Q1 2024 Civista Bancshares Inc Earnings Call

Participants

Dennis Shafer; Chief Executive Officer, President and Vice Chairman of the Board; Civista Bancshares Inc

Richard Dutton; Senior Vice President; Civista Bancshares Inc

Brendan Nosal; Analyst; Hovde Group

Justin Crowley; Analyst; Piper Sandler Companies

Terry McEvoy; Analyst; Stephens Inc.

Timothy Switzer; Analyst; Keefe, Bruyette & Woods North America

Manuel Navas; Analyst; D.A. Davidson & Company

Daniel Cardenas; Analyst; Janney Montgomery Scott LLC

Presentation

Operator

Ladies and gentlemen, before we begin, I would like to remind you that this conference call may contain forward looking statements, future performance and financial condition, and that involves risks and uncertainties Various factors could cause actual results to be materially different from any future results implied by such forward-looking statements. These factors are discussed in the Company's SEC filings, which are available on the company's website. Sony disclaims any obligation to update any forward-looking statements made during the call. Traditionally, you refer to non, which are intended to supplement most directly comparable cash release also available on the Company, certain financial and other quantitative information to be discussed today, well have the reconciliation of the GAAP measure, right, and as well as a reconciliation of the GAAP to non-GAAP this call will be recorded and made available after this event pulling at www.civb.com. At the conclusion of Mr. shipper's remarks. And so this management team will take any questions you may now. I will turn the call over to Mr. Shaike, please.

