First Commonwealth Financial Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 26, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Commonwealth Financial Corporation Second Quarter 2023 Earnings Release Conference Call. I would now like to turn the call over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.

Speaker 1

Thank you, Bandip, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's 2nd quarter financial results. Participating on today's call will be Mike Price, President and CEO Jim Reske, Chief Financial Officer Jane Grebenz, Bank President and Chief Revenue Officer and Brian Karap, 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.

Speaker 1

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 3 of the slide presentation a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statement. Today's call will also include non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliation of these measures can be found in the appendix of today's slide presentation.

Speaker 1

With that, I'll turn it over to Mike.

Speaker 2

Thank you, Ryan, and welcome everyone. Net income of $42,800,000 translated to $0.42 of earnings per share, which beat consensus assessment by a penny. Other headline figures include a 1.45% core ROA, A 52.8 percent efficiency ratio and a net interest margin of 3.85%. On a linked quarter basis, our net interest income was up $3,500,000 to $98,100,000 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 $2,800,000 with a fairly healthy reserve of 1.52%.

Speaker 2

Net charge offs were $8,700,000 The $7,100,000 or 82 percent 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 $1,600,000 Not only were mortgage originations up seasonally over last quarter, but the proportion that we sold grew to 72%. Momentum in spread and fee income was offset by non interest expense, which rose $3,200,000 to 66 $1,000,000 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 $148,000,000 or 6.9 percent annualized It 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.

Speaker 2

In our new capital region, formerly Centric Bank, we are tracking 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 Q1. Regionally, Northern Ohio, Pittsburgh and Community PA led the way for us with 2nd quarter deposit and loan growth. Some further reflections on the 2nd quarter follow. Our deposit gathering activities and focus continues to improve on top of an already strong That is both granular and diversified.

Speaker 2

In the Q2, 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 end market checking account acquisition strategy that we've worked on for several years. We're pleased with the progress in our equipment finance and the type of assets and spreads that we're beginning to add to our portfolio.

Speaker 2

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 Q2. Lastly, for the 5th 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 Roesky, our CFO.

Speaker 3

Thanks, Mike. Mike started with earnings, so I'll start with the balance sheet update. Average deposits, excluding acquired Centric deposits, Grew at an annualized rate of 10.8% compared to the Q1. 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 2 months of the Q1. Through June 30, We have retained 93% of the acquired Centric deposits, which is within expectation.

Speaker 3

Essentially, The decline in acquired Centric deposits was offset by growth everywhere else, so we end of period deposit balances 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 to CDs and money market accounts increased the cost of deposits by 42 basis points from 73 basis points to 114 basis points. While deposit costs grew, they did so at a slowing rate. And in fact, the pace of increases has been slowing since the Centric acquisition closed on January 31.

Speaker 3

The cost of deposits grew by 31 basis points in February of this year, but only by 14 basis points in March and the increases continue to slow over the 3 months of the Q2 by 13, 10 and 8 basis points consecutively. Non maturity 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 changed from 29.4 percent last quarter. So while deposit costs went up 42 basis points, the overall cost of funds was up 48 basis 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 2nd quarter NIM received a benefit from Centric Marks, but this was largely offset by the suppressive effect on the NIM of our maintenance of about $250,000,000 of excess liquidity in the 2nd quarter.

Speaker 3

We ended the quarter with a 3.76 NIM for the month of June, The anticipated 25 basis point Fed high today should boost NIM by about 5 basis points back into the low 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, holds at about 5% by the end of this year and fall in 2024, taking pressure off our deposit 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 should suggest a wider range of potential outcomes than normal.

Speaker 3

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. We believe that our healthcare costs are lower in the long run. The incentives were up only because there was a reversal last quarter and accruals this quarter returned to normal levels. And the cost for customer disclosure was for sending updated deposit agreements to our customers in anticipation of coming under CFPB to supervision due to crossing $10,000,000,000 in total assets.

Speaker 3

We were buying back shares opportunistically in the 2nd quarter when the price dipped 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 2nd 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 CET1 ratio remained unchanged at 10.8%. $50,000,000 of the $100,000,000 of subordinated debt We have outstanding at the bank level became callable at June 1 and went from 4.875 percent fixed To floating at a rate of 184.5 basis points over 3 month LIBOR of about 5.5%, which We'll convert to sulfur, of course, at the next payment date. And with that, I will turn it back over to Mike.

Speaker 2

Operator, open the line for questions.

Operator

The floor is now open for your questions. Our first question comes from the line of Daniel Tamayo from Raymond James. Please go ahead.

