Q2 2023 First Commonwealth Financial Corp Earnings Call
Participants
Brian G. Karrip; Executive VP & Chief Credit Officer; First Commonwealth Bank
James R. Reske; Executive VP, CFO & Treasurer; First Commonwealth Financial Corporation
Jane Grebenc; Executive VP, Chief Revenue Officer & Director; First Commonwealth Financial Corporation
Ryan M. Thomas; VP / Finance and IR; First Commonwealth Financial Corporation
Thomas Michael Price; President, CEO & Director; First Commonwealth Financial Corporation
Daniel Tamayo; Research Analyst; Raymond James & Associates, Inc., Research Division
Daniel Edward Cardenas; Director; Janney Montgomery Scott LLC, Research Division
Karl Robert Shepard; Assistant VP; RBC Capital Markets, Research Division
Manuel Antonio Navas; VP & Research Analyst; D.A. Davidson & Co., Research Division
Matthew M. Breese; MD & Analyst; Stephens Inc., Research Division
Michael Anthony Perito; MD; Keefe, Bruyette, & Woods, Inc., Research Division
Presentation
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 call over to Ryan Thomas, Vice President of Finance and Investor Relations. Please go ahead.
Ryan M. Thomas
Thank you, Mandeep, and good afternoon, everyone. Thank you for joining us today to discuss 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 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. Reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I'll turn it over to Mike.
Thomas Michael Price
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 $0.01. 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 or through purchase accounting marks with the Centric acquisition, and thus, did not hit the income statement. Our noninterest 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 in spread and fee income was offset by noninterest expense, which rose $3.2 million to $66 million, primarily due to increases in hospitalization expense, incentive expense and cost associated with the mailing a revised deposit agreement to our customers. Loan growth of $148 million or 6.9% annualized was at 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 can't justly actively manage our loan growth to match or deposit funding capabilities. 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 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 have 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. 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 is one of the best in-state banks in Pennsylvania. With that, I'll turn it over to Jim Reske, our CFO.
James R. Reske
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 first quarter. On an unadjusted basis, average deposits were up 20%, but that's because we only have the acquired Centric balances on our balance sheet for 2 months of the first quarter. Through June 30, we have retained 93% of the acquired Centric deposits, which is within expectation.
Essentially, the decline in acquired Centric deposits was offset by growth everywhere else until the 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 noninterest-bearing and savings, the CDs and 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 increases 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 has continued to slow over the 3 months of the second quarter 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 noninterest-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 received a benefit from Centric marks, but this was 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 point set 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, hold at about 5% by the end of this year and fall in 2024, taking pressure off of 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.
Noninterest expense was up due to hospitalization, incentives and deposit disclosures. We self-insure our health care for our employees, so our hospitalization costs always show some volatility based on the actual health experience of our employees, but we believe that our health care costs are lower in the long run. The incentives were up only because there was a reversal last quarter and accruals this quarter return to normal levels. And the cost for customer disclosure was sustaining 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 dip 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 Q3. We repurchased 766,393 shares in the second quarter at a weighted average price of $11.93.
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, bought 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 million of the $100 million of subordinated debt that we have outstanding at the bank level became callable at June 1 and went from 4.875% fixed to floating at a rate of 184.5 basis points over 3-month LIBOR of about 5.5%, which will convert to (inaudible), of course, at the next payment date. And with that, I will turn it back over to Mike.
Thomas Michael Price
Operator, open the line for questions.
Question and Answer Session
Operator
(Operator Instructions)
Our first question comes from the line of Daniel Tamayo from Raymond James.
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 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?
James R. Reske
That's definitely part of the equation, Dan. This is Jim. That hike -- I guess if I just did hike, while we're on this call, I said 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 6s. So if rates go to 5.25%, they have today and they stay in the 5% by year-end, we'll continue to see those positive replacement yields, giving us benefit on the margin through the end of this year.
And then part of that instability comes from the way we've constructed the balance sheet with half floating, half fixed, 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.
Daniel Tamayo
Got it. Okay. And what are you assuming in terms of loan growth at this point?
Thomas Michael Price
Our guidance will continue mid-single digit. We surprised a little bit on the high side this past quarter, but we -- there is 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 are you expecting to be putting on in the third quarter?
James R. Reske
So yes, to describe 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 out of 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 a 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.