Dennis Shafer

Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our first quarter 2020 Form Earnings Call. I'm joined today by Rich that an SVP of the company and Chief Operating Officer, of the bank, Chuck Porter, SVP of the company and Chief Lending Officer of the bank and other members of our executive team.
This morning, we reported net income for the first quarter of $6.4 million or $0.41 per diluted share, which represents a $6.5 million decline from our first quarter in 2023 and a $3.3 million decline from our linked quarter. While we are disappointed in our results, we knew there would be headwinds as we stepped away from the third party processor of income tax refunds. And we did not have the benefit of a $1.5 million one-time bonus that we received from the renegotiation of our debit brand agreement in addition, in late 2023, we implemented changes in the way we process overdrafts, which reduced service charge income. As a result of these three items, noninterest income was approximately $3.8 million less in this quarter than in the previous year. While we continue to reduce rates on our CD specials in select money market accounts for the migration from our non-interest bearing and lower rate checking accounts into higher rate money market accounts and CDs continue to put pressure on our net interest margin. We also experienced an increase in our allowance for credit losses or CECL model required higher reserves based on our individually analyzed loan and lease portfolio and loan growth.
During the third quarter of 2023, we announced that investment would be stepping away from the third party processor of tax refunds due to increased scrutiny from our regulator. So Vista earned $1.9 million and $475,000, respectively during the first and second quarters of 2023 related to this program like many in the industry, we have been analyzing the way we process overdraft accounts and the fees associated with those services. Late in December, we discontinued assessing a charge on represented overdrafts, represented overdrafts and reduced our NSF charge from 37 to 32,000. We are also enhancing how we communicate with our customers on the use of their deposit accounts. Our overdraft fees, which are included in service charges, declined $375,000 compared to our first quarter of 2023. We anticipate these changes changes will reduce service charge revenue by $1.2 million over the course of 2024. In anticipation of this lost revenue, we implemented a number of initiatives to reduce our reliance on wholesale and borrowed funding to increase revenue and to reduce expenses. Although we have seen some immediate impact. Most of the benefit from these initiatives will occur over the balance of the year. I am encouraged by the early results, and I'm optimistic that we are headed in the right direction. We anticipated pressure on our margin as we exited the tax program and the need to replace the significant interest free funding balances. It provided during the first and second quarters. However, it is difficult to model the impact of depositors migrating from noninterest-bearing into interest-bearing accounts, which was evident during the quarter.
During the quarter, our cost of funding increased by 35 basis points to 2.54%, while our yield on earning assets increased by 12 basis points to 5.64% this resulted in our margin contracting by 22 basis points coming in at 3.22% for the quarter.
During the quarter, we continued our measured approach to decreasing rates pain on some of our higher tiered demand deposit accounts and CD specials. In spite of lowering these rates, our cost of deposits, excluding brokered deposits, increased by 21 basis points to 1.22%. During the quarter, we have a number of initiatives in progress to reduce costs and our reliance on brokered and wholesale funding. The State of Ohio announced this Ohio home buyers plus program to encourage Ohioans to save for the purchase of homes in Ohio by offering tax incentives to the depositors and subsidizing participating banks as part of the program. The state will deposit up to $100 million in low-cost funds at the current rate of 86 basis points into participating banks. We also have historically maintained the cash balances of our wealth management clients and other financial institutions. However, we are currently taking steps that will allow us to hold the cash deposits, our wealth management clients has demand, we anticipate the rates to approximate Fed funds less 20 to 25 basis points. Based on the current cash positions, we anticipate being able to move $75 million of these funds into the bank. By the end of the third quarter, our loan and lease portfolios grew at an annualized rate of 5% for the quarter. This was organic growth, and we believe it is indicative of the continued strength of our markets in our organization. While this is slower, we have focused on holding weight at higher levels, we anticipate continuing to grow at a mid-single digit pace for the balance of 2024.
While our overall credit remains solid, as I previously mentioned, we experienced an increase in our allowance for credit losses or CECL model required higher reserves based on our individual annualized loan and lease portfolio. This was primarily attributable to a hospitality credit at a cellular tower power credits that have both been classified for several quarters. Both borrowers continue to be cooperative. However, new information became available during the quarter and it was necessary to adjust the collateral values and to increase our reserve earlier, we announced a quarterly dividend of $0.16 per share based on our March 29th share price. This represents a 4.16% yield and a dividend payout ratio of 42.11%.
Our efficiency ratio for the quarter was 73.8% compared to 64.3% for the linked quarter. However, if we were to back out the depreciation expense related to our operating leases from our leasing group, our efficiency ratio would have been 70% for the quarter and 60% from the linked quarter. During the quarter, noninterest income declined $319,000 or 3.6% in comparison to the linked quarter and $2.6 million or 23.2% in comparison to the prior year. Gross forced the primary drivers of the decrease from our linked quarter loans were declines in service charges due to the previously mentioned changes in value of processing overdraft in the $418,000 decline in swap fee income. These declines were offset by increases in other noninterest income, which included increases of $182,000 in fees related to leases and $289,000 in income from our captive insurance subsidiaries. Primary drivers for the decline for the prior year's first quarter were $1.9 million in tax refund processing fees earned in the prior year that I mentioned earlier and a nonrecurring $1.5 billion signing bonus that we recognized in the first quarter of 2023 related to a new debit brand agreement. These declines were partially offset by increases in the same other noninterest income items, a $584,000 increase in fees related to leases and a $453,000 increase in income from our captive insurance subsidiary. Noninterest expense for the quarter of $47.7 million represents a $2.3 million or 9% increase from our linked quarter. This increase was primarily attributable to increases