposits. So your assumption is that you replaced that with core funding over the course of the year and drive that down, or are you at a peak in terms of brokered funding?

Rich Dutton (SVP and COO)

Yeah. I mean, I doubt that we're going to replace 100% of it, but certainly, we've got a number of initiatives in place to kind of transition away from brokered or non-core funding and back to something more in line with what we've done historically.

Speaker 8

Got it. And then on the leasing business.

Rich Dutton (SVP and COO)

Go ahead, Nick. Go ahead.

Speaker 8

Just a different question. Just on the leasing business, specifically on the Gain on Sale line, I appreciate your commentary on lower production due to the rate environment and lower premiums with your partners given liquidity constraints. How should we think about the pipeline there? And usually, the fourth quarter, obviously, you get a step up for tax reasons with your borrowers there. Just overall, your thoughts there.

Dennis Shaffer (President and CEO)

Well, we do think we're going to be able to improve on what we did in 2023 from our leasing group. I think rates dictate a lot of what's going on. Fourth quarter is usually their strongest quarter. So first quarter will probably be a little bit softer than what it was in that fourth quarter. But we spent a lot of time. They were an unregulated company, and we're a regulated company. And we spent a lot of time with consultants in there looking at their IT systems, looking at just compliance training, things like that that I think took away from sales. So we do expect to make up some additional income in 2024 that we didn't have in 2023.

Chuck Parcher (SVP and Chief Lending Officer)

Nick, this is Chuck. I would say from a budgeting perspective, we budgeted for them to be a little bit more production than last year, but nothing that's nothing that would really move the needle.

Speaker 8

Very helpful. And then just my last question on expenses, your thoughts on the run rate going forward? It looks like a little bit of volatility in this quarter relative to what you're expecting.

Rich Dutton (SVP and COO)

Well, and Nick, we've always kind of trued up our accruals at the end of the year. And probably, I don't know if sloppy is a technical term, but maybe we got a little sloppy and had a little more to true up at the end of the year than what we have traditionally done. I think we guided you guys to $27.5 million for the quarter, and we ended up coming in at $25.3 million. When we normalize everything, what we're guided to for the first quarter is about $28.4 million of expense. And you'll recall that our merit increases all go into effect in the second quarter. So there'll be a little bit of a jump there, maybe $28.7 million is what we're looking at. And that would be a decent run rate then for the rest of the year.

Speaker 8

Thanks so much for the color. I appreciate you taking my questions.

Rich Dutton (SVP and COO)

You bet.

Operator (participant)

Your next question comes from Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy (Managing Director)

Hi, guys. Good afternoon.

Rich Dutton (SVP and COO)

Hey, Terry.

Terry McEvoy (Managing Director)

Maybe just to start off, the New York Community Bank that's been in the headlines this past week, are you getting questions, concerns from any of your clients on your commercial real estate loans or your liquidity position?

Dennis Shaffer (President and CEO)

We really have not gotten hardly any. We've gotten no calls that I know of. Unlike when the bank failed in March, there was quite a few calls and stuff. But we've heard nothing so far with the New York Community Bank struggles and stuff.

Terry McEvoy (Managing Director)

That's good to hear. Next question, as you commented in the press, Dennis, you've had really good growth in multifamily, non-owner-occupied loans. Could you just maybe talk about what your developers are seeing in the markets in terms of rates, vacancy trends? And are you being a bit more cautious at all on your multifamily underwriting given those conditions?

Chuck Parcher (SVP and Chief Lending Officer)

Yeah, Terry, this is Chuck. I would say yes, we're being a little bit more cautious for sure in looking at it. But we've got some of the markets that we're really strong in, Cleveland, Columbus, and Cincinnati, and predominantly Columbus, they can't build units fast enough. And I would tell you that probably 80% of the deals that we're doing that we're doing buildup on as far as on a multifamily, the rental rates are coming in higher than what they were projected to be in the appraisal. So those markets are really, really strong still in multifamily.

Dennis Shaffer (President and CEO)

And I would say, Terry, too, I mean, as far as are we being a little bit more cautious, I think the interest rate environment's driving some of that because a lot of these deals, you have to have more equity into the deals to make the numbers work. And so that's putting, yeah, I think your smaller developers and even some of the midsize developers are going to the sidelines. So the guys that are doing the deals are your pretty well-heeled borrowers because they have that extra cash to put into the deals. We're a lot of times seeing 35% or so going into those multifamily deals to make them work.