Speaker 4

Hey, good afternoon guys.

Speaker 2

Good afternoon.

Speaker 4

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, apologize. But with the kind of stable market or stable rate environment, Are you suggesting that you'll continue to see asset yields climb around the same rate that you see Funding cost raise rise, is that what you're saying?

Speaker 3

It's definitely part of the equation, Dan. This is Jim. Yes. It's a Fed hike, I guess, if I just did hikes while we're on this call, if that hike is up to another 25 basis points, we've been putting on new loans on the books At around 7% through the 2nd quarter and that's been replacing loans that have run off the books in the low 6s. 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 yields giving us benefit and margin And then part of the instability comes from the way we constructed the balance sheet with half floating, half fixed.

Speaker 3

A lot of loans that we repriced upwards will be sticky on the way down, that benefits margin and give us a little bit more stability.

Speaker 4

Got it. Okay. And what are you assuming in terms of loan growth at this point?

Speaker 2

Our guidance will continue mid single digit. We a little bit on the high side this past quarter, but we have plenty of revenue engines and if anything we're Metering loan growth just a bit to be kind of equally yoked with deposit growth.

Speaker 4

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 Q2 and what are you expecting to put them on in the Q3?

Speaker 3

Yes. I can tell you 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.

Speaker 3

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 or CD growth, that brings the overall average down.

Speaker 4

Got it. Okay. Well, I appreciate that, Jim, and all the color on my questions. Thanks, guys.

Speaker 3

Thanks. Thank you.

Operator

Our next question comes from the line of Karl Sheppard from RBC Capital Markets. Please go ahead.

Speaker 5

Hey, good afternoon guys. Hey, Carl. 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 around that?

Speaker 5

Is that just a function of getting further away from the last type before today or is there more I

Speaker 3

think there's an effect there. We talked about it anecdotally and 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 Q1. It seemed to be very slow in the first nonexistent in the first half of last year, picked up steam in the Q3, more steam in the Q4, but really full on So a lot of that repricing took place.

Speaker 3

And it's still incremental repricing, 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 I don't mean in this lead, there's still upward pricing pressure. If the I think in a falling rate scenario, the Fed starts cutting rates that pressure will come off relatively quickly. There's definitely still upper pricing pressure.

Speaker 3

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.

Speaker 2

The team meets every other week. Jim Jane Grebenz, our Bank President, our heads of our lines of business and Norm Montgomery, our 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.

Speaker 3

And I would build on that answer. I think our deposit pricing relative to the market was fairly aggressive in the Q1 and less so in the second. So but The shift turned slowly, so some of the 2nd quarter growth probably got some of the benefit of that Q1 pricing, and that kind of that continued. So, that's what Mike says. We have room to be more aggressive if he chose to be.

Speaker 5

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 Q1.

Speaker 3

Switching topics, I guess,

Speaker 5

looks like a good quarter for Equipment Finance. I think in the past you had mentioned $200,000,000 in balances 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?

Speaker 2

Jane, why don't you take that

Speaker 6

one? Thanks for the question. I think we'll still come in around $200,000,000 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?

Speaker 3

If I can just quickly, I just think the yields on that business have been very nice coming in over 7% new production yields. But as Jane mentioned, 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 Asset Class had experienced a lot of prepayments and so the duration is right around 5 years, which should help with the falling rate environment.

Speaker 5

Thanks for the help with everything and good quarter.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Michael Perico from KBW. Please go ahead.

Speaker 7

Hey, good afternoon guys. Thanks for taking my questions.

Speaker 2

You bet.

Speaker 3

Just I was just kind

Speaker 7

of curious, where are you guys tracking And I apologize, I missed

Speaker 3

this, I got a couple

Speaker 7

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 24, and obviously the NIM environment is more challenging. And I know you guys have really kind of done a nice job of investing and 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.

Speaker 2

We've been good expense managers over the years and we could pull a lever or 2 we're 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 $66,000,000 is a good figure. We could beat that or be a little higher. How does that feel to you, Jim?

Speaker 3

That's about right. I think your questions seem also in the flavor of the IRR we get on 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 as we invested in mortgage business and built that out and now it's a pivot finance business So 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. Was that I think it was a gist of your question.

Speaker 3

Is that right?

Speaker 7

Yes. 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, just I 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?

Speaker 2

It is. I We're bullish longer term on the growth of our company. We feel like we can have steady deposit in loan growth longer term. We think there's some room for an uptick in our fee businesses, particularly SBA and mortgage. We Regionally, we feel like we can improve in each of our 6 markets.

