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spk00: Ladies and gentlemen, good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the first Commonwealth Financial Corporation's first quarter 2023 earnings release conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you, and I will now turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin.
spk05: Thank you, Abby, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim Refke, Chief Financial Officer, Jane Gravince, Bank President and Chief Revenue Officer, and Brian Karup, our Chief Credit Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to FCBanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call. Before we begin, we need to caution listeners that this call will contain forward-looking statements. Please refer to our forward-looking statements disclaimer on page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I'll turn it over to Mike.
spk06: Hey, thank you, Ryan, and good afternoon, everyone. We are pleased with our results in a tumultuous quarter for the industry. Core earnings per share beat consensus by six cents Our NIM expanded, we had record net interest income, and we grew deposits much faster than loans, bringing down our loan-to-deposit ratio. In short, we worked our way through the first quarter by focusing intently on deposit gathering and retention while taking a measured approach to loan growth. Core earnings per share, which adjusts for one-time merger expenses, and the day one CECL provision associated with our acquisition of Centric was 45 cents in the first quarter. Core return on assets of 1.75% was up from 1.51% last quarter, reflecting the benefit of lower provision expense, while core pre-tax, pre-provision ROA of 2.11% was down from 2.28% last quarter. The NIM expanded by two basis points, the 4.01%, and the net interest income was up by $6.3 million over the last quarter. Non-interest income declined and expenses rose, contributing to an efficiency ratio that at 52.41% was slightly elevated from last quarter's 50%. The first quarter was an eventful one for us. We successfully closed and converted Centric Bank during the quarter. The legal close took place on January 31st, and the conversion occurred over the last weekend in February. I'm deeply grateful for all of the team members on both sides of this integration who worked to make this come together as smoothly as it did. We are bullish on the demographics of the region, which includes Harrisburg, Lancaster, and the Philadelphia suburbs of Devon and Doylestown. We're also pleased with the former-centric team that joined First Commonwealth in as they have added to our line and back office strength. The events of the first quarter in the banking industry put a spotlight on community banks like First Commonwealth that have diverse and granular deposit portfolios and ample access to liquidity. Looking back to the middle of last year before deposit competition began in earnest, our cost of deposits was one of the best of any financial institution in the country. And our time deposit book had been consciously reduced to less than 5% of total deposits. Furthermore, our deposit composition has for some time been balanced between urban and rural and business and consumer with a relatively large proportion of transaction accounts. As the events of the first quarter unfolded, we saw renewed interest in the composition of that deposit base. I would direct your attention to new disclosures on pages 13 through 17 in the accompanying slide deck. For example, as of the end of the first quarter, our uninsured deposits comprised only 27% of total deposits, and our total uninsured unsecured deposits amounted to only 17% of total deposits. Our average deposit size of $19,426 speaks to the granularity of our deposit base. and that figure is for all deposits. Consumer deposits represent 58% of our deposits, and the average consumer deposit is $12,726, while the average consumer checking account is $7,900. No one private sector industry represents more than 3% of our deposits. Approximately 98.2% of our deposits are less than $250,000 and 94% are less than $100,000. We refrained from certain deposit gathering strategies in the fourth quarter in a conscious effort to keep our total assets below $10 billion at quarter end. However, we have always been and continue to be focused on gathering new checking households and acting as the primary depository for our customers. At year end in 2022, our total assets were $9.8 billion, and we pivoted once again to broader deposit gathering. The results demonstrate the fruit of our efforts as average deposits grew 13.8% annualized, outstripping measured loan growth of 3.43% for the quarter, bringing down our loan-to-deposit ratio from 95.6% 93.9%. First quarter growth excludes Centric in the impact of purchase accounting marks as consumer loan categories led the way. We now expect to see mid single-digit loan growth through the end of the year. In light of our continued ability to generate excess or capital in excess of what is needed to fund organic loan growth, we're pleased to announce that we have raised the dividend and obtained an additional $25 million of share repurchase authorization from our board. Our digital platform continues to show impressive growth, particularly around customer engagement. We're now averaging over 210,000 average daily logins, a 24% year-over-year increase. This equates to approximately 1.2 logins per active user per day. As we look to the remainder of 2023 and into 2024, we will remain relentlessly focused on gathering and retaining core deposits. We will realize the benefits of the Centric acquisition and begin to grow. We will grow our CNI business through our regional business model. And with that, I'll turn it over to Jim Ruskie, our CFO. Jim?
