First Commonwealth Financial - Q1 2023

Transcript

Operator (participant)

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 Q1 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.

Ryan Thomas (VP of Finance and Investor Relations)

Thank you, Abby. 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 Reske, Chief Financial Officer, Jane Grebenc, Bank President and Chief Revenue Officer, and Brian Karrip, 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 three 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. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I'll turn it over to Mike.

Mike Price (President and CEO)

Okay. Thank you, Ryan. Good afternoon, everyone. We are pleased with our results in a tumultuous quarter for the industry. Core earnings per share beat consensus by $0.06. Our NIM expanded. We had record net interest income. 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 $00.45 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 to 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, 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. 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% to 93.9%. First quarter growth excludes Centric and 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 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 C&I business through our regional business model. With that, I'll turn it over to Jim Reske, our CFO. Jim?

Jim Reske (CFO)

Thanks, Mike. Net interest income grew by $6.3 million over 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 beta 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. 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/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 sweep account 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.

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 in 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 NIM 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. 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.

We expect operating expense to be in the range of $63 million-$64 million per quarter for the rest of 2023. Core provision expense was -$2.7 million, that is a release, $2.1 million of which was due to lower reserves on unfunded commitments, with the 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 CECL 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.

Including one-time credit marks for Centric, the loan loss reserve will increase from 1.35% of total loans on December thirty-first to 1.55% of total loans on March thirty-first, 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.

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 to 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. With that, we'll take any questions you may have.

Operator, questions? [crosstalk]

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, press star, then one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. We will take our first question from Frank Schiraldi with Piper Sandler. Your line is open.

Frank Schiraldi (Managing Director)

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? 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?

Jim Reske (CFO)

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. Given the fact that we had almost 0% deposit betas in 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.

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 beta that's in the upper 20s, more like 28%. It's impossible to peg even an exact number like that. It'd 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 NIM, the ending NIM for the year by about five basis points. If you have a 28% cumulative beta, 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 different from that. 10 points less than that.

That could maybe helps you give you some idea of to the sensitivity of the NIM to the betas. Given where things are going, it's very difficult to predict exactly where deposit behavior is gonna take us.

Frank Schiraldi (Managing Director)

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? Maybe by year-end it's sort of fully baked in your analysis?

Jim Reske (CFO)

Yeah. That's a great question. In our analysis, actually we tried to only go out one year. It's difficult to break even several quarters out, let alone going into the next year. The way we think about 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 by 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. 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.

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.

Frank Schiraldi (Managing Director)

Gotcha. Okay. That's great color. Thank you. Just curious, I mean, it makes perfect sense, you're talking about remaining under the $10 billion and the trust, sweep 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 sweep balances coming back on in the quarter?

Mike Price (President and CEO)

Yeah. Hey, Jim, why don't you take the rates, and I'll take the strategies.

Jim Reske (CFO)

Yeah. We hold those in a fiduciary capacity for our trust clients, so they can be no better or worse than what's offered on the market. Those rates are going to be over. They're going to be premium rates in the market, probably over 4%. But no better or worse than they were able to get in their sweep accounts, that's why we're able, as a fiduciary, to bring it back on the balance sheet. Mike, why don't you take the other question on?

Mike Price (President and CEO)

Yeah. Just, our Bank President, Jane Grebenc, and her head of corporate and retail banking, they have been laser-focused on a core depository for a decade. 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 RMs 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. 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.

Frank Schiraldi (Managing Director)

Yeah. No, I appreciate that. If I could just sneak in one last one. You mentioned, Jim, the $63 million-$64 million in operating expense. Any change to the, I think it was 35% expense saves, in the Centric deal? When are those fully baked in, by? Thanks.

Jim Reske (CFO)

When we announced it, we projected that those would be fully baked in by the first full year, which would be next year. We think we're on track to achieve that 35% this year.

Frank Schiraldi (Managing Director)

Okay, great. Thanks.

Mike Price (President and CEO)

Thank you.

Operator (participant)

We will take our next question from Karl Shepard with RBC Capital Markets. Your line is open.

Karl Shepard (Assistant VP)

Hey, good afternoon, everybody. Appreciate all the color on deposit betas. 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?

Jim Reske (CFO)

Actually, the asset yields we're still asset sensitive, and so there's still upside on the asset side. If you look at where we kind of 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. I'm not sure it works that way every quarter, but that's kind of the 100% loan beta, at least for the first quarter this year.

Karl Shepard (Assistant VP)

Yeah.

Jim Reske (CFO)

The new loans are coming on at really nice yields. I'm sorry, Mike.

Mike Price (President and CEO)

Oh, no, go ahead.

