First Commonwealth Financial Corporation (NYSE:FCF) Q2 2023 Earnings Call Transcript

First Commonwealth Financial Corporation (NYSE:FCF) Q2 2023 Earnings Call Transcript July 26, 2023

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the First Commonwealth Financial Corporation, Second Quarter ‘23 Earnings Release Conference Call. I would now like to turn the conference over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Ryan Thomas: Thank you, Bundy, and good afternoon everyone. Thank you for joining us today to discuss the First Commonwealth Financial Corporation’s Second 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 have 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, I 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 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.

Mike Price : Hey. Thank you, Ryan, and welcome everyone. Net income of $42.8 million translated to $0.42 of earnings per share, which beat consensus estimate by $0.001. Other headline figures include a 1.45% core ROA, a 52.8% efficiency ratio and a net interest margin of 3.85%. On a linked quarter basis, our net interest income was up $3.5 million to $98.1 million, despite some NIM contraction. As a full quarter of the Centric acquisition hit the income statement, loans grew, and average deposits increased. Our provision expense was up compared to last quarter, but remained low at $2.8 million with a fairly healthy reserve of 1.52%. Net charge-offs were $8.7 million, but $7.1 million or 82% was reserved for through purchase accounting marks with the Centric acquisition and thus did not hit the income statement.

Our non interest or fee income was up some $1.6 million to $24.5 million for the quarter due to increased mortgage gain on sale income and debit card tailwinds. Not only were mortgage originations up seasonally over last quarter, but the proportion that we sold grew to 72%. Momentum and spread in fee income was offset by non-interest expense which rose $3.2 million to $66 million, primarily due to increases in hospitalization expense, incentive expense, and costs associated with the mailing, a revised deposit agreement to our customers. Loan growth of $148 million or 6.9% annualized was at the high end of our guidance and was led by the commercial categories of construction, equipment finance and commercial real estate. For the quarter, average deposits from March to June were up over 10%, excluding Centric balances.

We consciously, actively manage our loan growth to match our deposit funding capabilities. In our new capital region, formerly Centric Bank, we are attracting to our retention as well as our expense targets. Recall that we announced the Centric acquisition late last August, had regulatory approval in less than 90 days, and closed and converted the bank in the first quarter. Regionally, Northern Ohio, Pittsburgh and Community PA led the way for us with second quarter deposit and loan growth. Some further reflections on the second quarter follow. Our deposit gathering activities and focus continues to improve on top of an already strong depository that is both granular and diversified. In the second quarter we became less aggressive than competitors with our savings and CD pricing and still saw growth in those categories.

Our online deposit account opening continues to improve with more than 20% of our recent personal checking accounts originated through the channel. This has more than doubled from the same period last year. This has been no overnight success story and just to be clear, this is an in-market checking account acquisition strategy that we’ve worked on for several years. We’re pleased with the progress and our equipment finance and the type of assets and spreads that we’re beginning to add to our portfolio. Also, our gain on sale mortgage and SBA businesses, coupled with other indirect business, our indirect business have subdued volumes, but we continue to improve our efficiency in those businesses while requiring better pricing. For example, new indirect loans came on the books at 145 basis points higher than those that ran off in the second quarter.

Lastly, for the fifth year in a row we are proud to have earned the recognition by Forbes as one of the World’s Best Banks and also as one of the Best In-State Banks in Pennsylvania. With that, I’ll turn it over to Jim Reske, our CFO.

Jim Reske: Thanks Mike. Mike started with earnings, so I’ll start with a balance sheet update. Average deposit: Average deposit excluding acquired Centric deposits grew at an annualized rate of 10.8% compared to the first quarter. On an unadjusted basis average deposits were up 20%, but that’s because we only had the acquired Centric balances on our balance sheet for two months of the first quarter. Through June 30th we have retained 93% of the acquired Centric deposits, which is within expectation. Essentially the decline in acquired Center deposits was offset by growth everywhere else, till the end of period deposit balance is relatively flat in the quarter. Even though deposit balances were generally steady, like most banks we continue to see changes in the mix of deposits.