in compensation related expenses, including salaries, which were up $139,000. Payroll taxes, which increased $434,000 as the beginning of the year old payroll tax loan resumed and an increase in health insurance expense of $346,000 You will recall that. So this is self-insured for our employee health insurance, as has been our practice beginning here by accruing our health insurance expense at the rate computed by our actuaries equally, as has often been the case, we were able to reduce that accrual in the third and fourth quarters of the prior year. In addition, the combination of truing up our marketing rule in the previous quarter and the resumption of our monthly marketing accruals in the current quarter accounted for $669,000 of the increase compared to the prior year's first quarter, noninterest expense increased $257,000 or 1%. The increase is attributable to our normal annual merit increases, which take place in April and software expenses related to our digital banking platform that will mostly offset by declines in depreciation related to operating leases and professional fees that were paid to the consultant who assisted us with our debit card brand renewals in five years.
Turning our focus to the balance sheet for the quarter, total loans and leases grew by $36.4 million. This represents an annualized growth rate of 5%. While we experienced increases in nearly every loan category, our most significant increases were non-owner occupied CRE loans, residential real estate loans and real estate construction loans. The loans we are originating for our portfolio are virtually all adjustable rate loans and our leases all have maturities of five years or less new and renewed commercial loans were originated at an average rate of 7.92%. During the quarter, loans secured by office buildings make up about 5.1% of our total loan portfolio. As we have stated previously, these loans are not secured by high-rise metro office buildings. Revenue are predominantly secured by single or two-story offices located outside of central business district, along with year-to-date loan production. Our pipelines are fairly strong and our undrawn construction lines were $244 million at March 31. Again, we anticipate loan growth to continue to be in the mid-single digit range for the balance of 2024.
On the funding side, total deposits were mostly flat, declining just $4.3 million or negative 0.1% since the beginning of the year. However, if we back out non-core cash program and broker deposits, our deposit balances declined to $29 million or 1% year to date. As I mentioned, we have a number of initiatives in progress in gathering core funding. Our deposit base is fairly granular with our average deposit account, excluding CDs, approximately $25,000. Noninterest-bearing demand accounts continue to be a focus excluding tax-related and brokered deposits. Non-interest bearing deposits made up 29.5% of our total deposits at March 31 with respect to FDIC insured deposits, excluding services out of deposit accounts and those related to the cash program, 13.1% or $392.3 million of our deposits were in excess of the SDIC. limits at quarter-end.
Our cash and unpledged securities at March 31 were $452 million, which more than covered these uninsured deposits other than the $369.5 million of public funds with various municipalities across our footprint. We had no deposit concentration at March 31. At quarter end, our loan to deposit ratio was 98.3%. Our commercial lenders, treasury management officers and private bankers continue to have some success requesting additional deposits and compensating balances from our commercial customers. And we will continue to be disciplined in how we price our deposits. We believe our low-cost deposit franchise. One of this is most valuable characteristics contributing significantly to our solid net interest margin and overall profitability. The interest rate environment continues to put pressure on buying portfolios. At March 31, our securities securities were classified as available for sale and $62.5 billion of unrealized losses associated with them. This represented an increase of unrealized losses of $7.9 million since December 31, 2023. Over the past few quarters, we have reduced our security portfolio by using its cash flow to fund our balance sheet. At March 31, our security portfolio was $608.3 million, which represented 15.7% of our balance sheet. We ended the quarter with our Tier one leverage ratio at 8.62%, which is being well capitalized for regulatory purposes. Our tangible common equity ratio was 6.26% at March 31, down slightly from 6.36% at December 31, 2023. So this is earnings continue to create capital, and our overall goal remains to maintain adequate capital to support organic level growth and potential acquisitions. Although we did not repurchase any shares during the quarter, we continue to believe our stock is a value while our capital levels remain strong. We recognize our tangible common equity ratios, SCREAM loans. Our previous guidance remains that we would like to rebuild our TCE ratio back to between 7% and 7.5%. To that end, we will continue to focus on earnings and will balance any repurchases and the payment of dividends with building capital to support growth. As we stated earlier eight K, the Board reauthorized a new stock repurchase program of $13.5 million during the April meeting. Despite the uncertainties associated with the economy and the expense pressures on borrower space. Our credit quality remains strong and our credit metrics remain stable. As I previously mentioned, we did make a $2 billion provision during the quarter, which was primarily attributable to a higher reserves required by our model based on individually analyzed loans and leases, which was driven by true two credits, including $43 million hospitality credit, which we expect to resolve via the sale of the properties and have a substantial guarantor backing and a $4 billion cellular tower credit, which we expect to resolve in the next six months.
I would note that neither of these credit issues were related to underwriting weakness. The hotel had an issue with its fire suppression system during the pandemic that prevented it from operating for 17 months and continues to limit operation. Cellular power business suffered an internal fraud where employee caused significant damage to the company for personal gain. Our ratio of allowance for credit losses improved from 1.3% at December 31, 2023 to 1.344% at March 31. In addition, our allowance for credit losses to nonperforming credits increased from 245.67% at December 31, 2023 to 247.6% at March 31, in summary, although our margin compression was more than we anticipated, our margin remains strong and we are taking steps to generate more lower cost funding. Our loan growth during the quarter should remain at a mid-single digit pace for the balance of 2024. While we experienced some isolated credit issues, we are seeing no systemic deterioration in our credit quality overall Civista continues to generate solid earnings, and our focus continues to be on creating shareholder value. And thank you for your attention this afternoon and your investment. And now we will be happy to address any questions that you may have.

