First Commonwealth Financial Corp /Pa/ Q1 FY2023 Earnings Call

Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. I would like to welcome everyone to the First Commonwealth Financial Corporation First Quarter 2023 Earnings Release Conference Call. Today's conference is being recorded, and all lines have been muted to eliminate background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I will now turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. You may begin.

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 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 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 statements. 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. And with that, I'll turn it over to Mike.

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 $0.06. 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 $0.45 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 include 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. 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% 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 excess 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 log-ins, a 24% year-over-year increase. This equates to approximately 1.2 log-ins 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. And with that, I'll turn it over to Jim Reske our CFO. Jim?

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. And because deposit growth exceeded loan growth, we 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 for these liquidity needs. At quarter end, our cash and available for sale 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 our trust company 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 of 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. 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 coming from the Centric acquisition and we expect operating expense to be in the range of $63 million to $64 million per quarter for the rest of 2023. Core provision expense was a negative $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. However, including one-time credit marks for Centric, the loan loss reserve will increase from 1.35% of total loans on December 31 to 1.55% of total loans on March 31, 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 6 basis points from 11 basis points last quarter. I would direct you to new disclosures on Pages 16 through 17 of our supplement to 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 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. And with that, we'll take any questions you may have.

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, I'm not sure if I missed the change there, but is that still the assumption? And can you maybe just talk about how long you think or when you think that sort of gets fully baked in to the margin?

Yes, sure, Frank. We've been spending a lot of time working on that and trying to understand that; deposit movements have been so varied this quarter, but it's difficult to predict. You may recall that a year ago, we dropped our cumulative deposit beta forecast. We have been for some time saying 25% cumulative deposit beta. And then, given the fact that we had almost 0% 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 deposits are going and based on current estimates, 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%. But it's impossible to peg even an exact number like that. Maybe more helpful, I'd 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. So 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 than that. So that maybe helps you 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.

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?

Yes. And that's a great question. And our analysis actually tried 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, 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 3.90s. And if we stress it and do a 30% cumulative deposit beta, the NIM ends up in the low 3.80s 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 at either side because no one really knows where deposits are going.

Got you. 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 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 deposits, which was still very strong the growth in deposits at legacy FCF, outside of those sweep balances coming back on in the quarter?

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

Yes. The rates on the trust deposits that we manage for our clients will reflect what is available in the market. These rates will likely be above 4%, offering premium rates compared to their sweep accounts. This allows us, as fiduciaries, to bring them back on our balance sheet. Mike, please address the other question.

Yes. 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 and it's taken that long to build it. And we were particularly focused in the first quarter on customer outreach through our branch managers in 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. And 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. So I hope that's helpful.

Yeah. No, I appreciate that. And then if I could just sneak in one last one. You mentioned, Jim, the $63 million 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.

We had — when we announced that, we projected that those will be fully baked in by the first full year which will be next year but we think we'll be able to we're on track to achieve that 35% this year.

Hey, good afternoon, everyone. I appreciate all the color on deposit betas. But I guess I wanted to follow up to 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?

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 rate raised 50 basis points and the asset yields went up by about 50 basis points. So kind of — I'm not sure, if it works that way every quarter but that's kind of a 100% loan beta at least for the first quarter this year. But the new loans are coming on a really nice yield. I'm sorry Mike...

No, no go ahead.

Yeah. So we're pleased to see where that's happening. And so even with — for example, some portfolios with minimal loan growth, the replacing yields are still pretty strong. Significant portfolio doesn't grow. The new loans that are coming on are coming out of higher rates of the loans that are coming off.

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. And then kind of switching over to lending. I think Mike you mentioned taking a measured approach — I think was your wording. 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 still a kind of a weaker environment.

Yeah. I think the — it's determined by price and some of the yields on some of our consumer categories had gotten a little tight. So we raised some rates and that restricted some volume particularly in the indirect business. We're still doing a lot of indirect, more — 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. And then I also think — some of the businesses have slowed down a bit. Mortgage has hopefully bottomed out and they're turning the corner there. And the commercial side, 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. And so that's — and also obviously our new Equipment Finance business, everything that's put on there will stick to the balance sheet since that's relatively new.