The shift in the mix from non-interest bearing and savings, the CD, the money market accounts increased the cost of deposits by 42 basis points from 73 to 114 basis points. While deposit costs grew, they did so at a slowing rate. And in fact, the pace of increase has been slowing since the Centric acquisition closed on January 31. The cost of deposits grew by 31 basis points in February of this year, but only by 14 basis points in March. And the increase is continued to slow over the three months of the second quarter, by 13, 10, and 8 basis points consecutively. Non-matured deposits cost 145 basis points at June 30, resulting in a cumulative through the cycle beta of 28%. And we were encouraged to see that the ratio of non-interest bearing deposits to total deposits was 28.7% at June 30, little change from 29.4% last quarter.

So while deposit costs went up 42 basis points, the overall cost of funds was up 48 basis points, while loan yields only went up 31 basis points, leading to 16 basis points of compression in the net interest margin to 3.85%. The second quarter NIM, we see the benefit from Centric marks. So this is largely offset by the suppressive effect on the NIM of our maintenance of about $250 million of excess liquidity in the second quarter. We ended the quarter with a 3.76 NIM for the month of June, but the anticipated 25 basis points fed high today should boost NIM by about 5 basis points back into below 3.80. Looking ahead, our NIM projections indicate relative NIM stability and slow steady growth in net interest income, based on a rate forecast that calls for short-term rates to peak at 5.25% this summer, hold at about 5% by the end of this year and fall in 2024, taking pressure off of deposits rates and bringing some steepness back into the curve.

Alternatively, if rates stay higher for longer, NIM will come under increasing pressure from rising deposit costs, but asset yields will hold up. So even in that scenario, our NIM outlook is relatively stable. However, I would caution that depositor behavior has proven difficult to predict, which suggests a wider range of potential outcomes than normal. Non-interest expense was up due to hospitalization, incentives and deposit disclosures. We self-insure our healthcare for our employees, so our hospitalization costs always show some volatility based on the actual health experience of our employees. So we believe that our healthcare costs are lower in the long run. Incentives were up only because there was reversal last quarter and accruals this quarter returned to normal levels.

And the cost for customer disclosure, plus for sending updated deposit agreements to our customers in anticipation of coming under CFPB to supervision due to crossing $10 billion in total assets. We were buying back shares opportunistically in the second quarter, when the price hit below $12.50 per share as we try to balance using internal capital generation to support loan growth and capital ratio expansion, against the opportunity to retire shares cheaply. We repurchased 766,393 shares in the second quarter at a weighted average price of $11.92. Tangible book value per share increased from $8.13 to $8.24 as retained earnings growth outstripped an increase in AOCI. The increased AOCI however brought our tangible common equity ratio down slightly from 7.9% last quarter to 7.8%, but our CET-1 ratio remained unchanged at 10.8%.

$50 million of the $100 million of subordinated debt that we have outstanding at the bank level became callable at June 1st and went from 4.875% fixed to floating at a rate of 184.5 basis points over a three month LIBOR of about 5.5%, which will convert to sell through of course at the next payment date. And with that, I will turn it back over to Mike.

Mike Price : Operator, open the line for questions.

Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Daniel Tamayo from Raymond James. Please go ahead.

Daniel Tamayo : Hey. Good afternoon guys.

Mike Price: Good afternoon.

Daniel Tamayo : I guess first, just following up on the margin guidance. The relatively stable margin, I get it if we don’t see as many or we get cuts or we don’t see as many hikes here. Sorry if we do see the hikes, I apologize. But with the kind of stable Mark – the stable rate environment, are you suggesting that you’ll continue to see asset yields climb around the same rate that you see funding cost rates rise. Is that what you’re saying?

Jim Reske: It’s definitely part of the equation Dan. This is Jim. Yes, if it’s a bad hike, I guess if I just did hike. So while we’re on this call if that hike, it’s another 25 basis points, we’ve been putting on new loans on the books at around 7% through the second quarter, and that’s been replacing loans that have run off the books in the low 6%. So if rates go to 5.25% as they have today and they stay in the 5% by year end, we’ll continue to see those positive replacement giving us benefit in margin through the end of this year. And then part of the new stability comes from the way we’ve constructed the balance sheet with half floating half fixed, a lot of loans that we’ve repriced upwards will be sticky on the way down. That benefits margin and give us a little bit more stability.