Operator
Our next question comes from the line of Karl Shepard from RBC Capital Markets.
Karl Robert 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 throw 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?
James R. Reske
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 seemed to be very slow and not existed in the first half of last year, picked up steam in the third quarter, more steam in the fourth quarter, but really fall out in the first quarter of this year.
So a lot of that repricing took place. 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 to mislead, there's still upward pricing pressure. I think in a falling rate scenario, the Feds are cutting rates that pressure will come off 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 there's a smaller increments of repricing helps to explain the story.
Thomas Michael 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 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.
James R. Reske
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 ship turned slowly. So some of the second quarter growth probably got some of the benefit of that first quarter pricing, and that continues. So that's how Mike says, we have room to be more aggressive if we chose to be.
Karl Robert Shepard
Okay. That's helpful. Your first comments make a lot of sense. I spent a lot of time tiding up my own bank accounts in the first quarter. But switching topics, I guess, 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, a refresh?
Thomas Michael Price
Jane, why don't you take that one?
Jane Grebenc
Thanks for the question. I think we'll still come in around $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 that. 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.
James R. Reske
If I understand -- just quickly, I just think the yield on that business has been very nice, coming in at over 7% new production yields. But as Jane mentioned, the mix shift continues to shift from indirect paper to more direct paper that yields getting even better and the duration is fairly steady. It's not an asset class that experiences a lot of prepayments and so the duration is right around 5 years, which should help in the fall rate environment.
Operator
Our next question comes from the line of Michael Perito from KBW.
Michael Anthony Perito
I was just kind of curious, where are you guys tracking on -- and I apologize I missed this. I got 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 base. So 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.
Thomas Michael Price
We've been good expense managers over the years, and we could pull a lever, two or not. And we're keeping even some of the businesses that have slowed a bit. We think they'll pay nice dividends for us as the economy continues to recover. I would think right around the $66 million is a good figure. We could beat that or be a little higher. How does that feel to you, Jim?
James R. Reske
That's about right. I think your question seem also have a flavor in 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 as we invested in a mortgage business and built that out and now Equipment Finance business to lift out that we did building that up. So we think those investments really will more than pay for themselves in the long run. Was that -- I think I addressed your question. Is that right?
Michael Anthony Perito
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 don't want to say business as usual, but continue doing that with the focus being to -- longer term generate that deposit and operate leveraging kind of not slow down too much given the environment and some of the challenges. Yeah, that's summary.
Thomas Michael Price
Yes, 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. We -- regionally, we feel like we can improve in each of our 6 markets. We're focused there. Equipment Finance, James spoke to, just -- and we have some businesses -- I mean, consumer lending right now, HELOC alone is subdued. But just I think the last 2 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 sell 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 Anthony Perito
Helpful. 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 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 the way 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 I would love your thoughts.
Thomas Michael Price
Yes. I think SBA, we're about $45 million through 6 months versus $63 million 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 stall 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 5 range, we could see an influx of 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.
Operator
Our next question comes from the line of Manuel Navas from D.A. Davidson.
Manuel Antonio Navas
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?
Thomas Michael Price
Yes. I'll let Brian take that. But I think we did a pretty good job with the markup 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 G. 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 million 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 moved to either nonaccrual or workout, you saw those -- the charge-offs for the second quarter be elevated.
Manuel Antonio Navas
Is there a pipeline for more of these that are kind of already reserved? Just wondering if we should see -- I'm just wondering what the expectations are?
Brian G. Karrip
We do have credits that are on nonaccrual, that have been reserved for, that are in special assets and being worked on.
Operator
Our next question comes from the line of Matthew Breese from Stephens.
Matthew M. 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?
James R. 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 or 9 basis points next quarter and then kind of fading out a little bit by 1 basis point a quarter after that. So part of the offset, though, and if you recall back in the prepared remarks and also in the text of the earnings release was that depressive 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 wash because we borrow it at a certain rate, we put them on the cost at almost the exact same rate. It just pumps up both sides of the balance sheet. It's suppresses the NIM ratio.
But as we invest in that 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 will help a little bit with margin. So those 2 factors kind of -- we'll continue to work off for each other.
Matthew M. 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?
James R. Reske
Yes. Hopefully, and we did buy some security in the second quarter. We just had more runoff as well, so offsetting it. But you should definitely see some more purchases in the second half. We just bought some a couple of days ago. So the yield to get a little more attractive, and we're seeing more opportunity there.