Jim Reske (CFO)

Yeah. We're pleased to see where that's happening. Even with, for example, some portfolios with minimal loan growth, the replacement yields are still pretty strong. Even if a portfolio doesn't grow, the new loans that are coming on are coming out at higher rates than the loans that are coming off.

Mike Price (President and CEO)

Yeah. Centric added a little to our asset sensitivity. Probably just over two-thirds of the commercial loans were variable.

Jim Reske (CFO)

That's right.

Karl Shepard (Assistant VP)

Okay. 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, just can you help me understand that? It feels like maybe a slight tweak in the loan growth outlook, I don't think you guys are signaling necessarily kind of a weaker environment.

Mike Price (President and CEO)

Yeah. I think it's determined by price and some of the yields on some of our consumer categories had gotten a little tight. We raised some rates, and that restricted some volume, particularly in the indirect business. We're still doing a lot of indirect, a little bit more on our terms. We have a very experienced leader there. We like the business we're getting, just not as much of it. I also think, 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. 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 C&I, in our regions, than we've had in a while. Also obviously our new equipment finance business, everything that's put on there will stick to the balance sheet since that's relatively new.

Karl Shepard (Assistant VP)

Great. Thanks for all the help.

Operator (participant)

As a reminder, it is star one if you would like to ask a question. We will take our next question from Daniel Tamayo with Raymond James. Your line is open.

Daniel Tamayo (Director)

Hey, good afternoon, everybody. Maybe first, we can start on the office commercial real estate portfolio. Appreciate the new disclosures. 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've got listed on that slide.

Jim Reske (CFO)

I'll hand it off to Brian Karrip, our Chief Credit Officer in a minute. You know, just a $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. 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.

Brian Karrip (COO)

Thank you. Thanks Mike, and thanks Daniel for your question. 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 is central business district and what is in the suburban. 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. The second loan has got a tenant that's a global credit tenant. 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. 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.

Daniel Tamayo (Director)

That's great color. I appreciate all that. Switching gears for my follow-up here, for you, Jim. You know, the reserves are much stronger after the deal now at 155. Just curious on your thoughts of where, you know, 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 just interested in your thoughts about the ACL here.

Jim Reske (CFO)

No, I appreciate that a lot. 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. If anything that compares more favorably, it appears than it did before and creates a little less pressure, in that sense. After this kind of reset for the acquisition, then the normal pressures just resume. We, more provision expense is going to be driven by loan growth and then changes in our Moody's economic forecast. 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.

Brian Karrip (COO)

No, that was well put.

Jim Reske (CFO)

Hopefully that helps, Daniel.

Daniel Tamayo (Director)

It does. Thanks, guys. Appreciate it. That's all for me.

Jim Reske (CFO)

Thank you.

Daniel Tamayo (Director)

Thanks.

Operator (participant)

we'll take our next question from Matthew Breese with Stephens. Your line is open.

Matthew Breese (Managing Director)

Hey, good afternoon.

Jim Reske (CFO)

Good afternoon.

Matthew Breese (Managing Director)

A few modeling questions on my end. Sorry if I missed it in your opening comments, but I was curious what accretable yield was for the quarter and then the outlook for the rest of the year.

Jim Reske (CFO)

It's about five and a half basis points in the quarter. It's hard to give you because some of it because the CECL is going to go up and down based on how credit performs. It's hard to give you kind of where that's going to go for the rest of the year. It's five and a half for the first quarter.

Matthew Breese (Managing Director)

Okay.

Jim Reske (CFO)

You're modeling that-

Matthew Breese (Managing Director)

I was hoping.

Jim Reske (CFO)

You might see it there for the rest of the year, and I'll update you as we go along.

Matthew Breese (Managing Director)

Okay. Turning to the securities portfolio. It's been in decline for five or six quarters now. Just wanted to get an updated message on, you know, what you're doing with cash flows there and if there's any appetite to add to it.

Mike Price (President and CEO)

Jim?

Jim Reske (CFO)

Yeah, thanks for asking. Great question. We, I think we'll change our approach. We, as you noted, we have been letting it run off to fund loan growth and expectations for strong loan growth. 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 stockpiled cash by basically borrowing from the FHLB and putting it on deposit with the Federal Reserve.

We'll probably deploy that excess cash into securities, you know, at a measured pace. We're dollar cost average into the market, not all at once. We'll probably deploy that, to grow the securities portfolio. One way to think about that is if we add, just reinvested ordinary cash flow for those last couple of quarters, the security portfolio will be at a higher level. 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.

Matthew Breese (Managing Director)

Okay. Do you care to give us some reference point in terms of securities to assets that you feel most comfortable with?

Jim Reske (CFO)

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.