Daniel Tamayo : Got it, okay. And what are you assuming in terms of loan growth at this point?

Mike Price: Our guidance will continue mid-single digit. We’ve surprised a little bit on the high side this past quarter, but we – there’s plenty of revenue engines, and if anything we’re metering loan growth just a bit, to be kind of equally yoked with deposit growth.

Daniel Tamayo : Okay, well that was my next question. So you’re expecting deposit growth to be in that same range it sounds like, and for the loan-to-deposit ratio to be relatively similar to what it is now. I guess my last question; just on the new CDs, as you build up those balances, what rates were you putting them on in the second quarter and what do you expect them to put them on in the third quarter?

Jim Reske: So yes, these – these targets are the specials we have in the market right now. We have a special at 4.80%. So the incremental CDs will come on at that. That’s not the full story, because we have a lot of CD maturities like anyone does. And when the CDs mature, about half will come on at the current market rate, about half will roll at the rack rate. So the incremental cost of those CDs is close to half of that incremental rate. That helps the overall cost of new CDs, their CD growth that brings the overall average down.

Daniel Tamayo : Got it, okay. Well, I appreciate that Jim and all the color on my questions. Thanks guys.

Mike Price: Thanks.

Jim Reske: Thank you.

Operator: Our next question comes from a line of Karl Shepard from RBC Capital Markets. Please go ahead.

Karl Shepard: Hey, good afternoon guys.

Mike Price: Hey Karl.

Karl Shepard: I wanted to pick up on the deposit cost conversation there in the CDs. Jim, you mentioned slowing deposit rate increases through the quarter. Can you just put a little more color on that? Is that just a function of getting further away from the last hike before today or is there more to it?

Jim Reske: No, I think there’s an effect there. We talked about it anecdotally and then these kind of numbers give us confidence in what we’re seeing, just some observations we have. There’s a big effect when consumers wake up and go from 0% to 400 basis points, and there’s just so much of that in the first quarter. It seem to be very slow and the first – non-existent in the first half of last year. It picked up steam in the third quarter, more steam in the fourth quarter, but really slow on in the first quarter of this year. So a lot of that repricing took place. And it’s still incrementally pricing, but when someone says they don’t want 4% they want 4.25%, the increments are smaller. And so that’s kind of what we’ve been observing anecdotally.

We still did – I don’t mean to mislead that there’s still upward pricing pressure. If the – I think at a falling rate scenario, the feds starts cutting rates that pressure will come off of them relatively quickly, but there’s definitely still upward pricing pressure. We’re just really pleased to see that pace slowing down and I think that the idea that there’s a smaller increments of repricing helps to explain the story.

Mike Price: The team meets every other week. Jim, Jane Grebenc our bank President, our Heads of our lines of business and Norm Montgomery, our product and Chief Information Officer to discuss that. And we are making game day decisions all the time. We have room to be more aggressive with pricing in the second half of the year than we certainly were in the second quarter, need be.

Jim Reske: And I would build on that answer. I think our deposit pricing relative to the market was fairly aggressive in the first quarter, and less so in the second. But the shift turned slowly, so some of the second quarter growth probably got some of the benefit of that first quarter pricing and that kind of – that continues. So that’s why Mike says we have room to be more aggressive if he chose to be.

Karl Shepard: Okay, that’s helpful. Your first comments make a lot of sense. I spent a lot of time tidying up my own bank accounts in the first quarter. But switching topics I guess, it looks like a good quarter for equipment finance. I think in the past you had mentioned $200 million in balances this year. Is that still kind of a fair expectation? And now that the business seems like it’s really up and running, any longer-term expectations you want to put out there or refresh?

Mike Price: Jane, why don’t you take that one?