spk08: Thanks, Mike. Net interest income grew by $6.3 million over the last quarter to a record $94.7 million. The net interest margin, or NIM, expanded by two basis points to 4.01% in the quarter as compared to last quarter. The cost of non-maturity deposits was 0.88% in the first quarter for a cumulative through the cycle data of 17.5% to date. Deposit rates increased over the course of the quarter, but at a slowing rate. up 31 basis points from January to February, but only up 15 basis points from February to March. Our projections for 2023 incorporate a rate forecast that suggests one more 25 basis point rate hike, and then a decline in the Fed funds rate to approximately 4.8% by year end. We estimate roughly five basis points of NIM compression next quarter, as always, give or take a few basis points. Our forecasts are highly dependent on assumptions regarding the repricing of deposits. In terms of liquidity, we began the first quarter of 2023 with $285 million of overnight borrowings from the Federal Home Loan Bank. And because deposit growth exceeded loan growth, we had paid off those borrowings completely towards the middle of March. However, in response to industry-wide liquidity concerns, we stockpiled some cash, as did many banks this quarter, to be sure we have cash on hand to meet liquidity needs. At quarter end, our cash and available for sale for securities as a percentage of total assets increased 102 basis points to 10.6%, and total available liquidity of $4.1 billion was 2.6 times total uninsured slash unsecured deposits. First quarter average deposits grew at a 13.8% annualized rate, as Mike previously mentioned. excluding the acquisition of Centric Bank. Part of that growth came from the transfer in January of approximately $109.1 million of average off-balance sheet deposits from a trust company's sweep accounts back onto our balance sheet. This was one of the strategies that, as Mike mentioned, we held off on executing in the fourth quarter to avoid inadvertently going over $10 billion in total assets. However, even without this transfer, Average deposits would still have grown by 8.3% annualized in the first quarter. The total cost of deposits, which includes non-interest-bearing deposits, increased by 52 basis points from 20 basis points last quarter to 73 basis points in the first quarter. The total cost of funds, which includes borrowings, grew by 51 basis points to 90 basis points for the quarter, up 39 basis points from last quarter. This growth of 51 basis points to the total cost of funds was nearly equal to the 50 basis point increase in the yield on total earning assets in the quarter, which helps explain why the name was largely unchanged. Fee income declined by $1.3 million as compared to last quarter, due largely to ongoing weaknesses in our gain on sale businesses. Operating expense increased by $5.8 million as compared to last quarter, as you might expect following an acquisition. Approximately $1.9 million of this expense was directly attributable to Centric operating expense, and another $400,000 was the result of increased intangible amortization costs attributable to Centric. And there were other indirect expenses associated with the acquisition, such as advertising, that are difficult to quantify. For example, we experienced a $742,000 increase in FDIC deposit insurance premiums in the first quarter, approximately $300,000 of which can be attributable to Centric. Looking forward, we expect intangible amortization expense to total $4.7 million in 2023, with $2.1 million of that stemming from the Centric acquisition. And we expect operating expense to be in the range of $63 to $64 million per quarter for the rest of 2023. Core provision expense was negative $2.7 million, that is, a release, $2.1 million of which was due to lower reserves on unfunded commitments, with a remaining $0.6 million release due to the low level of charge-offs and loan growth, along with a slightly improved Moody's economic forecast within our CISO model. Centric credit marks came in very close to what we expected when we announced the transaction. There was a $10.7 million one-time day one provision expense for Centric as anticipated, but this is excluded from our reported core operating figures. However, including one-time credit marks for Centric, the loan loss reserve will increase from 1.35% of total loans on December 31st to 1.55% of total loans on March 31st, 2023, adding further protection to capital. Our non-performing loans reflect the acquisition, but credit trends continue to be strong. with very low charge-offs down to six basis points from 11 basis points last quarter. I would direct you to new disclosures on pages 16 through 17 of our supplement that break out our CRE and office loan portfolios. Finally, tangible book value per share increased from $7.92 per share at year end to $8.13 per share due to retained earnings and a $13.1 million improvement in AOCI. from $137.7 million to $124.6 million. AOCI is down to 14.8% of tangible common equity from 18.6% last quarter, and our tangible common equity ratio remains at 7.8%. I would add that if the fair value marks on our available for sale and held in maturity securities were fully realized, we would remain well capitalized. While we have received an additional $25 million of share repurchase authorization from our board, as Mike mentioned, we anticipate taking a measured, opportunistic approach to buybacks, balancing the need to capitalize moderate loan growth and preserve capital with the opportunity to retire shares at these attractive price levels. And with that, we'll take any questions you may have.