Question and Answer Session

Operator

Thank you.
Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star, followed by the one on your touchtone. You will hear a prompt and your hand has been raised. Questions will be taken in the order receipt. Should you wish to cancel your request, please press the star ball. If you are using a speakerphone, please lift your handset before pressing any case. Once again, that is star one. Should you wish to ask a question.
Your first question is from Brendan Nosal from Hovde Group, please.

Brendan Nosal

Yes, you folks have been doing well, hybrid and maybe just to start off here, and I think you folks have historically had the CFO position vacant for quite a long time. So just maybe talk through the decision to formally fill that CFO position with your announcement earlier today and why now is the right time?

Dennis Shafer

Well, I think Todd, Michael has filled that role for us for the last 30 years, and he's done a great job at that. But Todd, is approaching retirement age. You'll be retiring over the next couple of years and we wanted to have a sufficient time. Todd has a lot of institutional knowledge, and we think you'll bring the value working with our new CFO. But we just thought the timing of that was is right now, given that and given his plans for the future.

Brendan Nosal

Great. Thanks. And maybe one more from me. And moving to the expense base cost, even though costs were up sequentially, they still came in quite a bit better than I was expecting. And I think on the last earnings call, you folks pinpointed by $28.7 million of expenses per quarter for the final three quarters of the year. Just kind of curious to hear your updated thoughts on the expense base and how you expect that to trend going forward.

Richard Dutton

And Brendan, this is Rich. We did we guided last quarter, I think during the call it 28.4. And I would say that's a good number for the rest of the year. And the big difference that we had between the first quarter and the rest of the years. As you'll recall, our merit increases go into effect April first every year. And that's really the only significant, I think, additional Passave cash expenditure that we've got weighted portfolio and our budget between now and the end of the year.

Dennis Shafer

So the year, we really focused on further expense control at or near the end of last year and going into this year, just knowing the loss in revenues that we would have. So I think that's a really good if we're guiding to that because I think we're starting to see some of the expense control initiatives that we put into place. So I think that number at Ritchie, we guided last quarter are more merit increases went into effect in the second quarter. But I think that's a metric that's showing that I think we are again controlling other expenses.

Brendan Nosal

Yes, yes, that's perfect. Are Thank you for taking my questions.

Dennis Shafer

Thank you.

Operator

Your next question is from Justin Riley from Piper Sandler. Please ask your question.

Justin Crowley

Hey, good afternoon, guys. Wanted to hit on the net interest margin for the quarter. Given some of the dynamics you discussed in the prepared remarks, can you unpack a little more just what you're seeing as far as lingering upward pressure on the funding side, where we may be on that when you get to a spot where asset repricing allows for margin stabilization and let's call it a flat rate environment.

Richard Dutton

And just this is Rich again, I can't remember if you were on the call last time, we're not planning to have a great track record of predicting what our margin is going to do. But I think even with the contraction that had no margin perspective more. And I think the initiatives that Dennis discussed have you hired homebuyers with ours and we feel pretty confident we're going to be able to bring $100 million are pretty low-cost funding related to that and the opportunity to move some of the cash balances that are worth making group has that are off balance sheet or balance sheet or two to opportunities to kind of reduce funding. And again, I think absent growth and probably the bigger well card is absent a migration from the non-interest-bearing deposits into higher, whether they're money market or even a CD. I mean, that's the thing. And I think we continue to adjust. I don't know it's impossible to model, but we haven't figured out how to model that. I think our models tell us that if nothing changes and we don't have a significant crazy movements in interest rates that again will contract by basis points.
But I've said that two quarters in a row, and I've been wrong two quarters in a row as a big difference I think Jed, just is we are starting to see some positives. We are we were able to reprice some brokered near the end of March, some of the brokered deposits we did see, you know, some improvement there. We were able to get to that funding and 22 basis points less than we got. We had it on the books for we have a lot of our CD specials, you know, are starting. They are they have they know rates haven't moved. So those rates were high back midyear last year, mid-year and end of the third quarter. Those rates a year ago. We'll adjust downward at their next repricing here over the next deal for the ones that are coming due over the next quarter or so.

Dennis Shafer

So there are some positive signs. But I do think as Rich alluded to it all comes down to, you know, the loan, you know how fast we grow loans because we're going to need funding for that and we may not get the benefit of utilizing the well program and the tax money that may be a phone call saying we're starting to implement. We'll be able to start taking those of homeland plus deposits here early in the first week of May here. But how quickly we put those on the balance sheet, we're really dependent on what that you know, where our margin goes in that second quarter with the third quarter, I think we should see good improvement because we also have a more loans and assets we repricing than we have the first half of the year.
So there's couple of factors. You know, I think at least some positive signs that we see that the large late starts stabilizing.

Justin Crowley

Okay. Got you. That's helpful. And then I guess just dovetailing off on some of that, what do you have? I'm not sure if you're able to quantify just in terms of brokered funding that's maturing through the balance of the year and what does that repricing look like board here?

