Civista Bancshares Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

Key Takeaways

  • Mixed Q3 results: Net income of $10.4 million ($0.66 per share) was down 6.5% year-over-year, but nine-month earnings rose 22.1% to $33.3 million ($2.12 per share).
  • Robust loan growth: Organic loans and leases grew at an 18% annualized rate in Q3 and 10.9% year to date, with management expecting single-digit growth into 2024.
  • Margin compression: Net interest margin narrowed to 3.69% (3.88% YTD) as funding costs rose 21 bps to 1.72%, partly offset by a 3 bp increase in yield on earning assets.
  • Exiting tax refund business: The bank will cease its income tax refund program in 2024 due to regulatory complexity, aiming to replace the $2.4 million fee income via leasing growth, new revenue initiatives and expense controls.
  • Capital priorities: Quarterly dividend held at $0.16 per share (24.2% payout) and share repurchases resumed ($1.5 million in Q3), while Tier 1 capital remains strong at 8.79% despite a decline in tangible common equity to 5.5%.
AI Generated. May Contain Errors.
Earnings Conference Call
Civista Bancshares Q3 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

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 Savista 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.

Operator

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 Savista Bancshares' website at www.civb.com. At the conclusion of Mr. Schaeffer's remarks, he and the Savista management team will take any questions you may have.

Operator

Now I will turn the call over to Mr. Schafer.

Speaker 1

Good afternoon. This is Dennis Schafer, President and CEO of Savista 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 Archer, 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 $10,400,000 or $0.66 per diluted share, which represents a 6.5% decrease from the Q3 in 2022. And net income of $33,300,000 or $2.12 per diluted share for the 9 months ended September 30, 2023, which represents a 22.1% increase over our 1st 9 months of 20 22's performance.

Speaker 1

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 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.

Speaker 1

Our yield on earning assets increased by 3 basis points during the quarter to 5.34% and was 5.29 percent 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%.

Speaker 1

During the quarter, we experienced what has become our typical decline in total deposits, which were down $147,000,000 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 $187,000,000 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 $5,600,000,000 in stimulus payments from the U. S.

Speaker 1

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 and 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 that represents a 24.2 percent dividend payout ratio based on our year to date earnings.

Speaker 1

Our efficiency ratio for the quarter was 66.5% compared to 67.9% for the linked quarter and 65.5 percent 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 percent year to date. Our return on average assets for the quarter was consistent with our linked quarter at 1.12 percent and our return on average equity was 11.83% for the quarter compared to 11.58 percent 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 $1,000,000 or 11.2 percent in comparison to the linked quarter and increased $2,400,000 or 41.7% in comparison to the prior year Q3.

Speaker 1

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 1st and second quarters. The primary driver for the increase over the prior year's quarter was $1,900,000 in lease revenue and residuals generated by our leasing division. Our leasing division and that revenue stream were not a part of Savista until the beginning of Q4 in 2022. Year to date, non interest income increased $9,300,000 or 49.1 percent in comparison to the prior year.

Speaker 1

The primary drivers of this increase were $6,200,000 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 $1,500,000 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.

Speaker 1

Non interest expense for the quarter of $26,800,000 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 $19,100,000 or 30.2% over the prior year. Much of this increase is attributable to growth from our acquisitions of CommuniBank and VFG in the 3rd 4th quarters of 2022. Our compensation expense increased $7,500,000 or 20.4% over the prior year. The bulk of the increase is due to $6,100,000 in additional salary commissions and benefits attributable to new employees from last year's acquisitions.

Speaker 1

The balance of this increase is attributable to normal benefit and merit increases. While we do have 7 additional branch offices as a result of our Commuter Bank acquisition, The $7,200,000 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 owed and depreciated by Savista until the end of the lease term. Depreciation related to operating leases was $6,100,000 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.

Speaker 1

Like

Speaker 2

many in

Speaker 1

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 $208,200,000

Speaker 2

which includes

Speaker 1

$32,900,000 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 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 experience increases in nearly every loan category. Our most significant increases were in non owner occupied CRE, residential real estate loans and lease financing receivables.

Speaker 1

The loans we are originating are virtually all adjustable rate loans and our leases all have maturities of 5 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 2 story offices located outside of central business districts. Along with year to date loan production, our undrawn construction lines were $239,500,000 at September 30. We anticipate loan growth to moderate to a low single digit rate for the balance of 2023 and into 2024.