Jane Grebenc : Thanks for the question. I think we’ll still come in around the $200 million. We might be a little bit on either side of that though, as we calibrate how much indirect equipment finance paper we want to buy, based on margin. But the business is coming along nicely and we’re pleased with it, and I don’t think that I’m prepared to talk much about next year or beyond, because it’s just so capital, it’s so tied to what’s going on in capital replenishment for commercial clients.

Jim Reske: If I could just add – just quickly, I just think the yields on that business have been very nice, coming in at over 7% with new production yields. But as Jane mentioned, if the mix shift continues to shift from indirect paper to more direct paper, the yields get even better. And the duration is fairly steady. It’s not an asset class and experiences a lot of prepayments, and so the duration is right around five years, which would help with a falling rate environment.

Karl Shepard: Thanks for the help with everything, and good quarter.

Mike Price: Thank you.

Operator: Our next question comes from the line of Michael Perito from KBW. Please go ahead.

Michael Perito: Hey, good afternoon, guys. Thanks for taking my questions.

Mike Price: You bet.

Michael Perito: I was just kind of curious, where are you guys tracking on – and I apologize if I missed this. I got in a couple of minutes late. But where are you guys tracking on the OpEx side as you look to the back half of the year, and just kind of maybe philosophically as we think to 2024? Obviously, the NIM environment is more challenging and I know you guys have really kind of done a nice job of investing and expanding product without really seeing too much appreciation in the OpEx space. But maybe an update there, both near-term and kind of just high-level, how you’re thinking about the rate of investment would be great. Thank you.

Mike Price: We’ve been good expense managers over the years, and we could pull a lever or two or not. And we’re keeping even some of the businesses that have swooned a bit. We think they’ll pay nice dividends for us as the economy continues to recover. I would think right around the 66 is a good figure. We could beat that or be a little higher. How does that feel to you, Jim?

Jim Reske: That’s about right. I think your question seems also in favor of anything, the IRR, we get our investments and the returns we get on those. We think we’ve been really good at doing this and kind of good managers and good stewards of capital. So we invested in a mortgage business and built that out and now we compete with the finance business, doing a lift out that we did in building that up. So I think those investments really will more than pay for themselves in the long run. I think that was just a good question. Is that right?

Michael Perito: Yeah, no, that’s all very helpful and makes sense. So I mean, it sounds like kind of hopeful to hold the line, maybe a little upward pressure here, but kind of from a high level. I don’t want to say business as usual, but continue to invest with the focus being to longer term generate the positive operating leverage and kind of not slow down too much given the environment and some of the challenges. Is that a fair summary?

Mike Price: It is. We’re bullish longer term on the growth of our company. We feel like we can have steady deposit and loan growth longer term. We think there’s some room for an uptick in our fee businesses, particularly SBA and mortgage. Regionally, we feel like we can improve in each of our six markets. We’re focused there. Equipment finance, Jane spoke to. And we have some businesses – I mean, consumer lending right now, HELOC loan is subdued. But just, I think the last two years we grew in every market and we grew in every line of business and we’re certainly not there right now. The commercial is kind of leading the way in direct auto and a little bit of mortgage, but we can hit on more cylinders. We need to find the funding and we just want to be a bank that sells funds and maintain our competitive advantage on the low-cost depository.

But we’re bullish on the future of our company and what we’ve built, and we don’t feel like it’s fully realized yet in terms of the capacity within our communities.

Michael Perito: Helpful. Thank you, guys. And then just secondly for me, as we think about the back half of the year, is there any room, based on your outlook and then what you see today, and maybe some rate stabilization that you’re assuming in your guidance. For some of these fee items that have kind of worked against you in the first half of the year to rebound, whether that’s swaps, mortgage, even trust has looked a little bit lower than where you were run rating in the back half of the year. I mean, any line of sight on some rebound there that could be helpful or – would love your thoughts?