Dennis Shafer

So that is all in the fourth quarter, the remainder out of that, we have done nothing of repricing. We had a slug $151 million that repriced March 20th and we really didn't get much benefit of that in the first quarter end.
The next two's float of our brokered stuff is really in the fourth quarter, late in the fourth quarter that will reprice, right?

Richard Dutton

So we've got $500 million, and that's been kind of constant of brokered CDs. As Dennis said, we've got $200 million of that will come due will mature in November of this year. The rest of it goes in the 25, and that's really getting with Whole Foods.

Justin Crowley

Okay. That's helpful. And then just shifting gears a little on. I know the focus here has been rebuilding capital levels, getting TCE back to seven, 7.5, but just looking for any high-level commentary on the impact environment for M&A, which I know of course, has remained fairly quiet, but just more So trying to get a sense of just where your capital priorities stand over, maybe the medium or longer term?

Dennis Shafer

Yes. I mean, I think there's a lot of dialogue happening around M&A. I just think it's really tough environment to do any M&A right now, whether you are a buyer or seller, the loan marks, you're trying to figure that out in this environment with your lifetime GPU. You really dive into how, you know, the are buyers or sellers.
The loan books are repricing. Will you what's the what's the effective, higher rate for the half on those books and things like that?
So I think the marks are that you're doing are pretty heavy. So Irish diaper rash, we will focus on Campo, you know, building our capital base right now is we just think it's too tough an environment right now to do any type of M&A.

Justin Crowley

Okay. Got it. Thanks for taking my questions, guys. Appreciate it. Yes, Keith.

Operator

Your next question is from Terry McEvoy comments.
Yes, thanks.

Terry McEvoy

Good afternoon, everybody, or maybe could you just talk about loan pipelines, some confidence in that mid-single digit growth rate over the remainder of the year? And do you think that growth will continue to come from kind of multi-family and Metro Ohio markets and some of the other categories that Dennis talked about earlier.

Richard Dutton

And there is a chunk of pipelines are actually pretty good right now and when I compare it to last year, our pipeline right now is actually higher than it was last year, sitting at the same time. Now I would tell you that our pull through rates are not quite as strong as they were in the past, just because we're really trying to be very high, very mindful of margin and holding rates well above even the last, you know, as far as new originations on most especially real estate deals. So our pull-through rate of somewhere it has been we're still seeing really good strong on demand, especially in the multifamily area. Obviously, coinless can't fill the units fast enough, but we're seeing really good people, good growth in Cincinnati and Cleveland too.
As far as the metro markets with some with some we've got some stuff coming on both in Toledo and Andy and Dave, too. So I would say that the five major metro markets are doing well and multifamily side, we really haven't seen really any what I would call rate concessions and rate pressures across anywhere categories so far. And we're really seeing that in the multi-family area most of that's coming on and efforts being built, the rents are actually higher. Those being up what's being projected in the appraisal. So you feel pretty good about what we've said here and Ohio and Southeast Indiana and Northern Kentucky. We feel like the demand is still pretty strong.
The one thing that I think we talked about last call, it takes a little bit more equity in these projects on permit to get them to work from a cash flow perspective. But yes, is the bigger developers are willing to put that extra cash in and make more.

Terry McEvoy

That's great. Thanks for the color there on as a follow up, I know that's a tough question. How are you thinking about the non-interest bearing funds coming out of the tax refund processing program that was $19.5 million last quarter. Should we kind of model out $20 million per quarter going forward? Or was the first quarter of a bit outsized in your view?

Richard Dutton

Well, that's probably fair. I think at the end of March, we had about $31 million left in there, Terry.

Terry McEvoy

Okay.

Richard Dutton

Or kind of at the mercy, if you will, of the tax processing partner that we have. I mean there may at some point going to move that money out, but we thought it was going to happen in December. And I guess we'll find that they won't leave it because it's troubling to us. But right now the conversation is that they'll be gone sometime in the second quarter.

Terry McEvoy

And then just one last quick one. The $1.2 million of overdraft service charge revenue that's lost this year, is that fully captured in the 1Q run rate or is there incrementally more to it come down a bit in the remainder of the year?

Richard Dutton

I would say that our first quarter is typically our highest and SF. quarter post holidays. So if we have $305,000 less of interest income in the first quarter, it's going to be something less than that and over the course of 12 months, we're kind of projecting momentum too.