Speaker 1

On the funding side, total deposits increased $175,800,000 or 6.7 percent since the beginning of the year. However, if we were to back out non core tax program and broker 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 at September 30.

Speaker 1

With respect to FDIC insured deposits, excluding Savista's own deposit accounts and those related to the tax program 14.5 percent or $404,500,000 of our deposits were in excess of the FDIC limits at September 30. Our cash and unplanned securities at September 30 were $430,000,000 which more than covered these uninsured deposits. Other than 361 point $1,000,000 of public funds with various municipalities across our footprint, we had no concentration in deposits at September 30. At September 30, 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 when we think it makes sense.

Speaker 1

We believe our move cost deposit franchise is one of At September 30, all of our $595,500,000 in securities were classified as available for sale and had $93,100,000 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 31, 2022. Despite this decline, our Tier 1 capital ratio at September 30 was 8.79%, which is well above what is deemed well capitalized for regulatory purposes. Savista'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 of value, and as such, we resumed our repurchase program during the Q3.

Speaker 1

During the quarter, we repurchased 84,230 shares of common stock for $1,500,000 for the average price of $17.77 per share. This represents all our repurchase activity year to date. We have an authorization of approximately $12,000,000 remaining in our current repurchase program. While our capital levels remain strong, we recognize our tangible common equity ratio screens low and we'll balance our repurchases in 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.

Speaker 1

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 31, 2022 to 1.28% at September 30, reflecting growth in our adoption of CECL during the Q1. In addition, our allowance for loan losses to non performing loans increased from 261.45 percent at December 31, 2022 to 308.52% at September 30. 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.

Speaker 1

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

We will now begin the question and answer session. The first question comes from Nick Cottrill with Hubby. Please go ahead.

Speaker 3

Good afternoon, everyone. How are you?

Speaker 2

Good. Welcome back, Nick.

Speaker 3

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?

Speaker 4

Yes, I'd say low to mid single digits. I mean, I would say ballpark 5% maybe, Nick, from that perspective, 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.

Speaker 1

And Nick, I'd say some of it will be us Being a little bit more selective, we have to push our interest rates. We got to get our spread because our loan to deposit ratio is so high. So we have to push our spread and Those rates those spreads are widening for us. So we anticipate those that higher rate environment will slow lending activity as well.

Speaker 3

Yes, makes sense. 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?

Speaker 2

I don't know if I'd use the term irregular, but yes, 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 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 out. That was the big, I guess decline in the compensation number in the Q4 was that we've kind of reduced the accrual, Nick, on health insurance.

Speaker 2

I think I told you guys $28,000,000 will be a run rate last quarter. It looks like you guys heard me. I would tell you that A good rate for the Q4 is probably $27,500,000 I don't know that I would want to go into next year. There's a couple of things moving around, 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 1st part of April, so that they're not really impacted in the Q1.

Speaker 2

And we've got 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.

Speaker 3

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

Speaker 1

We do anticipate it to increase. We were just on a call with them yesterday, Chuck. It looks like they're going to double what they did in September. So I

Speaker 4

think we probably need to get back to you Nick on quantification number, but we do expect higher production and output for leasing division in the 4th quarter.

Speaker 3

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?

Speaker 1

No, no charge. I mean, I can just be that the revenue that we incurred

Speaker 2

or earned, I guess, in each of the first two For the last number of years, that just goes to 0.

Speaker 3

Yes. Okay.

Speaker 1

Yes. We will look to replace that income. I think we've got We think we have opportunity through our leasing division as well as we have short revenue. We've identified a few revenue opportunities within our existing products and services. And I think We'll have higher expense controls as we move into next year.

Speaker 1

So we're still working through the budget, so we really can't Quantify any numbers there, but we're looking to kind of make it a neutral as neutral of an impact as possible.

Speaker 3

Thank you for taking my questions.

Speaker 2

You bet. Thank you, Nick.

Operator

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

Speaker 5

Hey, guys. Good afternoon.

Speaker 2

Good afternoon, Jerry.

Speaker 5

Dennis, I think your comments on the income tax Refund business and the press release were pretty clear, as is the $2,400,000 of fees. What amount of deposits 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?