Terry McEvoy (Managing Director)

And then thanks for that. And maybe one last one. When you put together the 2024 budget, any type of range you were thinking about for that lease revenue and residual income line? I know you talked about it earlier, but it is a growing part of your fee income stream. And just maybe get some insight in terms of how you're thinking for the full year.

Rich Dutton (SVP and COO)

You know what, Terry? If I gave you a number, I'd be kind of fudging. Let me look, and I'll get you a good number, and I'll get it out to all you guys, okay? I don't have that in front of me.

Terry McEvoy (Managing Director)

Okay. Appreciate that, Rich. Thanks for taking my questions.

Dennis Shaffer (President and CEO)

Thanks, Terry.

Operator (participant)

Your next question comes from Michael Perito with KBW. Please go ahead.

Speaker 9

Hi. This is Mike's associate, Andrew, filling in. Thanks for taking my questions.

Rich Dutton (SVP and COO)

Hey, Andrew.

Dennis Shaffer (President and CEO)

Hey, Andrew.

Speaker 9

Just a quick one here for me first. I was just wondering, was there any accretion impact on the margin this quarter? And if so, what would the core NIM have looked like for 4Q?

Rich Dutton (SVP and COO)

It was 6 basis points, which has been pretty consistent, I think, for the last number of quarters in terms of accretion impact. Take 6 basis points off of it, and that's what it would have been. I guess going forward, I don't see it changing over the next 4 quarters anyway.

Speaker 9

Great. Thanks for that. And then I appreciate all the color on the capital front. Obviously, the focus here is to kind of push back up towards that 7, 7.5 TCE. Broadly, with the repurchase kind of expiring here in May, I know you said you're going to be opportunistic, but maybe just a high-level comment on M&A. I know that's not the focus right now, but have conversations kind of started to return to the market here? And yeah, just any broad thoughts there would be great.

Dennis Shaffer (President and CEO)

I still think it's fairly quiet on the M&A front. I mean, everybody's talking, but there's a few banks that are struggling that I think would like to partner up. But they're just tough deals to do right now. The marks are so heavy. And just to get done and where banks are where we're trading at and other banks are trading at, I think those deals are hard to do. So for right now, we are laser-focused just trying to grow our capital, increase that TCE ratio because I don't see a lot happening over this first half of the year. So we're going to be laser-focused in getting that TCE ratio back in line.

Speaker 9

Great. Appreciate all the color. Thanks for taking my questions.

Operator (participant)

Ladies and gentlemen, as a reminder, should you have a question, please press star one. Your next question comes from Manuel Navas with D.A. Davidson. Please go ahead.

Manuel Navas (VP and Research Analyst)

Hey, good afternoon, guys.

Rich Dutton (SVP and COO)

Hey, Manuel.

Manuel Navas (VP and Research Analyst)

Do you have kind of an overall guide for fees? I guess it's in part driven by VFG trends, but just kind of do you have an overall expectation for fees that include them, include that business?

Rich Dutton (SVP and COO)

I'm looking. I guess what we're seeing for the line item that was lease revenue and residual, so that'd be the operating piece of it, that looks like it'd have a run rate of about $2 million a quarter. I think that's maybe a little bit better than what we did this year.

Manuel Navas (VP and Research Analyst)

Okay. Then the other pieces grow with industry trends?

Rich Dutton (SVP and COO)

They do. And they're kind of buried in interest income. I mean, they're not—you know what I mean? And then I guess other, as far as the selling of equipment at the end of a lease and whatnot, that's kind of buried in.

Chuck Parcher (SVP and Chief Lending Officer)

You're just talking leasing.

Rich Dutton (SVP and COO)

Right. Just talking leasing.

Chuck Parcher (SVP and Chief Lending Officer)

He's just talking leasing.

Rich Dutton (SVP and COO)

Right.

Chuck Parcher (SVP and Chief Lending Officer)

Is his question overall fees or just leasing?

Manuel Navas (VP and Research Analyst)

My question was overall fees, but I appreciate the lease itself.

Rich Dutton (SVP and COO)

Okay. I'm sorry. I'm sorry. Yeah. I had the lease on my mind.