Matthew Breese (Managing Director)

Okay. Okay. The other subject we didn't quite fully flesh 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.

Mike Price (President and CEO)

Yeah. You know, the downdraft here, the last year or so has been, with our gain on sale businesses, primarily, SBA and mortgage. Just had lunch with our mortgage head last week, and hopefully we've bottomed out, and we can make some progress there. We think that long term will be a strength of the bank. Right now, these, two of the key businesses, are struggling a bit and are a little bit below our internal budgets as well. We think we can, we can pick up and improve that line item, from here towards the end of the year.

Matthew Breese (Managing Director)

Got it. Okay. Maybe, Mike, just commenting on M&A from here. Would love to get a sense for geographically, you know, which direction you'd like to head, east or west. Give us a kind of an updated thought on kind of sizing of any potential targets that you might be interested in.

Mike Price (President and CEO)

Well, the first thing order of business is, you know, announcing, closing, and converting a bank are the easy part. The hard part is, you know, having a ground game and growing a great franchise and a footprint that we just acquired. 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. We wanna hit the ground running in the second half of the year and certainly well into 2024. 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.

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, you know, 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. 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, 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. So there's all kinds of opportunities that, you know, they tend to be kind of episodic in terms of how they present themselves. But, you know, we're trying to... There's a lot of good banks out there that we can partner with. In terms of size, you know, I think our history is probably fairly indicative of what might be our future.

You know, we've done really small deals, you know, $200 million and up to Centric was the largest at $1.1 billion. Very manageable. That way, if you get sideways for a few months, you can figure it out and press forward. We expect deals to not only be accretive to earnings, but really accretive to profitability long term. That's a little higher standard. You know, the things we've done in Ohio have done exactly that for us. We were a, you know, 60-plus efficiency bank. We were a, you know, an ROA that couldn't get to one. You know, 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. I wish it was, you could almost bake it into your plan. You and I both know you can't. At least if you're selective, you can't.

Matthew Breese (Managing Director)

No, I understand, and I appreciate all the color. Thank you. That's all I had.

Operator (participant)

As a reminder, this is star one if you would like to ask a question. We will take our next question from Manuel Navas with D.A. Davidson. Your line is open.

Manuel Navas (Senior Research Analyst and Managing Director)

Hey, good afternoon.

Mike Price (President and CEO)

Hey, Manuel.

Manuel Navas (Senior Research Analyst and Managing Director)

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 if it's gonna be first half weighted or not. Any kind of thoughts on that, on that end as well?

Mike Price (President and CEO)

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 the trend, but it certainly has been the case the last 2 or 3 years. As I look at kind of on page 7, our. Actually, it's not page 7. Sorry about that. I think it's the page before loans. Page 6. You know, I think, you know, we have an opportunity to grow C&I. Construction has been good to us. That could present some opportunities. Commercial real estate, we picked up a lot of commercial real estate with Centric.

We'd like to grow the C&I, the small business, I think that's where we would start. We have good mortgage, commercial real estate, and other portfolios that just are a little harder in a higher rate environment. Indirect auto, as I mentioned, where you really need to get the right pricing and the right deal. I think it'll come on the C&I 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, you know, we're looking at over $200 million there alone, that'll help the C&I side. Is this helpful or I don't mean to ramble.

Manuel Navas (Senior Research Analyst and Managing Director)

No, I was gonna ask about equipment finance specifically, so that was kind of helpful with that target.

Mike Price (President and CEO)

Jim, anything? Jane, you're on the line. Anything I missed? Jane?

Jane Grebenc (Bank President and CRO)

No. I think that we're really targeting, as you said, Mike, C&I. We will get our fair share of commercial real estate. You know, that's why you have lots of businesses, because when some are down, the others can, carry the water.

Manuel Navas (Senior Research Analyst and Managing Director)

Okay. Can I flip that to kind of deposit side? Just kind of thoughts on where the non-interest bearing % can stay stable or where it can fall to. You know, a lot of your new growth is CDD. I'm just wondering how high that book can get just as you kind of play out across the year and grow deposits.

Mike Price (President and CEO)

Yeah. Jim, why don't you... You've modeled it, so.

Jim Reske (CFO)

Yeah. The NIB to total deposits was 33% last quarter. Fell to 29% this quarter. It was 25% pre-pandemic. It's probably settled somewhere in the mid- to high-20s.

Manuel Navas (Senior Research Analyst and Managing Director)

Then the CD book was so low before.

Jim Reske (CFO)

Right

Manuel Navas (Senior Research Analyst and Managing Director)

like, just two quarters ago. Where could that get to? I mean, you just have capacity there. Just kind of thoughts on a more normalized CD book.