Speaker 1

Yes. We'll maintain some of those deposits. There's just a certain percentage that sticks around that we'll have to achieve over the next 5 years or so. But Rich, do you

Speaker 2

have the balances there? Yes. At September 30, Kerry, we had $73,400,000 on our balance sheet. And I think at the beginning of the year, that number was, I want to say $40,000,000 I might be exactly right, but it's close. And that's that number that Dennis said for whatever reason.

Speaker 2

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 check or whatever, but those checks percentage of them just don't ever get cashed. And those will remain on our balance sheet again for which is typically 5 years. Each states are a little different, but I'd say for the most part that will run out or spin down over the next 5 years.

Speaker 5

And where were the peak in balances this year? Where did they peak out? Any guess or any feel there?

Speaker 2

Yes. I mean, I think the average Got to be flipping through my notes here. So we

Speaker 1

had about $174,000,000 in reduction, I think, And tax deposits for the quarters. So

Speaker 2

Yes. So the year to date average period was 169,000,000 That's where most of it comes through.

Speaker 1

But the net money, Terry, was moving in and out much quicker the last 2 years than it had the previous, Say 5 years for whatever reason, we really didn't know. But our funding as we move forward is going to have to rely on More brokered and 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 I've gone to the sidelines. The big banks generally fear recession, so they kind of go to the sidelines.

Speaker 1

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. 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 No one else is lending, we're going to require much more of those deposits or all of those deposits.

Speaker 5

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

Speaker 2

side. We wish it was one. There are no big ones, but they're yes, 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 it.

Speaker 2

But apparently, they're not selling fast enough.

Speaker 1

Well, we just we're trying to 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 preventive. 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 3 weeks ago, and this was a topic of discussion. But We just got to raise the level of awareness for all of our customers because the fraud piece of it is really picked up throughout our industry.

Speaker 5

And maybe one last one. The decision to to exit the income tax refund business. As you mentioned, the release might get in the way of future bank M and 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 and A for Savista?

Speaker 1

Well, I think it's tough right now just as you mentioned just to do any type of M and A given where Stock prices are and low marks and marks on security portfolios and things like that. It's just tough to make that math work. We are continuing to have dialogue and we're meeting with potential partners. So 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.

Speaker 1

We have looked at a couple of smaller deals that were announced earlier in the year. We just couldn't make those the math work. And I don't see that easing up in the near term, but we have to continue with the discussions because The minute you stop, you kind of lose that a little bit of that maybe that relationship and stuff. So I just think you have to continue those discussions and because certain banks are going to be under more pressure than we are. And they're going to want to partner up and we want to make sure we're top of mind.

Speaker 1

So we'll continue to have meaningful discussions with people that we view as good partners.

Speaker 5

Great. Thanks for taking my questions. Have a nice weekend.

Speaker 1

Okay. Thanks, Terry.

Operator

The next question comes from Tim Switzer with KBW. Please go ahead.

Speaker 6

Hey, good afternoon. I'm on for Mike Perito. Thanks for taking my question.

Speaker 2

You bet. You too.

Speaker 7

First off, Do you guys

Speaker 6

have what the purchase accounting impact was to the margin this quarter? I think last quarter is around 8 basis points, and had some like prepayments. I'm wondering if that settled down at all.

Speaker 2

It's almost identical. We competed it at 7 basis points this quarter, Tim.

Speaker 6

Okay. Is that like kind of a good run rate going forward? Or should it move back down once prepayments, moderate?

Speaker 2

I would use that until we tell you differ. How about that? So if you're wrong, you'll only be wrong for a quarter.

Speaker 6

Sounds good. And could you guys talk about your expectations for the NIM going forward? I'd expect a little bit of moderation on the compression still next quarter or 2, but like when do you think you could really trough here?

Speaker 2

Well, I think one thing I'd like to say 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 10.1%. 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.

Speaker 2

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 from the first at least 100 basis points movement. I'd be surprised if you think rates are going to go up more than 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?

Speaker 2

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 3.69. 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 over the last two quarters.

Speaker 1

Yes. We may see similar impact in the 4th quarter just because of that reliance on the

Speaker 2

brokered and stuff,

Speaker 1

but we really don't as we get through that, we think it's tough. Well, I'm surprised as I talk to other banks, we haven't given up all the margin. If you look back At the end of 2021, our margin was 3.47. I think we haven't given all that margin back up. So we may I think we were we Our deposit beta didn't move as quick the 1st two quarters as it did the last quarter and I'm sorry, the Q4 of 'twenty two and the Q1 of 'twenty three, our deposit beta didn't move like other banks did.