Terry McEvoy

Okay. Thanks for taking my questions. Have a good day, Pacer.

Operator

Thank you. Your next question is from Kim Scott Searle from KBW. Please ask your question.

Timothy Switzer

Very good afternoon. Thanks for taking my questions.

Dennis Shafer

Thanks, Jim.

Timothy Switzer

I had a follow up on your loan commentary. I think you guys raised your guidance expectation from lows, low single digit last quarter to mid single digits. And I think I remember you guys mentioning something about it sounds like the competitive environment has been a little bit more intense last quarter. Have you seen that moderate a little bit and that maybe what drove the upside to guidance here?

Richard Dutton

Well, I think I think I think all along, we were projecting mid-single digits, you know, five, 6% minus 5% is what we're really focused on. And we have seen a little bit of relief, not a lot. I mean, there's a lot of competitors out there. As we talked about. I think last call, we thought we've seen a lot of competitors come back, getting treasury plus as compared to kind of really looking at cost of funds more. So with the inverted yield curve that put us on, we'll look at competitive disadvantage. But online, as you know, the five and 10 have actually come back up a little bit in this first quarter on into the second quarter. So that treasury plus we've got a little closer to what we're offering on. But I feel I just feel like we really have changed our and our tightened saying I don't believe I don't feel that way after first quarter results.
Well, the only thing I'd add, and it seems that we're selling the governor really on our loan growth is our ability to fund that loan growth. And we're disciplined in how the loan guys price does, but a bigger impediment for us to grow our balance sheet is competition is our ability to fund that, right?

Timothy Switzer

It really gets to the heart of the business and can you guys remind us what percentage of your loans are floating rate and how you'd expect loan yields to trend in a downward rate environment? And then maybe what the overall impact on them then would be if we just got maybe one or two basis cut towards the end of the year?

Dennis Shafer

Well, we think that will benefit as those rate cuts probably benefit us a little bit because again, we've been funding some of that with our with overnight borrowings. So, you know, those have been trending kind of upwards. I think they were up $30 million from 1231 to 331. So we would benefit from that. And we also have it will yield more loans repricing a lot of our loans are tied to 75% of our book are more tied to two treasuries. And those even if short-term rates come out of it looks like the yield curve trying to correct itself a little bit and those treasury rates are higher. So as that book reprices, we should benefit. So go ahead.

Richard Dutton

And just to kind of give you some rough numbers on about a little over 25% of our book is slowing daily come from that perspective, Tim. So then when we started out the year, we did at the time we had about $140 million that we're going to reprice in on 2024, of which only $15 million of that was repricing in the first quarter. So when Dennis mentioned earlier that we feel good about some of the repricing. And so the margin help in the second half of the year out of that $140 million, $93 million of it was going to be it's going to be a movement in the second half of the year.

Timothy Switzer

Great. Appreciate all the detail. Thank you.

Operator

Thank you. Your next question is from Andrew Nicholas from D.A. Davidson.

Manuel Navas

Thank you. Yes, I think all my questions have been answered, but could you help quantify the potential size of the wealth management TAM opportunity and you sort of $75 million in Q3 or is there more after that? Or is it just that amount?

Richard Dutton

So a lot of banks as well. This is Rich here. This just beyond just the transaction, those those deposits are sitting in our wealth department that once we get the mechanics of that squared away, would just be a move that money over to the bank and as I'm going to be super cheap money, but it will be certainly less than what we borrow overnight.

Dennis Shafer

And then well, I would add that we mentioned those two initiatives, but there are a number of other initiatives that we think that we'll be able to add deposits.
I mean, we have a we're looking at all our public filings in the markets that we where we have branches. I've looked at it as schools and libraries, municipalities and county money and stuff. And we're proactively going to be reaching out and getting a little bit more aggressive to get maybe a little bit more of that funding. We have a number of we import a number of reports, for instance, with customers with lending with no or little loans, our deposit relationships, and we'll be targeting those customers and stuff.
So I think there's a number of initiatives underway to in addition to the state of Ohio to a wider plus program. And that well program that we think can be an immediate impact on our funding costs. I wouldn't say be a well over time and over and over the next year or that's over the as I mentioned in my remarks over the next year.

Manuel Navas

Okay. I appreciate that. Thank you.

Operator

Yes, can you once again, you wish to ask a question, please press star one on your telephone. Your next question is from Daniel Alternans from Janney Montgomery Scott. Please Okay.