spk00: Operator questions? Thank you. As a reminder, If you would like to ask a question, press star then the number one on your telephone keypad, and we will pause for just a moment to compile the Q&A roster. We will take our first question from Frank Chiraldi with Piper Sandler. Your line is open.
spk07: Thanks. Good afternoon. Just in terms of the margin detail you gave on I think you said five basis points of margin contraction in the second quarter, give or take. Seems really strong, especially if you're still targeting that 25% total deposit beta. Not sure if I missed the change there, but is that still the assumption? And can you maybe just talk about, you know, how long you think or when you think that sort of gets fully baked in to the margin?
spk08: Yeah, sure, Frank. We've been spending a lot of time working on that and trying to understand it. Deposit movements have been so varied this quarter that it's difficult to predict. You may recall that a year ago we dropped our cumulative deposit beta forecast. We had been for some time saying 25% cumulative deposit beta. And then given the fact that we had almost 0% deposit betas in any incremental deposit betas in any given quarter last year, We dropped it to 20%, and then towards the end of last year, we said we better go back to 25%. That was our going assumption. Well, we've done some work now to understand where our deposits are going, and based on current estimates, kind of extrapolating the first quarter deposit trends into the end of the year, we would calculate a deposit data that's in the upper 20s, more like 28%. But it's impossible to peg even an exact number like that. It would be more helpful if I tell you that when we look at it that way, we can say that for every... point of cumulative deposit beta, it affects the ending NIM for the year by about five basis points. So if you have a 28% cumulative data, you have one result. And if it ends up being 30% cumulative deposit beta by the end of the year, the margin is 10 points less than that. So that maybe helps to give you some idea of the sensitivity of the NIM to the betas. But given where things are going, it's very difficult to predict exactly where deposit behavior is going
spk07: Okay. I guess when you think about that 28% or whatever it ends up being, do you sort of feel like that continues maybe for a few quarters after the Fed stops? So maybe by year end, it's sort of fully baked in in your analysis?
spk08: Yeah, that's a great question. And our analysis actually tries to only go out one year. It's difficult to break even several quarters out, let alone going into the next year. So the way we think about it is a cumulative through the cycle beta taking us to just the end of this year in a world where the Fed funds comes up a little bit, another quarter point, and then drops down to 4.8 by the end of the year. Even in those results, Frank, when we do a 28% deposit beta, the NIM ends up around in the low 390s. And if we stress it and do a 30% cumulative deposit beta, the NIM ends up in the low 380s. by the end of the year. And that's why we're fairly comfortable saying five basis points per quarter, but give or take a few on either side because no one really knows where deposits are going.
spk07: Gotcha. Okay. That's great color. Thank you. And then just curious, I mean, it makes perfect sense. You're talking about remaining under the 10 billion and the trust suite balances coming back on in the first quarter. Just curious what sort of rates those are at. And if you could talk about the growth in the deposit, which was still very strong, the growth in deposits at legacy FCF outside of those sweet balances coming back on in the quarter.