Dennis Shaffer (President and CEO)

Go ahead. So I was going to say we probably will do fairly close to what we did this year in fees. We have overdraft fees that we had some overdraft reform, and we lose a little bit of overdraft income there. But we do think we're at least right now with the yield curve so inverted that we can pick up some swap fees. If rates move down even slightly, I think Chuck feels we've got some portfolio residential loans that we did put on the books that we probably can flip over into saleable loans, which also frees up a little liquidity there. So I think our guide is probably fairly close to that $37 million or so of non-interest income that we did in 2023.

Rich Dutton (SVP and COO)

Mr. Shaffer usually shoots a little high. I'd say that number's probably closer to $34 million. I don't know if it grows linearly.

Dennis Shaffer (President and CEO)

No, that's right because we got tax money in there.

Rich Dutton (SVP and COO)

Right. Right. Right. So I think if you had $8 million from the first quarter and $8.2 million, $8.7 million, and $9 million, I think that's the way we've budgeted it for the year. How about that?

Dennis Shaffer (President and CEO)

Oh, $34 million. That's right. Yeah.

Manuel Navas (VP and Research Analyst)

Okay. I appreciate that. I like the comments about the NIM with rate cuts, but just kind of for the next even more near term, you put on a lot of loans this quarter. Where do you kind of see the NIM going next quarter?

Rich Dutton (SVP and COO)

I mean, it might float a little higher. Again, just based on what we did on the funding side. Again, we put a lot of higher-yielding loans on in December and November. I don't know.

Dennis Shaffer (President and CEO)

Yeah. I think it stays about where it's at. We think it's pretty well troughed. But we hope to get some improvement there. We'll see because we are hopefully getting better pricing on the brokerage stuff. We're going to hopefully bring down some of the funding costs, which we've talked about. We've started to do and then with things repricing. So we're optimistic that we'll be able to improve there.

Rich Dutton (SVP and COO)

Yeah. I think we're going to see some pressure on the lending side, though, too, from that perspective. Fourth quarter, we felt like we had a lot of our competition seemed like they kind of went to the sidelines in the fourth quarter, kind of waiting. So believe it or not, in December, our commercial production, new and renewed, was over 8%, which I think is the first time we've eclipsed the 8% piece. We're seeing rates in the marketplace right now really fall back here mid-January with almost all the competition back in and a lot of the competition now going back to pricing off the treasury as compared to kind of pricing off where deposit costs are.

Manuel Navas (VP and Research Analyst)

I appreciate that commentary. Overall, I guess that also probably drives some of the loan growth commentary. But is there an amount of success on the deposit side that could give you some upside to low single-digit loan growth?

Dennis Shaffer (President and CEO)

Well, I think so. We're really focused on the funding side. I think that's going to be a big challenge not only for us in 2024, but for all community banks. So we're all faced with the same thing. We've got a number of initiatives underway, as Rich alluded to, some of those just we have scrubbed our existing loan portfolios, whether that's consumer or commercial. There are customers that don't have a deposit relationship or we know that have substantial other deposits. So we'll be putting a campaign around that to go after those customers. So that'll be one of our focuses to try to build core deposits.

We are in the process of identifying another bucket of cash-heavy clients that these cash-rich businesses like law firms or title companies, business and professional associations, and then trying to create a niche product to go after to try to get some of those deposits. We'll probably throw some more dollars at our treasury management area. We've had great success hiring commercial lenders who are pretty well connected with books of business. We've done that on the treasury side. I think we may want to do that some more and see if they can move over deposits. We're going to expand our digital deposit product offering. There's a number of initiatives, I think, to do that we're going to be embarking on throughout the year that will give us some opportunity to build upon our strong core deposit franchise.

Manuel Navas (VP and Research Analyst)

That's great. I appreciate it. I'll step back into the queue.

Operator (participant)

Your next question comes from Daniel Cardenas with Janney Montgomery Scott. Please go ahead.

Daniel Cardenas (Director)

Good afternoon, guys.

Rich Dutton (SVP and COO)

Good afternoon.

Daniel Cardenas (Director)

A couple of questions here. Your tax rate's kind of been jumping around throughout the year. What's kind of a good run rate to use for you guys on a go-forward basis?