Great. Thanks a lot.

Hey, good afternoon, everybody. Maybe first we can start on the office commercial real estate portfolio. I appreciate the new disclosures. But if you 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?

I'll hand it off to Brian Karrip, our Chief Credit Officer in a minute. But just a $5.4 million average commitment rent per square foot in the space of about $17.65, which is really well below East and West Coast rents and then good debt service coverage of about $1.53 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. 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 is in the 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 were only two loans above $15 million in the portfolio. One loan is secured by multiple properties that 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.

That's great color. 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 1.55. Just curious on your thoughts 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?

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 little bit of a reset following the acquisition, nice higher level of 1.35 to 1.55. 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 back to the same pressure as it was before and has been for a while. Brian I don't know if there's anything you wanted to add to that?

No that was well put.

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

Thank you.

Good afternoon.

Good afternoon.

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?

It's about 5.5 basis points in the quarter. It's hard to give you because the CECL is going to go up and down based on how credit performs. So it's hard to give you where that's going to go for the rest of the year, but it's 5.5 for the first quarter.

Okay. And then I hope…

...for rest of the year and I’ll update you as we go along.

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

Jim?

Yes, thank you for the question. It is an excellent inquiry. I believe this will alter our strategy. As you've observed, we have been allowing the portfolio to decline to support loan growth, anticipating strong demand, and it has reduced to a fairly low level, around 12% of our total assets. As I noted in the prepared remarks, towards the end of the quarter, we accumulated cash by borrowing from the FHLB and depositing it with the Federal Reserve. We plan to gradually invest that excess cash into securities, using a dollar-cost averaging strategy rather than deploying it all at once, to expand our securities portfolio. Additionally, if we incorporate just the reinvested ordinary cash flow from the last couple of quarters, the securities portfolio will increase in size. This approach will help us to effectively redeploy that cash flow and elevate the portfolio to a higher level.

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

I would right now I don't know exactly. But right now I'm contemplating adding about $100 million of securities portfolio balance from here by the end of the year.

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 is hoping for some color there?

Yes. The decline over the past year has primarily affected our gain on sale businesses, especially in SBA and mortgage. I recently met with our head of mortgage, and we are hopeful that we've reached the lowest point and can start making progress. We believe that these businesses represent a long-term strength for the bank. Currently, both are facing challenges and are slightly below our internal budgets. However, we anticipate improvements in this area as we move towards the end of the year.

Got it. Okay. And then maybe Mike just commenting on M&A from here. Would 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?

The first priority is to announce the closure and conversion of a bank, which is relatively straightforward. The challenging part is establishing a strong presence and expanding the franchise in the newly acquired area. We are making significant efforts on this monthly. Given our past experience with mergers and acquisitions, we anticipated a slight initial decrease in deposits and loans, and we accounted for that in our planning. Our goal is to start off strong in the second half of the year and continue that momentum into 2024. These markets present great opportunities, and we believe the branches can become a valuable source of deposits for us. We're making positive progress, and these areas have demographics that are somewhat stronger than what we've seen in Western Pennsylvania, resembling more of Ohio. Speaking of growth, Ohio has been very favorable for us, showing double-digit growth in both loans and deposits for the past five to six years. Our smaller bank in Cincinnati has grown from $180 million to over $700 million in assets. Similarly, Columbus and Northern Ohio have reached $1.2 billion and $1.3 billion respectively. These markets can enhance our deposits and improve the loan-to-deposit ratio, much like we have in Pennsylvania, which is our home state with $3.4 billion in Community Pennsylvania deposits, the backbone of our company. We consistently explore opportunities in rural deposits, which present themselves sporadically. There are numerous solid banks we could potentially partner with. Regarding size, our past experiences indicate our future direction. We've engaged in a range of deals, from $200 million to our largest at $1.1 billion with Centric, which have all been manageable. This allows us to navigate challenges more easily. We anticipate that future deals will not only contribute positively to earnings but will also enhance long-term profitability, setting a higher standard for our acquisitions. Our experiences in Ohio have exemplified this. We transitioned from a bank with an efficiency ratio over 60 and an ROA below one to a much improved position over the last five to six years primarily through successful acquisitions, the majority of which stemmed from organic growth. I understand this might be more detail than expected, but the reality is that while we'd like to incorporate these aspects into our plans, it's clear that a selective approach is necessary.