spk06: Yeah, HM, why don't you take the rates and I'll take the strategies.
spk08: Yeah, so the rates and the trust deposit, so those trust deposits, we hold those in a fiduciary capacity for our trust clients, so they can be no better or worse than what's offered in the market. So those rates are going to be over, probably over there are going to be premium rates in the market of probably about 4%. But no better or worse than they were able to get in their sweep accounts, and so that's why we're able, as a fiduciary, to bring it back on balance sheet. And Mike, why don't you take the other question?
spk06: Yeah, just our bank president, Jane Gerbentz, and her head of corporate and retail banking, they have been laser-focused on a core depository for a decade and it's taken that long to build it. We were particularly focused in the first quarter on customer outreach through our branch managers and our commercial RNs with the competitive rates that Jim mentioned. We've rebuilt the CD book. We had let that whittle down to virtually nothing. We have a team that's really empowered to make exceptions for clients. You know, we look at a good deposit base of small businesses, corporate clients, municipalities. It's long tenured, deep relationships, sticky and granular. And we just look to add to it every month. And that's a big part of the incentives for our branches who have a balance sheet and our corporate RMs. I hope that's helpful.
spk07: Yeah, no, I appreciate that. And then if I could just sneak in one last one. You mentioned, Jim, the $63 to $64 million in operating expense. Any change to the, I think it was 35% expense saves in the Centric deal? And then when are those fully baked in by? Thanks.
spk08: We had, when we announced it, we projected that those would be fully baked in by the first full year, which would be next year. But we think we're on track to achieve that 35% this year.
spk02: Okay, great. Thanks. Thank you.
spk00: And we will take our next question from Carl Shepherd with RBC Capital Markets. Your line is open.
spk12: Hey, good afternoon, everybody. I appreciate all the color on deposit betas, but I guess I wanted to follow up, too, and ask about asset yields. Just kind of what are you thinking about asset yield lift as we roll through kind of the back half of the year, assuming kind of your rate forecast?
spk08: Actually, the asset yields are still asset sensitive, and so there's still upside on the asset side. If you look at where we went this quarter, it was a quarter where the Fed raised rates 50 basis points, and the asset yields went up by about 50 basis points. So I'm not sure it works that way every quarter, but that's kind of a 100% loan beta, at least for the first quarter of this year. But the new loans are coming on a really nice yield. I'm sorry, Mike.
spk06: Oh, no, go ahead.
spk08: Yeah, so we're pleased to see where that's happening. For example, some portfolios with minimal loan growth, the replacing yields are still pretty strong. So even if the portfolio doesn't grow, the new loans that are coming on are coming at a higher rate than the loans that are coming off.
spk06: Yeah, and Centric added a little to our asset sensitivity. Probably just over two-thirds of the commercial loans were variable. That's right. Okay. Okay.
spk12: And then kind of switching over to lending. I think, Mike, you mentioned taking a measured approach, I think was your wording. I'm just curious, what's driving that? I noticed maybe lower construction commitments in the materials, but just can you help me understand that? And it feels like maybe a slight tweak in the loan growth outlook, but I don't think you guys are signaling necessarily kind of a weaker environment.
spk06: Yeah. I think it's determined by price and the some of the yields on some of our consumer categories had gotten a little tight. So we, um, raised some rates and, uh, that restricted some volume, particularly in the indirect business. We're still doing a lot of, uh, indirect, uh, more, a little bit more on our terms. We have a very experienced leader there. Uh, we like the business we're getting, uh, just not as much of it. And then I also think, um, You know, some of the businesses have slowed down a bit. Mortgage has. Hopefully it's bottomed out, and they're turning the corner there. And the commercial side on the commercial real estate has backed up a little bit as well. We have nice pipelines, I would say, more so in CNI in our regions than we've had in a while. And also, obviously, our new equipment finance business
spk00: everything that's put on there will stick to the balance sheet since that's relatively new great thanks for all the help as a reminder it is star one if you would like to ask a question and we will take our next question from daniel tamayo with raymond james your line is open hey good afternoon everybody um
spk04: Maybe first we can start on the office commercial real estate portfolio. Appreciate the new disclosures. But if we could just talk about maybe the dispersion of that office portfolio, kind of where it is within your markets, if there's any of it kind of central business district, particularly the big metro areas that you get listed on that slide.