Mike Price: Yeah, I think SBA. We’re about $45 million through six months versus $63 million last year, and a pretty decent pipeline. The gains on sales are a little bit lower than they were a year ago, but nonetheless, the pipeline is stronger there. And perhaps that could be a tailwind. And mortgage saw a little better, $600,000 or $700,000. I think $600,000 in the second quarter improvement. I think rates are being more accepted by clients. We’re seeing a high volume of prequalification activity. The key is inventory, and the fact is the majority of homeowners, they have low rates and so – but I think once rates fall into the five range, we could see an influx in inventory. So maybe we could move the needle a little bit there. But we’re really focused on the higher margin commercial businesses to grow and to be the important factor in our mid-single-digit loan growth, because the spreads there are just quite frankly, more attractive.

Michael Perito: Got it. Very helpful. Thank you guys for the color here and for taking my question.

Mike Price: Thanks.

Operator: Our next question comes from a line of Manuel Navas from D.A. Davidson. Please go ahead.

Manuel Navas : Hey, I think a lot of my questions have been answered. Can you kind of just return to the slug of net charge-offs that came from Centric and just kind of how that came about?

Mike Price: Yes, I’ll let Brian take that. But I think we did a pretty good job with the mark-up front and the credits that we identified or the credits that we’re working through. Brian, why don’t you take the rest of that?

Brian Karrip : Yes, we reported $8.7 million of net charge-offs, of which about $7.6 million were associated with the Centric portfolio. $7.1 had been previously reserved for. So, as we work through the portfolio, as we do our annual line sheet review, identify credits, appropriately mark credits, and then take actions on those credits that we’ve moved to either non-accrual or on workout, you saw those, the charge-offs for the second quarter be elevated.

Manuel Navas : Is there a pipeline for more of these that are kind of already reserved? Just wondering if we should see it? Just wondering what the expectations are.

Brian Karrip : We do have credit that are on non-accrual that have been reserved for, that are in special assets and being worked at.

Manuel Navas : Okay. That’s actually it for me. Thank you.

Mike Price: Great. Thank you.

Operator: Our next question comes from the line of Matthew Breese from Stephens. Please go ahead.

Matthew Breese: Good afternoon.

Mike Price: Hey, Matt.

Matthew Breese: I was hoping to start on the NIM. I believe purchase accounting contributed 14 basis points to the margin this quarter. Could you just give me some sense for where that should shake out over the next handful of quarters? Is that 14 bps a good run rate?

Jim Reske: No, I think – that’s a great question. I think it’s going to come down a little bit. We kind of calculate 8 basis or 9 basis points next quarter and then kind of fading out a little bit by about 1 basis point a quarter after that. So, part of the offset, though, if you recall back in the prepared remarks and also in the text of the earnings release was that suppressive effect on the NIM of all that excess cash on the balance sheet, we are starting to invest that. And so, right now it’s economically awash, because we borrow it at a certain rate. We put it upon deposit at almost the exact same rate. It just pumps up both sides of the balance sheet. It suppresses the NIM ratio. But as we invest some of that in securities, pick up 50 basis points or more, maybe we’ll see what happens after today’s hike, maybe a little more than that. That’ll help a little bit with margin. So those two factors kind of will continue to work off of each other.

Matthew Breese: Okay. And I know that’s something you mentioned last quarter, maybe starting to put some money back to the securities portfolio. Obviously, it was down, I think 1.1% point-to-point. Should we start to see some securities growth in the coming quarters?

Mike Price: Yes, I hope so. And we did buy some securities in the second quarter. We just had more runoff as well offsetting it. But now you should definitely see some more purchases in the second half.

Matthew Breese: Okay.

Mike Price: We just bought some a couple of days ago. So the yields are getting a little more attractive and we’re seeing more opportunity there.

Matthew Breese: I was hoping you could also comment on updated thoughts around full cycle deposit beta at this point, if there is any sort of range you could provide. And then, considering your disclosures in the 10-Q about rate sensitivity and NII impact, particularly from 100 basis point cut, I think it foots to less than 2%, which is a bit surprising given the kind of the construction of the balance sheet. I guess I wanted some sense for whether or not that kind of impact to NII in 2024 from 100 bps of cuts is a reasonable point to work off of, you know call it 5 to 10 bps of NIM pressure on 100 bps of cuts.