Speaker 2

We're focused there. Equipment Finance, James spoke to. Just and we have some businesses that I mean, consumer lending right now, HELOC, HELON 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.

Speaker 2

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 self 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.

Speaker 7

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 what you see And maybe some rate stabilization that you're assuming in your guidance. For some of these fee items that have kind

Speaker 3

of worked against you in 1st half of

Speaker 8

the year to rebound, whether that's swaps, mortgage,

Speaker 7

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?

Speaker 2

Yes. I think SBA, We're about $45,000,000 through 6 months versus 63,000,000 last year And 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, dollars 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.

Speaker 3

The key is

Speaker 2

inventory and the fact is the majority of homeowners, they have low rates. And so but I think once rates fall into the 5 range, we could see an influx in inventory. So maybe we can 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.

Speaker 7

Got it. Very helpful. Thank you guys for

Speaker 3

the color today and for taking my question. Thanks.

Operator

Our next question comes from the line of Manuel Neves from D. A. Davidson. Please go ahead.

Speaker 9

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?

Speaker 2

Yes. I'll let Brian take that. But

Speaker 4

I think we did

Speaker 2

a pretty good job with the mark upfront and the credits that we identified are The credits that we're working through, Brian, why don't you take the rest of that?

Speaker 8

Yes, we reported $8,700,000 of net charge offs, of which about $7,600,000 were associated with the Centric portfolio, dollars 7,100,000 had been previously Reserve 4. 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 2nd quarter be elevated.

Speaker 9

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

Speaker 8

We do have credits That are on non accrual that have been reserved for that are in special assets and being worked at.

Speaker 9

Okay. That's actually it for me. Thank you.

Speaker 3

Great. Thank you.

Operator

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

Speaker 10

Good afternoon.

Speaker 2

Hey, Matt.

Speaker 10

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?

Speaker 3

No, I think it's great question. I think it's going to come down a little bit. We kind of calculate 8 or 9 basis points next quarter and then kind of fading out a little bit 5.1 basis point a quarter after that. So part of the offset though, if you recall back in the prepared remarks and also in the The earnings release was that depressive effect on the NIM of all but excess cash on the balance sheet. We are starting to invest that.

Speaker 3

And so right now it's economically washed because we borrow it at a certain rate. We put it on deposit at almost the exact same rate. It just pumps up both sides of the balance sheet. It suppresses the name ratio. But as we invest on that securities, pick up 50 basis points or more, We'll see what happens after today's hike, maybe a little more than that.

Speaker 3

That'll help a little bit with margin. So those two factors kind of We'll continue to work on each other.

Speaker 10

Okay. I know it's something you mentioned last quarter, maybe starting to put some money back to the securities portfolio. Obviously, it was down 1.1 percent point to point. Should we start to see some securities growth in the coming quarters?

Speaker 3

Yes, I hope so. We did buy some securities in the 2nd quarter. We just had more runoff as well, so offsetting it. But now you should definitely see some more purchases in the second half. Okay.

Speaker 3

We just bought some a couple of days ago. So that's the yield to get a little more attractive and we're seeing more opportunity there. I was hoping you

Speaker 10

could also comment on updated thoughts around full cycle deposit beta at this point, if there's any sort of range you could provide. And then considering your disclosures in the 10 Q about rate sensitivity and NII impact from particularly from 100 basis point cut, I think it puts 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 call it 5 to 10 bps of NIM pressure on 100 bps of cuts.

Speaker 3

So 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 as a concrete categorical statement, But those are parallel shifts. And so what we're trying to run and the guidance I'm trying to give you are non parallel shifts. They're based on a little more realistic view Of where markets are going to go.

Speaker 3

Now real estate depends on the perspective of the holder, I suppose. We are using our Moody's forecast that we purchase we use a weighted forecast and we've been doing this pretty consistently. So the baseline forecast that gets 40% weighted and then we put some weight on upside and downside We don't change those rates. We think that gives us a decent perspective over time. And what that calls for is a nonparallel shift So yes, the front end of the curve comes down, but the middle end stays up.

Speaker 3

And so a lot of the loans that we have priced in 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, but we have some steepness in the yield curve. So all those things are kind of us working together to create a projection that call. Calls for NIM stability even when a parallel shift as published in the Q shows asset sensitivity and downward pressure in a falling rate environment.

Speaker 3

And all of that, I would say again, the caveat I put in my prepared remarks that the positive behavior is very difficult to predict. And so, we'll continue to provide updated guidance, but they're 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 of your question though and I'm forgetting what it was right now, if you could go back a little bit.