spk06: I'll hand it off to Brian Karp, our chief credit officer, in a minute. But just $5.4 million average commitment, rent per square foot in the space of about $17.65, or $17.65, which is really well below East and West Coast rent. And then good debt service coverage of about 153 and loan-to-value of 63.2. which just means that vacancy could go up quite a bit, and a developer, it won't break the developer. Brian, why don't you add a little more commentary to slide 17? Thank you.
spk11: Thanks, Mike, and thanks, Daniel, for your question. So when we think about our book and the dispersion of the portfolio, we have a subscription with a global real estate firm that provides information and analytics. and we receive monthly updates. We think that our portfolio has behaved as well if not better than most others. Let's talk about the materials we gave you. Our markets are stable and very predictable. As we break our portfolio down and think about our geographic dispersion across each of the markets identified on slide 17, we further define it as what a central business district and what is in the suburban. So we have about $87 million that is in Central Business District, and it's performing reasonably well. As we think about the balance of the book and the materials we provided, there are only two loans above $15 million in the portfolio. One loan is secured by multiple properties, and those are leased to the federal government And the second loan is got a tenant that's a global credit tenant. So the office book has performed fine, notwithstanding all the concern and the noise. We focus on this book and have focused on it since the pandemic. And it may not come out in the slides, but we're down about $77 million over the past year or so, 14 months. And we'll continue to work to appropriately size this book given the economic conditions.
spk04: That's great, Collar. I appreciate all that. And then switching gears to my follow-up here for you, Jim, the reserves are much stronger after the deal now at 155. Just curious on your thoughts of where – if you think that still will drift up potentially from here. Obviously, a lot of questions in terms of what would happen in the environment, but I'm just interested in your thoughts about the ACL here.
spk08: No, I appreciate that a lot, and I'll start, and then Brian, if you have some further thoughts, you can add to it as well. With the acquisition and the marks, the mark contributed to the ACL and gave us a bit of a reset following the acquisition at a nice higher level from 135 to 155. So if anything that compares more favorably to peers than it did before, it creates a little less pressure in that sense. After this kind of reset for the acquisition, then the normal pressures just resume. Provision expense is going to be driven by loan growth and then changes in our Moody's economic forecast. So after the reset, it's kind of back to the same pressures it was before and have been for a while. Brian, I don't know if there's anything you wanted to add to that.
spk02: No, that was well put. Hopefully that helps, Danny. It does. Thanks, guys. Appreciate it. That's all for me. Thank you. Thanks.
spk00: And we'll take our next question from Matthew Brees with Stevens. Your line is open.
spk03: Hey, good afternoon. Good afternoon. A few modeling questions on my end. Sorry if I missed you in your opening comments, but I was curious what a credible yield was for the quarter and then the outlook for the rest of the year.
spk08: It was about five and a half basis points in the quarter. It's hard to give you because the CISO is going to go up and down based on how credit performs. So it's hard to give you kind of where that's going to go for the rest of the year, but it's five and a half for the first quarter.
spk02: Okay.
spk08: You might keep it there for the rest of the year, and I'll update you as we go along.
spk03: Okay. And then turn it to the securities portfolio. It's been in decline for five or six quarters now. Just wanted to get an updated message on what you're doing with with cash flows there and if there's any appetite to add to it.