Mike Price: So, a couple of questions there. I’ll start with the interest rate risk. I would start by saying, all our disclosures in the 10-Q are accurate. That’s a concrete categorical statement, but those are parallel shifts. And so what we’re trying to run, the guidance I’m trying to give you are non-parallel shifts. They are based on a little more realistic view of where markets are going to go. Now, realistic depends on the perspective of the holder I suppose. But we’re using our Moody’s forecast that we purchased and we use a weighted forecast. We’ve been doing this pretty consistently. So there’s a baseline, forecast that gets 40% weight, and then we put some weight on upside and downside and we don’t change those weights.

We think that gives us a decent perspective over time. And what that calls for is a non-parallel shift next year. So yes, the front end of the curve comes down, but the middle end stays up. And so a lot of the loans that we have priced at the middle end of the curve don’t reprice downward, and you end up with a steeper curve environment and that is generally positive for banks. That’s the kind of environment all of us banks like. We make more money with it, although we have some steepness in the yield curve. So all of those things are kind of us working together to create a projection that calls for NIM stability, even when not a non-parallel shift as published in the Q, shows asset sensitivity and downward pressure in a falling rate environment.

And all of that, I would say again, with the caveat I put in my prepared remarks, that depositor behavior is very difficult to predict and so we’ll continue to provide updated guidance. But they are all subject to the assumptions that the inputs that go into it, and that’s what the whole industry is dealing with. There was another part to your question though, and I’m forgetting what it was right now. If you could go back.

Matthew Breese: Yes. In prior quarters we’ve discussed the outlook for a full-cycle deposit beta. I believe we’ve kind of oscillated between 20% and 25%. I’m curious, your thoughts where that is now.

A – Mike Price: It’s higher now. It’s higher now. We would say now 32%. But I want to be clear about this, and I’m really glad you asked, because I think there’s some industry confusion over what the cumulative through this cycle beta means. We interpret that as through the hiking cycle. So today’s hike from the Fed is the last of the hiking. That means the Fed raised rates from 25 basis points to 525, and that’s 500 basis points of hikes. That’s the denominator, because that’s through the cycle. I don’t know that the industry is very consistent on how they calculate the denominator. Everyone just wants to say, just give me the beta. So, when I tell you 32%, that’s my denominator. And so when I look forward, I say non-mature deposits will go up to like 160.

They started at 5, that’s 155 up – I’m dividing it by 500, because that’s when the hiking cycle ends. Other practice may differ, and I would love it if all you guys would ask more piercing questions about all the other things you cover to find out what that answer is.

Matthew Breese: Well, let’s try it a different way. Where do you expect deposit costs to peak over the next four quarters?

A – Mike Price: The non-maturity deposits, I think are going to be about 160.

Matthew Breese: Okay.

A – Mike Price: 160. And that’s say – that’s the interest-bearing savings and money market. Interest-bearing checking savings money market are 160.

Matthew Breese: Okay. A couple of other follow-ups for me. First, any change or updates to the estimated impacts from Durbin commencing a year from now?

Mike Price: No. We’ve been saying about $13 million in change, that’s what’s disclosed in the Q. That’s the lost interchange income, and we’ve always disclosed and we’ve been at a couple million dollars of soft costs. You saw some of that this quarter with the $0.5 million we had for disclosures. That’s kind of soft cost that we’ve been talking about for years.

Jim Reske: Hopefully, that’s a one-time cost though.

Mike Price: That one?

Jim Reske: Yes.

A – Mike Price: Right. But those estimates are in line with what we’ve been saying in the past, and our view on that hasn’t really changed.

Matthew Breese: Got it, okay. Last one; I noticed in the presentation you have 90 – I think its 97 million of office commitments scheduled to mature over the next 24 months. Curious, have you reached out to those borrowers, stressed those credits? And just curious, how do they hold up on rate resets in today’s environment? And what are some of the major stress points or highlights from that analysis if you have any?

Mike Price: Yes. We’re touching those customers in a line review sheet exercised in May. We’re touching them in an annual review process. And Brian, why don’t you fill in the blanks?