Speaker 10

Yes. In prior quarters, we've discussed the outlook for a full cycle deposit beta. I believe we've kind of Oscillated between 20% 25%. I'm curious your thoughts where that is now?

Speaker 3

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 the cycle Beta means we interpret that as through the hiking cycle. So today's hike from the Fed is the last of the hiking.

Speaker 3

That means the Fed raised rates from 25 basis points to 5.25 and that's 500 basis points in 5. 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.

Speaker 3

And so when I look forward and I say, non maturity deposits will go up to like About 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 of you guys are going to ask more piercing questions than all the other banks you cover to find out what that answer

Speaker 10

Well, let's try it a different way. Where do you expect deposit costs to peak over the next 4 quarters?

Speaker 3

The non maturity deposits, I think are going to be about 160.

Speaker 4

Okay.

Speaker 3

$160,000,000 And that's the interest bearing savings and money market interest bearing checking savings money market 1.60.

Speaker 10

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?

Speaker 3

No. We've been saying about $13,000,000 in change. That's what's disclosed in the Q. That's the lost interchange income and we've We've disclosed and we've announced a couple of $1,000,000 of soft costs. You saw some of that this quarter with a $500,000 we had for disclosures.

Speaker 3

That's kind of soft talk Soft cost that we've been talking about for years, Michael, that's a one time cost though. That one, yes, right. So but those estimates are In line with what we've been saying in the past and our view and that hasn't really changed.

Speaker 10

Got it. Okay. Last I noticed in the presentation you have 90, I think it's $97,000,000 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?

Speaker 2

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

Speaker 8

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 talked to them well in advance about interest rate reserves, but potential resizing, What an appraisal, a new appraisal may look like and so we do have very clear plans for each one of our borrowers.

Speaker 10

Understood. Any red flags as you kind of work through those? Any sort of unfortunate outcomes?

Speaker 8

Yes. So we have, as you know, Two credits that we put into non accrual back during the pandemic, 2 office credits. Those credits have been there. We continue to work through those A little over $15,000,000 As an outcome of the line sheets, we downgraded 4 credits to OEM. Of those 4 credits, 2 are in the office space.

Speaker 8

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. Got it. Okay. That's all I had.

Speaker 10

I will leave it there. Thanks for taking my questions.

Speaker 2

Thanks, Matt.

Operator

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

Speaker 5

Good afternoon, guys.

Speaker 2

Hey, Dan.

Speaker 11

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?

Speaker 2

I would say we had budgeted for a decrease with the Centric acquisition In our new capital region and that's we were within our budget there for the 1st year and so there was a downdraft there and we expected That's part of acquisition activity. I think in the rest of the book, no, we felt good about the growth there. And we do feel like Having done 6 acquisitions here or branch deals, these they tend to Bottom out in the 1st 6 to 12 months and then you start building in earnest and we'll get there as well. I have to say our retail and 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.

Speaker 3

Yes. And I would just add, because I think your question is I'm trying to get to like number of accounts, because Michael was talking about balances and we're pretty discloses in terms of balances with Centrica acquired, but number of accounts is relatively stable in the second quarter. It wasn't any noteworthy erosion or anything like that.

Speaker 11

All right. Good. And In terms of acquisitions, what's the environment like right now, not only for whole banks, but maybe for Asset subsets.

Speaker 2

We're not seeing a lot. I think there's a lot of conversations out there, and encouragement and We're not seeing a lot of opportunity at this point. Do you have anything you want to add?

Speaker 3

No, I think that's right. I think This is just market color commentary that you can read anywhere, but I think probably smaller banks are feeling more pressure than larger banks and so maybe there will be more opportunity opening up in the future As they face more funding pressures with maybe more liability sensitive balance sheets and so that might open up opportunity, but for now it's Yes, still pretty quiet. Yes.

Speaker 2

But we still have the biggest opportunity we're working on right now and that's the deal we just did. Right. 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.

Speaker 11

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

Speaker 3

It's a hair over 20%. Let me get to that actual number for you. At the tax rate, 20.26 percent And it's been under 20% for a long time, but basically with the acquisition of Centrix, the whole balance sheet is 10% bigger and the The amount of permanent tax differences really didn't change, including all those other things. So that's just a bigger base of income and now it's A little bit closer to the actual federal tax rate, 20.26.

Speaker 11

Okay, great. Thanks guys. Appreciate it.

Operator

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

Speaker 2

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've touched down in communities and the difference we can make with

Operator

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

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Earnings Conference Call
First Commonwealth Financial Q2 2023
00:00 / 00:00