Jim Reske (CFO)

It's a fair question, but you know, I don't have an answer for you. I don't know as a % of total deposits. We're definitely rebuilding it. We had let it go to 0. We had really, during the pandemic, focused on trying to get our total cost of deposits as close to zero as possible.

Mike Price (President and CEO)

Yeah.

Jim Reske (CFO)

With a conscious idea to not pursue time deposits, and we are doing that. I will tell you one thing that's really encouraging is a little antidote 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. Idle cash balances that because we're offering such low rates, they took them somewhere else, and now they're bringing them back. What we have found is that when we put out a time deposit special and we track dollars for every $100 million we attract, just say about $50 million of that will be our own money. That's customers that kept it in a non-interest bearing account or a savings account.

They take advantage of a CD special. About $25 million will be, money from our own customers that they kept somewhere else, some other bank they bring back to us. The last $25 million is new money coming from outside the bank.

Mike Price (President and CEO)

Yeah.

Jim Reske (CFO)

Hopefully that gives you a little color on how things are moving. We do have the time deposit.

Mike Price (President and CEO)

Yeah. We had the luxury of doing that simply because, you know, Jane and the team, our business bankers, our commercial bankers, our 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. You know, not all branch employees and banks run their retail model that way. 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 or, or low interest checking. I think it'll be natural that perhaps, you know, we can, we can grow, 'cause 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.

Jane Grebenc (Bank President and CRO)

No, I don't think so, Mike. I think you've covered it.

Jim Reske (CFO)

Let me just add one bit that might also be helpful to you in terms of deposit flows within the bank. We gave the number for the amount of non-interest-bearing that decline in non-interest-bearing over the course of the quarter. On average, it was $180 million in change. 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. 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.

In a different environment, customers weren't willing to pay that cost, and things have changed. We saw 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. That's a lot of non-interest-bearing money that just becomes a now account basically, within, you know, bearing interest, but stays at the bank. Our customers really appreciate it.

Manuel Navas (Senior Research Analyst and Managing Director)

That's great color. Can I shift with one last question?

Jim Reske (CFO)

Please.

Manuel Navas (Senior Research Analyst and Managing Director)

You have your fund outlook, your Fed funds outlook that has a little bit of a lower endpoint for the year. Kind of how is, how are you positioned for potential rate declines at some point?

Jim Reske (CFO)

Yeah. We're still asset sensitive. 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 like talked about stock buying and 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, where we typically have bought in the past, that'll produce a liability sensitive layer that will blunt our asset sensitivity a little bit.

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 the lower rates.

Mike Price (President and CEO)

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. We become aware when we veer off of that, and then organically, we try to get back there.

Jim Reske (CFO)

Yeah.

Mike Price (President and CEO)

We just think it's straight pool.

Manuel Navas (Senior Research Analyst and Managing Director)

Thank you. Thank you for the, for the comments.

Operator (participant)

We'll take our next question from Dan Cardenas with Janney Montgomery Scott. Your line is open.

Dan Cardenas (Director)

Hey, good afternoon, guys. Just 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, 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?

Mike Price (President and CEO)

Yeah. I think on.

Jim Reske (CFO)

Thirteen.

Mike Price (President and CEO)

13, we have your answer. I do think we got some broker deposits from Centric, but I don't think we've had them.

Jim Reske (CFO)

No, Dan, I'm so glad you asked because we have not had any broker deposits. Now we are showing $18.7 million. They are all acquired from Centric. We really have not had any appetite or desire to use broker deposits wholesale funding in the past. We inherited those in the acquisition.

Dan Cardenas (Director)

Okay.

Jim Reske (CFO)

In terms of your other question? I'm sorry.

Dan Cardenas (Director)

Any desire to maybe use the Bank Term Funding Program?

Jim Reske (CFO)

We've been evaluating it. Well, we have not tapped into that. We are evaluating it. It seems like some of the financial terms could be attractive. We wanna make sure that there's been a stigma or signaling effect from tapping it in the markets. We were eager to see the reaction in the market to others that might have tapped into that and how that appears, because there may be some financial advantages to using some of that facility. To date, we have not.

Dan Cardenas (Director)

Okay, great. Perfect. That's all I have. Thanks, guys.

Jim Reske (CFO)

Thanks, Dan.

Mike Price (President and CEO)

You bet.

Operator (participant)

There are no further questions at this time. I will now turn the call back to Mr. Mike Price for any additional or closing remarks.

Mike Price (President and CEO)

Well, thank you again. We appreciate the partnership. We appreciate the opportunity to be with a number of you, several of you every quarter. We always learn and from your perspective. Thank you for your great questions today. Take care.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call, and we thank you for your participation. You may now disconnect.