Brian Karrip: Yes, we – for each one of the loans that come due in the next 24 months, we have a plan around each one. So our relationship managers meet with their clients. We discuss what the upcoming maturities might look like. We talk to them well in advance about interest rate reserves, about potentially resizing, what an appraisal, a new appraisal may look like, and so we do have very clear plans for each one of our borrowers.

Matthew Breese: Understood. Any red flags as you kind of work through those? I mean, any sort of unfortunate outcomes?

Brian Karrip: Yes. So, we have as you know, two credits that we put into nonaccrual factoring the pandemic, two office credits. Those credits have been there. We continue to work through those for over $15 million. As an outcome of the line sheets, we downgraded four credits to OEM. Of those four credits, two are in the office space. And so those credits are both paying as agreed. Again, we were working with the borrowers and have plans for each of those credits and we expect to resolve those over time.

Matthew Breese: Got it, okay. That’s all I had. I will leave it there. Thank you for taking my questions.

A – Mike Price: Thanks, Matt.

Operator: Our final question comes from the line of Daniel Cardenas from Janney Montgomery Scott. Please go ahead.

Daniel Cardenas: Hey. Good afternoon, guys.

A – Mike Price: Hey Dan.

Daniel Cardenas: So going to the deposits, just quickly, with the move that we saw this quarter on deposit balance, was there any significant move in customer balances – in the number of customers? Did we see a substantial increase or decrease this quarter?

Mike Price: I would say we had budgeted for a decrease with the Centric acquisition in our new capital region, and that’s – we’re within our budget there for the first year. And so there was a downdraft there and we expected that. That’s part of acquisition activity. I think in the rest of the book, no. We felt good about the growth there. And we did feel like having done six acquisitions here or branch deals, they tend to bottom out in the first six to 12 months and then you start building in earnest and we’ll get there as well. I have to say, our retail on our branch side of the Centric acquisition has gone quite well, and we feel good about the turnaround and the focus on small business already there.

Jim Reske: Yes. And I would just add, because I think your question is trying to get to like a number of accounts. Michael, we’re talking about balances and we’re pretty disclosive in terms of balances with the Centric acquired, but number of accounts is relatively stable in the second quarter. There wasn’t any noteworthy erosion or anything like that.

Daniel Cardenas: All right, good, good. And then in terms of acquisitions, what’s the environment like right now, not only for whole banks, but maybe for asset subsets?

A – Mike Price: We’re not seeing a lot. I think there’s a lot of conversations out there and encouragement. But we’re not seeing a lot of opportunity at this point. Jim, anything you want to add?

Jim Reske: No, I think that’s right. I think this is just market color commentary that you can lead anywhere. But I think probably smaller banks are feeling more pressure than larger banks, and so maybe there’ll be more opportunity opening up in the future if they face more funding pressures with maybe more liability-sensitive balance sheets. And so that might open up opportunity, but for now it’s still pretty quiet.

Mike Price: Yes. But we still have the biggest opportunity we’re working on right now and that’s the deal we just did. Closing and converting the bank is relatively easy to making sure that you can play offense and hit the ground running a year later. And so that has a lot of our time and energy and focus right now.

Daniel Cardenas: Good. And the last question for me, how should I be thinking about your tax rate in the back half of this year?

Jim Reske: It’s a hair over 20%. Let me get the actual number for you. Effective tax rate, 20.26%, and it’s been under 20% for a long time. But basically with the acquisition of Centric, the whole balance sheet is 10% bigger, and the amount of permanent tax differences really didn’t change. Its all-in-all those other things. So that’s just a bigger base income and now it’s a little bit closer to the actual federal tax rate, 20.26%.

Daniel Cardenas: Great. Thanks guys. I appreciate it.

Operator: I would now like to turn the call over to Mike Price for closing remarks.

Mike Price : Thank you for your time and your genuine interest and your good questions. They help us a lot in terms of how we think about our company. We remain enthused about the future of our company. We’re proud of the businesses we’ve built and the way we touched down in communities and the difference we can make with consumers, small businesses, and larger companies and it’s a privilege. Thank you very much.

Operator: Thank you, ladies and gentlemen. This does conclude today’s call. Thank you for your participation. You may now disconnect.