spk08: Yeah, thanks for asking. Great question. We do think we'll change our approach. As you noted, we have been letting it run off to fund loan growth and expectations for strong loan growth. And it's really come down to a pretty low level, about 12% of total assets. As I mentioned in the prepared remarks, towards the end of the quarter, we stockpile cash by basically borrowing from the FHLB and putting it on deposit with the Federal Reserve. But we'll probably deploy that excess cash into securities, you know, at a measured pace. We're dollar cost averaging in the market, not all at once. But we'll probably deploy that to grow the securities portfolio. And one way to think about that is if we had just reinvested ordinary cash flow for those last couple quarters, the securities portfolio will be at a higher level. And so this will be a way to kind of replicate that redeployment of the cash flow and get it back up to a little bit higher level.
spk03: Okay. Do you care to give us some reference point in terms of securities to assets that you feel most comfortable with?
spk08: Right now, I don't know exactly, but right now I'm contemplating adding about $100 million to the securities portfolio balance from here by the end of the year.
spk02: Okay.
spk03: The other subject we didn't quite fully fleshed out, was just thoughts around fee income, some of the moving parts there this quarter, and then the outlook for the rest of the year. I was hoping for some color there.
spk06: Yeah. You know, the downdraft here the last year or so has been with our gain-on-sale businesses, primarily SBA and mortgage, and just had lunch with our mortgage head last week, and hopefully we've bottomed out and we can make some progress there. And we think that long-term will be a strength of the bank. And right now, two of the key businesses are struggling a bit and are a little bit below our internal budgets as well. And so we think we can pick up and improve that line item from here towards the end of the year.
spk02: Got it. Okay.
spk03: And then maybe, Mike, just commenting on M&A from here. We'd love to get a sense for geographically, which direction you'd like to head, east or west, and then give us kind of an updated thought on kind of sizing of any potential targets that you might be interested in.
spk06: Well, the first thing, order of business, is announcing, closing, and converting a bank are the easy part. The hard part is having a ground game plan and growing a great franchise and a footprint that we just acquired. And we're working hard on that every month. We had actually modeled, just because of our history with M&A, a little downdraft initially with deposits and loans. And we put that into our deal math. But we want to hit the ground running in the second half of the year and certainly well into 2024. But those are great markets. It's a great opportunity. Those branches, we think they can become a terrific depository for us. We're off to a good start. And those are markets that have a little stronger demographics than we're used to in western Pennsylvania, more like Ohio. In terms of our preference for growth, Just stating a fact, Ohio has been very good to us. We've had double-digit growth there on the loans and deposits side now for five or six years. Our little $180 million bank in Cincinnati is now over $700 million in assets. Columbus and Northern Ohio are now $1.2 billion and $1.3 billion, respectively. They can fill in with the depository and get a better loan-to-deposit ratio like we have in Pennsylvania, but there's a lot of upside there and we like those markets and they've been good to us. You know, Pennsylvania is our home state and, uh, we have $3.4 billion in community Pennsylvania in deposits. That's kind of the breadbasket of the company to the extent that we could do things in market or contiguous to that. And Jim and I muse about, and Jane about rural depositories all the time. We love them. And, uh, So there's all kinds of opportunities. They tend to be kind of episodic in terms of how they present themselves, but there's a lot of good banks out there that we can partner with. In terms of size, I think our history is probably fairly indicative of what might be our future. we've done really small deals, you know, 200 million and up to, uh, Centric was the largest at 1.1 billion and, uh, but very manageable. And that way, if you get sideways for a few months, you can figure it out and press forward. And we expect deals to not only be accretive to earnings, but really accretive to profitability long-term. And that's a little higher standard. And, uh, The things we've done in Ohio have done exactly that for us. We were a 60-plus efficiency bank. We were an ROA that couldn't get to one. That's all changed in the last five or six years with some good acquisitions. Quite frankly, most of that is organic. That's probably more color than you bargained for, but... I wish it was, you could almost bake it into your plan, but you and I both know you can't. At least if you're selective, you can't.
spk03: No, I understand and I appreciate all the color. Thank you. That's all I had.