Rich Dutton (SVP and COO)

What was it? 15 for the quarter? I mean, 15% or 16% is probably, I think, where we're kind of settling in at.

Daniel Cardenas (Director)

Okay. Thank you. And then I noticed a little bit of a creep-up in your non-performers this quarter. Can you give us a little color as to what was driving that in terms of was it one loan? Was it multiple loans? The section of the portfolio that it was coming from? And then also, what do watchlist trends look like for you guys?

Mike Mulford (Chief Credit Officer)

Hi. This is Mike Mulford the Chief Credit Officer. We had one loan relationship that moved to non-accrual. It was about $3.5 million. That was a big reason for the jump in the non-performings. And I missed the last part of your question.

Daniel Cardenas (Director)

Yeah. Just trying to get a sense of, well, for that one loan, was that a commercial loan? I'm assuming?

Mike Mulford (Chief Credit Officer)

Yes. Yes.

Daniel Cardenas (Director)

Okay. And.

Rich Dutton (SVP and COO)

Non-CRE loan.

Mike Mulford (Chief Credit Officer)

Non-CRE. Yeah. Non-CRE.

Rich Dutton (SVP and COO)

It's a C&I loan. Yeah.

Daniel Cardenas (Director)

Okay.

Rich Dutton (SVP and COO)

Because I think he asked about watchlist, and I think that's pretty stable.

Mike Mulford (Chief Credit Officer)

Oh, yeah. Yeah. The watchlist credits are pretty stable. Very few great changes for the quarter and no systemic issues that we're seeing right now.

Rich Dutton (SVP and COO)

We're also saying we're not really seeing much movement as far as some of our loans are repricing. We're not seeing a lot of pressure on those loans from the jump in interest rates causing cash flow issues. You always have a handful when you're looking at them. But all in all, it's been very stable. Knock on wood, it remains that way.

Daniel Cardenas (Director)

Okay. And then are there any particular segments in your portfolio that maybe you're tapping the brakes on as you come into 2024? Or is that not necessarily the case?

Mike Mulford (Chief Credit Officer)

I mean, obviously, like everybody else, we're very mindful of office and not to let office exposure get too high. We're watching the hotel piece of it, but we've pretty much stayed pretty much flat from a percentage basis point. In that as well. I think somebody earlier mentioned multifamily. We're still bullish on multifamily, but we are taking a closer look, and especially looking at communities, to see if they can sustain the growth of the multifamilies taking place. So other than that, I think we're probably being a touch more cautious, but we're not really shutting down any areas.

Daniel Cardenas (Director)

Okay. Perfect. Perfect. And then the last question I have is just, it looks like your home loan advances came down fairly substantially in the quarter. Did you guys do that through the broker deposits that you raised, or how was that achieved?

Rich Dutton (SVP and COO)

Yeah. That was exactly what it was. I mean, it was just it was cheaper to go out and get the broker deposits than it was to borrow it through the Federal Home Loan Bank. And generally, we try to keep the Federal Home Loan Bank stuff freed up because that's something that's readily available. So when we see inefficiencies or opportunities in other wholesale markets or the brokered market, we're always kind of looking at it. If it makes sense, we'll take down a chunk of financing there just because, again, it's economically to our advantage. And also just from a risk standpoint, we try to keep the Federal Home Loan Bank line as free as we can just in case.

Daniel Cardenas (Director)

How much capacity do you guys have left on that line?

Rich Dutton (SVP and COO)

I don't have that in front of me, but I'll have to get back to you. It's a lot.

Daniel Cardenas (Director)

All right. Great. I'll step back. Thanks, guys.

Operator (participant)

There are no further questions at this time. Please proceed.

Dennis Shaffer (President and CEO)

Okay. Well, thank you. In closing, I just want to thank everyone for joining us and those that participated in today's call. The interest rates environment continues to be a challenge. However, our earnings do remain strong, and our margin remains solid. I am very proud of the fact that for the year, we had record net income. We had year-over-year margin expansion, and we had positive earnings per share growth. And I'm sure there's a lot of community banks that can say that they had all three of those things. So I remain optimistic that our disciplined approach to pricing and our solid core deposit franchise will continue to produce superior results. And I just look forward to talking to everyone in the next few months to share our first quarter results. So thank you.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.