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

Hi. Good afternoon.

Good afternoon, Manuel.

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?

Yes. When reflecting on the past few years, the first quarter has typically been slower for us, with better performance expected in the second half of the year. I'm not sure if that's a consistent trend, but it's certainly been apparent over the last couple of years. Regarding our opportunities for growth, particularly in Commercial and Industrial (C&I), we see potential, especially in construction which has been beneficial. We've also made significant strides in commercial real estate with Centric, and we aim to expand our C&I small business efforts. Additionally, we have a solid mortgage portfolio in commercial real estate, though navigating a higher rate environment makes that challenging. For indirect auto lending, finding the right pricing and deals is crucial. Overall, I anticipate growth in C&I and some in branch consumer lending. Equipment Finance, while growing more slowly than we anticipated, will still contribute significantly this year, with projections over $200 million. I hope this information is useful. I apologize if I was lengthy.

Right. I was going to ask about Equipment Finance specifically. So that was kind of helpful with that target.

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

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

Okay. Can I flip that to kind of deposit side just kind of thoughts on where the non-interest-bearing percentage can stay stable or where it can fall to? And 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?

Yes. Jim, why don’t you — you've modeled it.

Yes. So the NIV the total deposits were 33% last quarter fell to 29% this quarter. It was 25% pre-pandemic. So it probably settles somewhere in the mid- to high 20s.

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 thoughts on more normalized CD book.

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

Yeah.

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 have taken money — picked up their operating accounts with us, but idle cash balances that because we're offering sectional rates they took them somewhere else and now they're bringing them back. So 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 may 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.

And we had the luxury of doing that simply because, 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 core depository from a small business. And 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 will be natural that perhaps 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.

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

Let me add a helpful detail regarding deposit flows within the bank. We reported a decline in non-interest-bearing deposits averaging around $180 million during the quarter. However, money market accounts and other deposit categories increased, particularly certificates of deposit. We have been offering the ICS product for a long time, which allows customers to diversify their deposits while receiving nearly unlimited deposit insurance. Customer awareness of this product has grown, leading them to take advantage of it despite its costs. In this changing environment, customers are now more willing to pay that cost. While non-interest-bearing deposits decreased, ICS balances increased from approximately $100 million to $200 million over the quarter. This shift means a significant amount of non-interest-bearing funds converted to interest-earning accounts, while still being maintained at the bank. We are pleased to provide this option, and our customers truly value it.

That's great color. Can I shift with one last question? You have your Fed funds outlook that has a little bit of a lower end point for the year. How are you positioned for a potential rate decline at some point?

Yes, we are still asset sensitive. We are considering, but have not yet implemented, derivative strategies to swap either assets or liabilities to lessen that sensitivity. Some of the actions we are taking will help reduce asset sensitivity somewhat. For instance, at the end of the quarter, we accumulated cash using overnight financing. As we invest that cash in securities, which typically have a term of about four to five years, it creates a layer of liability sensitivity that will help mitigate our asset sensitivity a little. Additionally, as we expand businesses like Equipment Finance that have very few prepayments and an average life that aligns closely with the stated life, this increases our duration and further helps to soften the impact of lower rates.

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've become aware when we veer off of that and then organically we try to get back there. We just think it's straight pool.

Thanks. 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 tapped 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?

I think we have your answer on Page 13. I believe we do have some broker deposits from Centric, but I don't think we've received any on that.

Yeah. 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 wholesale funding in the past. But we inherited those in the acquisition.

Okay.

And what was your other question? Sorry.

Any desire to maybe use the bank term funding program?

We've been evaluating it. We have not tapped into that, but we are evaluating it. It seems like some of the financial terms could be attractive. But we want to make sure that there's been a stigma or signaling effect from tapping it in the market. And so 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. But to date 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 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.

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