Speaker 1

It did then start moving much more rapidly in the second and third quarter and we will probably have further compression here into the 4th quarter.

Speaker 6

Okay. Okay. So at least another quarter or 2 of compression and possibly you can stabilize. Okay. Yes, that makes sense.

Speaker 6

The last question I had was you guys stepped back and You made the comment that you like the value of your stock here. Any insight you can give us on if you'll continue to do that and use the rest of your on authorization over the rest of the year and into 2024?

Speaker 1

Well, I think as I mentioned in the comments, we just recognize that, that tangible common equity Ratio is it just screens low and the ratio is lower this quarter than it was the previous quarter. So I think it makes repurchasing your stock a little bit tougher. But we'll continue To be mindful of that and kind of balance the repurchases and the payment of dividends with building capital and support growth, We I don't anticipate repurchase activity to really

Speaker 2

Out of the levels it has been for

Speaker 1

the last couple of years. Yes. So I think it would be tough to burn through that authorization. Tim, I want to make one

Speaker 2

clarification. Dennis said

Speaker 1

he thought it was a value.

Speaker 2

He did not say he liked where our stock price was. That's right.

Speaker 6

Understood. Well, that's all for me. Thank you, guys. Have a good weekend.

Speaker 2

Okay. Thanks, Tim.

Operator

The next question comes from Manuel Nieves with D. A. Davidson. Please go ahead.

Speaker 7

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, Q4 and 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?

Speaker 2

Well, I think the compression was a whole lot more from 1 to 2 than it was from 2 to 3. And I think what we're saying is probably that 17 basis Points of compression that we saw in Q for over the course of Q3 is probably A good barometer of what we might anticipate. Q4. Q4. Right.

Speaker 7

And then perhaps a little bit less compression into next year.

Speaker 8

Correct.

Speaker 7

And this is and then At the point if we have no more hikes and we're staying at $550,000,000 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?

Speaker 2

I think it'd be more of a stable kind of a scenario, Manuel. Again, we're 100% loaned up ish, So that makes it I mean, there aren't a whole lot of levers to pull. And we're everything that every bit of growth that we have, incrementally, we got to go out and fund it. And that makes it hard to expand.

Speaker 1

Sure. Our modeling kind of shows that rates up, rates down, it's pretty neutral.

Speaker 4

The only positive part right now Manuel is that we are slowly seeing as Dennis mentioned earlier, we're slowly seeing our loan rates increase Month over month from a production perspective and obviously all the ones that roll right now are rolling at significantly higher price.

Speaker 7

Okay. Can you talk a little bit about kind of the where you're focusing on for deposit gathering, because I'm sure that's kind of a wildcard 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.

Speaker 1

Yes, a couple of things there. 1, The commercial deposits that we mentioned, we're really pushing hard to say, look, with certain banks not lending, We're saying, if we're going to do your deal, we got to have all these deposits. So we need to just compensate balances and then we're having Yes. And we're having pretty good success with that. We're having pretty good success with that.

Speaker 1

So that's one focus. We have streamline 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 and go after those loans and process those loans. We'll also look to almost Check out a micro loan through our retail division, which we don't have, A lot of those small business loans are self funding.

Speaker 1

So those are two areas where we're really focusing on. And then we continue to work on our digital app to get 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 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.

Speaker 7

That's great. Just shifting over the equipment leasing growth seem 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?

Speaker 1

The yields are higher. The yields for at least September were 10%. And as Chuck indicated on the commercial side, even yields that are going on in October and maybe an increase since the September 30 rates. So yes, volume was a little bit less We do anticipate that volume in the leasing group to be up quite a bit in

Speaker 2

the 4th quarter. Probably just a

Speaker 4

touch less Manuel than what we probably guided for the full year, but we think we'll close the gap in the Q4.

Speaker 7

And you can always choose to sell more of that if you have any balance sheet constraints.

Speaker 1

Right. That's exactly right. We are getting paid less on it for the people purchasing it. So we try to weigh that, but yes, we may end up having to do that. Right now, we modeled it going in Keeping 50% and selling 50%, that's kind of what made the earn back numbers work.

Speaker 1

We felt we made it work. And So far, we've been sticking to that, but we may have to shift course depending on liquidity needs.

Speaker 7

Okay. I appreciate the comments. Thank you very much.