Matthew M. Breese
I was hoping you could also comment on updated thoughts around full cycle deposit beta at this point, if there's any sort of range you can provide, and then considering your disclosures in the 10-Q about rate sensitivity and NII impact from -- particularly from a 100 basis point cut. I think it fits 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.
James R. Reske
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 as a concrete categorical statement. But those are parallel shifts. And so what we're trying to run in the guidance I'm trying to give you are nonparallel shifts, so based on a little more realistic view of where markets are going to go. Now real estate depends on the perspective of the holder as supposed. Where we are using our [movies] forecast that we purchase, and we use a weighted forecast, and we've been doing this pretty consistently.
So as a baseline, forecast that gets 40% weighted and then we put some weight on upside and the downside, and we don't change those ways to think that gives us a decent perspective over time. And what that calls for is an nonparallel 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 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 those banks like to make -- they make more money of it, we have some steepness in the yield curve. So all those things are kind of us working together to create a projection that causes NIM stability, even when not a 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're all subject to assumptions that the inputs that go into it. And that's what the whole industry is. There was another part to your question, though, I'm forgetting what it was right now, if you could go back?
Matthew M. 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?
James R. Reske
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 due to 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 5.25% 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 want 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-maturity 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 practices may be different. I would love it if all you guys are to ask more peers and questions and all the other things you cover. I find now what that answer.
Matthew M. Breese
Well, let's try it a different way. Where do you expect deposit costs to peak over the next 4 quarters?
James R. Reske
The non-maturity deposits, I think, are going to be about 160. The interest-bearing savings and money market -- checking, savings, money market, a 160.
Matthew M. Breese
Okay. A couple of other follow-ups for me. First, any change or update to the estimated impact from Durbin commencing a year from now?
James R. Reske
No. We've been saying about $13 million and change. That's what's disclosed in the Q. That's the lost interchange income and we've always disclosed and we've announced a couple of million dollars of soft costs. You saw some of that this quarter with $0.5 billion we had for disclosures, that's kind of soft talk -- soft cost that we've been talking about for years like...
Thomas Michael Price
That's a one-time cost though.
James R. Reske
That one. Yes, right. So, but those estimates are in line with what we've been saying in the past and our view on that has really changed.
Matthew M. Breese
Got it. Okay. Last one. I noticed in the presentation, you have 90 -- I think it's $97 million of office commitments scheduled to mature over the next 24 months. Curious, have you reached out to those borrowers, stress 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?
Thomas Michael Price
Yes. We're touching those customers in 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 blank?
Brian G. Karrip
Yes. 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 with the upcoming maturities might look like. We talk 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.
Matthew M. Breese
Understood. Any red flags as you kind of work through those? I mean any sort of unfortunate outcomes?
James R. Reske
Yes. So we have, as you know, 2 credits that we put into nonaccrual factoring the pandemic 2 office credits. Those credits have been there. We continue to work through those a little over $15 million. As an outcome of the line sheets, we downgraded 4 credits to OEM. Of those 4 credits, 2 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.
Operator
Our final question comes from the line of Daniel Cardenas from Janney Montgomery Scott.
Daniel Edward 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 and the number of customers? Do you see a substantial increase or decrease this quarter?
Thomas Michael 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 do feel like having done 6 acquisitions here or branch deals, they tend to bottom out in the first 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.
James R. Reske
Yes. And I would just add, because I think your question trying to get like number of accounts. Mike was talking about balances, we're pretty disclosive in terms of balances with Centric acquired, but a number of accounts is relatively stable in the second quarter. There wasn't any noteworthy erosion or anything like that.
Daniel Edward Cardenas
All right. Okay. Good. And then in terms of acquisitions, what's the environment like right now, not only for whole banks, but maybe for asset subsets?
Thomas Michael 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?
James R. Reske
No, I think that's right. I think this is just market color commentary that you can meet 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 still pretty quiet. Yes.
Thomas Michael Price
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 Edward Cardenas
Okay. Good. And then last question for me. How should I be thinking about your tax rate in the back half of this year?
James R. Reske
The -- here over 20% actual number for you, like the 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 if only knows 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%.
Operator
I would now like to turn the call over to Mike Price for closing remarks.
Thomas Michael Price
Yes. 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 that we touch 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.