spk00: As a reminder, it is star one if you would like to ask a question. And we will take our next question from Manuel Navas with D.A. Davidson. Your line is open.
spk02: Hey, good afternoon.
spk09: Just thinking about the loan portfolio and the mid-single-digit loan growth guide, can you kind of go into a little more detail on the mix of it going forward? I know you talked a little bit about consumer pulling back a little bit, but just a little more color on the mix, and it's going to be first half weighted or not. Any kind of thoughts on that end as well?
spk06: Yeah, when you look back the last several years, the first quarter, at least for us, has always been light, and we've tended to do better in the second half of the year. I don't know if that's a trend, but it certainly has been the case the last two or three years. As I look at kind of on page seven, our – actually, it's not page seven. Sorry about that. I think it's the page before loans. Page six, you know, I think – You know, we have an opportunity to grow CNI. Construction has been good to us. That could present some opportunities. Commercial real estate, we've picked up a lot of commercial real estate with Centric. We'd like to grow the CNI, the small business, and I think that's where we would start. But we have good... mortgage, commercial real estate, and other portfolios that just are a little harder in a higher rate environment. And indirect auto, as I mentioned, where you really need to get the right pricing and the right deal. And so I think it'll come on the CNI side and maybe a little bit on the branch side, the branch consumer lending side. Certainly on equipment finance, that business is ramping up. A little slower than we expected, but nonetheless, it'll be meaningful this year. I think we're looking at over $200 million there alone, so that'll help the CNI side. Is this helpful? I don't mean to ramble.
spk09: I was going to ask about equipment finance specifically, so that was kind of helpful with that target.
spk02: Jim, anything? Or Jane, you're on the line. Anything I missed? Jane?
spk01: No, I think that we're really targeting, as you said, Mike, C&I, and we will get our fair share of commercial real estate. And, you know, that's why you have lots of businesses, because when some are down, the others can carry the water.
spk09: Okay. Can I flip that to kind of the deposit side? Just kind of thoughts on where the non-interest bearing percentage can stay stable or where it can fall to. And, you know, a lot of your new growth is CDE. I'm just wondering how high that book can get just as you kind of play out across the year and grow deposits.
spk06: Yeah, Jim, you've modeled it.
spk08: Yeah, so the NIV, the total deposits was 33% last quarter, fell to 29% this quarter. It was 25% pre-pandemic. So it probably settles somewhere in the mid to high 20s.
spk09: And then the CD book was so low before, like just two quarters ago. Where could that get to? I mean, you just have capacity there. Just kind of thought on a more normalized CD book.
spk08: It's a fair question, but I don't have an answer for you. I don't know if it has a percentage of total deposits. We're definitely rebuilding it. We had let it go to zero. We had We had really, during the pandemic, focused on trying to get our total cost of deposits as close to zero as possible.
spk06: Yeah.
spk08: And so with a conscious idea to not pursue time deposits, and we are doing that. I would say one thing that's really encouraging is a little anecdote that might be helpful to you. As we put out time deposits now, we find that a lot of the customers that we have are very loyal to us and had taken money to get their operating accounts with us, but idle cash balances that, because we were offering special rates, they took them somewhere else, and now they're bringing them back. So what we have found is that when we put out a time deposit special and we track dollars for every $100 million we attract to stay, about $50 million of that will be our own money. That's customers that kept it in a non-trespassing account or a savings account. They take advantage of a CD special. But about $25 million will be money from our own customers that they kept somewhere else, some other bank. They bring back to us. And then the last $25 million is new money coming from outside the bank. So hopefully that gives you a little color on how things are moving. But we do have a good time.
spk06: Yeah, and we had the luxury of doing that simply because, you know, Jane and the team are business bankers, are commercial bankers, are branch managers. I mean, their primary charge is to go out and get a non-interest-bearing deposit account and a you know, a core depository from a small business. And, you know, not all branch employees and banks run their retail model that way, but Jane and the team do. And that really put us in a strong position where really over half of our depository was non-interest bearing and now accounts are low interest checking. And so I think it'll be natural that perhaps You know, we can grow because our customers are loyal. We just didn't give them a really attractive CD option. Jane, anything you want to add? This is your baby.