Speaker 2

Thank you.

Operator

The next question comes from Daniel Cardenas with Janney. Please go ahead.

Speaker 6

Hey, good afternoon, guys.

Speaker 2

Hey, Dave.

Speaker 8

You had mentioned on the call that $2,400,000 revenue hole is going to be plugged through increasing your leasing, some revenue opportunities within your current products and services and some expense controls. I guess if you had to assign percentages, how would that work out and how quickly do you think you can fill that hole?

Speaker 1

Well, We hope to gain a chunk of it through the leasing group because as they became they were an unregulated privately held company. And So we had additional expenses in there, consultants that we've had to hire. We had to have which including accountants and IT people and different things, that should be behind us for the most part. So we hope to pick up some there. We hope to build a little bit more cadence now.

Speaker 1

I can tell you Activity in the last 4 or 5 months has been much better than the 1st 4 or 5 months of the year, Dan. So If we just continue now to do what we're doing, we're going to make up those first 4 or 5 months where we weren't really extremely profitable in that with that group. Just because we were they were kind of sidetracked on other things and we had additional expenses and the rates we're moving up and just getting everybody on board. So we do think we'll be able to make up a good chunk of that with the leasing group. Then there's some expenses that go away on that side.

Speaker 1

We've identified Some expenses on our side, things like overtime and things like that, that we think we can control a little bit more. So we've identified some expense things. And then just through normal Products and services that we have, Chuck has led a revenue enhancement project team that they've come up we've had people from all over the Bay, and they've come up with some dollars there as well. I would say, maybe half of it's going to come from the leasing side and then the other half from revenue enhancements and from expense saves. That's my best guess right now.

Speaker 1

Again, we're working through the budget. So that's our best guess right now.

Speaker 8

Right. And do you think that this is the timing on this, that this can be done in 2024? And do you think that's going to taken until 2025 before you kind of hit full stride there.

Speaker 1

No, we think we can get that. We want So some of the things involve sending disclosures and things like that. Those are really set to go out in December. So We hope to be hitting the ground running in January with a lot of this.

Speaker 8

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 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?

Speaker 4

A little bit of both.

Speaker 2

I'm trying to get to the page. So we're scheduled for was almost $30,000,000 that will mature in the next quarter in the Q4 and probably

Speaker 1

2 thirds

Speaker 2

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 and 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.

Speaker 2

And Rich and I were

Speaker 1

just talking about some of that, Dan, too, even at the investments of there are certain tax implications. We're going to run the math, see what those tax implications are because It may be better for us just to utilize those funds to fund some of this loan growth and stuff or pay down borrowings or stuff like that. So we're running we're working on that as well. We just don't have an answer for you there. But Rich is right.

Speaker 1

So far, our we've said, hey, let's just reinvest that is because of the tax implications, but we're rerunning the math on that.

Speaker 6

Got it. Okay.

Speaker 8

Good. And then on your credit, I mean credit quality Good. How are watch list 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 2 or 3 quarters ago?

Speaker 2

Yes, Dan, this is Chuck.

Speaker 4

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. We don't really have any, per se, any concentration in downtown office. Most of our offices It's suburban office, you know that 1, 2, 3 story building in suburbia. So we're not really seeing a lot of strain there yet, but we're watching it closely.

Speaker 4

We're really seeing a lot of really nice growth of the multifamily piece across our major metropolitan areas in Ohio, they can't build units fast enough in Columbus, etcetera. So we feel good about that piece of it. All in all, I would tell you that we don't have a lot of concern right now, but like everybody else, we're watching a little closer.

Speaker 1

Yes. The watch list has been fairly the migration there, it's been pretty neutral because we've added a couple, But then a couple have either paid off or upgraded. So it's from a number of loans and from a dollar standpoint, it's pretty neutral.

Speaker 8

Okay, good. And then last question for me. What How should we be thinking about your tax rate here on a go forward basis?

Speaker 1

The effective tax rate for the

Speaker 2

I guess year to date was 15.4% and for the quarter was 15.2%. So I'd say 15% would be what I'd put in my model.

Speaker 8

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

Speaker 2

You bet. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Dennis Schaeffer for any closing remarks.

Speaker 1

Well, thank you. In closing, I just want to thank everyone for joining and those who have 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 this year to share our year end results.

Speaker 1

So thank you for your time today.

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