Daniel Cardenas

Good afternoon, guys. And I have a couple of questions on the fee income side.
I mean, I appreciate all the color that you guys have given and it sounds like you're working trying to catch up some of the the holes that have been created, but how should we think a good run rate for you guys on a go-forward basis?

Richard Dutton

We had $8.5 million for the quarter. Again, I think the wildcard in there right now for us is mortgage bank. Again, we're coming into a model. We look to invest time, and then I'll let Chuck talk about it, but I don't I guess the other wildcards least opinions related to our racing and again, work, I guess what you're implying here in two of our scope proposals are pretty lumpy revenues, depending on when a piece of equipment is sold and whatnot.
And I'll let Chuck talk about mortgage banking a little bit Well, Dan, we view our first quarter production in mortgages and it doesn't show that as well on that gain on sale. We did about $10 million more dollars in production in the first quarter of this year as compared to the first quarter last year on we feel like we've got a really solid pipeline there. We're still limited a little bit in Ohio and just the amount of inventory that's out there. It's just we've got a lot of pre-approvals that people can still buy houses, but we have put a concerted effort going into it into this year about getting more of our production being salable as comparative portfolio. Obviously, the fee, the construction piece and our CRA. piece has to go on the books, but the rest of the stuff we're really pushing towards more salable product. And it seems like the consumer is getting a little bit more adjusted to having higher rates I mean, a lot of people still are kind of what kind of a 3% rate to get to 7% rate. But people that actually you have been holding off making a move are starting to come into the marketplace because states need to admit it and it doesn't look like the rates are going to come down and in the real near distant future slow spring and summer months volumes should be up.

Dennis Shafer

So we are optimistic there. Also, we did create a syndication desk it through when our leasing company, which I said, which will help us with some of that gain on sale because we'll be at a mill that's going to be their sole function to work our relationships and get us the best pricing so that our gains improve the cadence will happen to get us in some sort of cadence where that's happening a little bit quicker and things. So that was another one of our initiatives that we looked at was how do we how do we how do we maybe do a little bit better? We're going to incentivize genomics leading that area based on bigger gains. If we can get them, we'll have a chance to review that a little bit and then COVID stuff.
But that was another initiative that we undertook in the first quarter.

Richard Dutton

The only thing I'd add, and we talked about the NSF fees being down $375,000, but our service charges were only down about $300,000. So we made data with higher service charges and that's something we put in place during the quarter.

Dennis Shafer

We only had one month of benefit on our service charge. We did increase some service charges across the board, and we really only had one month of March was the only real month of benefit there. So we are trying to offset some of that lost revenue various ways.

Daniel Cardenas

So it sounds like maybe you can stay flattish in Q2 and then start start building up from there, honestly.

Dennis Shafer

Yes.

Daniel Cardenas

Okay. And then how should we think about that?

Richard Dutton

I'm sorry, say the wildcard of that a little bit too, is our swap income. It kind of bounces up and down depending on our borrowers appetite for we did have quite a few what I would call mid to short term swaps in the fourth quarter, I think we generated 495,000 in the fourth quarter, it would jump in on a three year swap at that time than when the yield curve and bounce around that hasn't tenants as appealing to more borrowers But depending on how that the inversion of the yield curve goes over the next few months, we might be able to pick up a little more swap income too.

Daniel Cardenas

That can be lumpy credit, so on. Yes, that's right. And then our tax rate for you guys, how should we be thinking about that?

Richard Dutton

We came in a lot lower than we thought it would at this time our effective rate was just under 12% this quarter, but we've always kind of said 15% or 16%. And I think that's what kind of I don't know what the tax preference items were and I should that drove that down this quarter of it. That's about as low as we've ever seen. I should know the answer to that, you wait until the very last question to ask is what led to millions?

Daniel Cardenas

Correct? No problem.
Right. I'll stop there and step back.

Dennis Shafer

Thank you.

Richard Dutton

Thanks, Dan, and stay safe.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Dennis Shaffer for closing.

Dennis Shafer

Remarks. was audio for everyone for joining and those that have participated in the call today. Again, while we were not pleased with our first quarter, we are confident that our strong core deposit franchise and just our disciplined approach to pricing deposits and managing the Company positions us well for the future for future success. So I look forward to talking to you all again in a few months to share our second quarter results. Thank you for your time today.

Operator

Thank you, ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.