spk01: No, I don't think so, Mike. I think you've covered it.
spk08: Let me just add one bit that might also be helpful to you in terms of deposit flows within the bank. We gave a number for the amount of non-trust bearing that declined non-trust bearing over the course of the quarter. On the average, it was $180 million and change. But money market went up. Other deposit categories went up. CDs definitely went up. Here's just one dynamic for you. We have offered the ICS product for a long time. That's the product we all know about now that allows customers to break up their deposits and receive virtually unlimited deposit insurance. It's a product we've had for years. And now there's much more awareness of it. And so customers are taking advantage of it. There's a cost to it. There always has been. And so in a different environment, customers weren't willing to pay that cost. And things have changed. So while we saw non-interest bearing deposits go down, we saw the ICS balances go up from about $100 million to $200 million over the course of the quarter. So that's a lot of non-interest bearing money that just becomes a now account, basically, with the bearing interest that stays with the bank. So we're happy to offer that. Our customers really appreciate it.
spk09: That's great color. Can I shift with one last question? You have your fund outlook, your Fed funds outlook that has a little bit of a lower end point for the year. Kind of how are you positioned for potential rate declines at some point?
spk08: Yeah, we're still asset sensitive. So we are considering but have not executed on derivative strategies that would either swap either assets or liabilities to reduce that asset sensitivity. Some of the natural things we're doing will blunt the asset sensitivity a little bit. For example, when we talked about stockpiling cash at the end of the quarter, we borrowed that with overnight money. As we deploy them to securities with some kind of term, usually four to five years, we typically have bought in the past. That'll produce a liability-sensitive layer that will blunt our asset sensitivity a little bit. And then as we grow businesses, especially like equipment finance, which has very few prepayments and really has an average life close to the stated life, that gives us a little bit more duration, too, and that helps a little bit organically to blunt against a lower rate.
spk06: And that has been our strategy organically. We've used hedges in the past, but we've been very intentional about being 50% variable and 50% fixed. And we become aware when we veer off of that and then organically we try to get back there. We just think it's straight pool.
spk02: Thank you. Thank you for the comments.
spk00: And we'll take our next question from Dan Cardenas with Jannie Montgomery Scott. Your line is open.
spk10: Hey, good afternoon, guys. Most of my questions have been asked and answered. Just a couple quick questions on the deposit front. I mean, I've noticed a number of larger financial institutions kind of tap the broker deposit market this quarter. Wondering if there's any brokered CDs in your book at quarter end, and then also maybe some color as to your desire, if any, to use the bank term funding program.
spk06: I think on page 13 we have your answer. I do think we've got some broker deposits from Centric, but I don't think we've had them.
spk08: No, Dan, I'm so glad you asked because we have not had any broker deposits, but now we are showing $18.7 million. They are all acquired from Centric. So we really have not had any appetite or desire to use broker deposits and wholesale funding in the past, but we inherited those in the acquisitions. And in terms of your other question, I'm sorry.
spk10: Any desire to maybe use the bank term funding program?
spk08: Oh, we've been evaluating it. We have not tapped into that. We are evaluating it. It seems like some of the financial terms could be attractive, but we want to make sure that there's no stigma or signaling effect from tapping it in the markets. And so we were eager to see the reaction in the market to others that might have tapped into that and how that how that appears because there may be some financial advantages to using some of that facility but today we have not okay great perfect that's all i have thanks guys thanks dan you bet and there are no further questions at this time so i will now turn the call back to mr mike price for any additional or closing remarks well thank you again we appreciate the partnership we appreciate the opportunity to be uh
spk06: with a number of you, several of you every quarter, and we always learn from your perspective. And thank you for your great questions today. Take care.
spk00: Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.
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