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spk00: good afternoon my name is emma and i will be your conference operator today at this time i would like to welcome everyone to the first commonwealth financial corporation second quarter 2022 earnings call all lines have been placed on mute to prevent any background noise after the speaker's remarks there will be a question and answer session if you would like to ask a question during this time simply press star followed by the number one on your telephone keypad If you would like to withdraw your question, again, press the star 1. Thank you. Ryan Thomas, Vice President of Finance and Investor Relations, you may begin your conference.
spk03: Thank you, Emma, 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 Gerbentz, Bank President and Chief Revenue Officer, and Brian Karup, our Chief Credit Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fdbanking.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 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. With that, I will turn the call over to Mike.
spk09: Hey, thank you, Ryan, and welcome, everyone. Net income of $30.8 million produced core earnings per share of $0.33 for the second quarter of 2022, which was up by $0.04 over the first quarter. Robust annualized loan growth of 10.8% XPPP coupled with net interest margin expansion to 3.38% helped drive a $5.5 million improvement in net interest income to $73.7 million and a $5.8 million improvement in core pre-tax, pre-provision net revenue to $42.5 million in the second quarter. And that's despite a $1.2 million decline in PPP income. Non-interest or fee income was up $535,000 in the second quarter to $24.5 million, as increases in swap, interchange income, and mortgage were offset by a downdraft in SBA gain on sale income. Expenses were essentially flat, and the efficiency ratio fell to 55.87%. Core pre-tax, pre-provision ROA was 1.77%. Over the last four quarters, our loans, XPPP, have grown consistently at 10.8% in Q2 and 8.8% in Q1 of 2022 and 11.2% in Q4 and 8.2% in Q3 of 2021. Given our recent track record of loan growth, we remain confident that we can maintain momentum for the second half of 2022 consistent with a high single-digit growth target. Both our consumer and commercial lending businesses, as well as the five regions of our bank, have all contributed significantly to our loan growth trajectory. The consumer lending categories have led the way in the first half of 2022, whereas we expect that commercial lending growth will pick up in the second half of 2022 like last year. Commercial lending benefited from increased CNI line utilization, which grew to 43.5% in the second quarter, up from 35.9% at year end. It bears repeating that mortgage indirect, small business, and now equipment finance were not meaningful in our repertoire of lending solutions just five to six years ago. We continue to build momentum in equipment finance, ending the quarter with $21 million in footings. As we look to the second half of 2022, we now project to end the year with approximately half the footings we had earlier projected, but that's more indicative of technology headwinds and project headwinds. than any change in strategy or our long-term outlook. The broadening of our revenue base into different lines of business has occurred with our non-interest for fee income as well. Although more normalized mortgage volumes have led to a decrease in gain in sale income over the last year, mortgage origination volume was actually up slightly in the second quarter compared to last quarter, leading to a $300,000 pickup to $1.6 million. in mortgage gain on sale income. SBA origination volumes remain brisk through two quarters in 2022. We've already closed $63 million in SBA loans, up from $35 million for the same period last year. SBA gain on sale income, however, was down from $2.2 million in the first quarter to $800,000 in the second quarter, which we see as a bit of an aberration. Elongated construction timelines and supply chain challenges have delayed the realization of gain on sale income, even for closed loads. Consequently, in the first half of 2022, we've realized only $2.9 million in gain in sale income. We expect the run rate of SBA gain on sale income to return to our expected run rate of $2 to $2.5 million per quarter in the second half. On the liability side of the balance sheet, our average deposits grew 6.7% annualized in the second quarter, even as our overall cost of total deposits stayed anchored at four basis points. Our average non-interest bearing checking deposit balances grew 10% annualized during the second quarter. It also bears repeating that our depository is comprised of 34% non-interest-bearing checking accounts of which 66% are businesses. Over half of our $8 billion depository is in checking accounts with only 5% in the time deposit category. Our depository should remain a source of strategic advantage, particularly in a rising rate environment, as well as a source of solid interchange and other fee income. On the credit side, charge-offs remain low, at nine basis points annualized, and our provision expense of $4.1 million added $2.4 million to reserves that now stand at 1.31% of total loans. Our NPLs fell to $35.7 million, or just 50 basis points of total loans, while NPAs to assets now stand at 38 basis points. Our criticized and classified loans are at the lowest level levels in years. Turning to several digital tools, of our 280,000 checking accounts, we now have over 13% penetration with Zelle and over 70% penetration of our digital, mobile, and online banking platform, which is up from 51% pre-pandemic. We also have over 165,000 average logins per day, which is over double our pre-pandemic level. In addition, our secured conversations pool makes digital interaction personal and on-demand for our consumers. At this pace, our digital interactions through our engagement center will surpass calls into our engagement center in the next year. In addition, we have seen our TM services, treasury management, such as ACH, positive pay, and remote deposit capture increasing significantly over the past year. few years as we have upgraded and enhanced these tools for our businesses. It's also added to fee income. With our new credit card platform, we are now focused on the next generation of business and consumer credit cards, including full integration with our mobile and online banking. Our digital interactions now account for approximately 86% of our overall customer interactions, with the remaining 14% coming from branch, ATM, and engagement center calls. With that, I'll turn it over to Jim Refke, our CFO.
spk05: Thanks, Mike. I'll start with the net interest margin, which expanded from 3.19% to 3.38%. The NIM expansion was driven by a 22 basis point increase in the yield of the loan portfolio, combined with the cost of deposits that stayed flat at four basis points, as Mike mentioned. The NIM expanded even though the average balance of excess cash actually increased by $47.3 million from last quarter, which has a suppressive effect on the NIM. The growth in cash was commensurate with the $133.1 million of growth in our average deposit balances. Over the course of the quarter, the NIM benefited from the redeployment of excess cash into $186 million of low growth. We expect this trend to continue. Our core NIM which excludes the effects of PPP and excess cash, expanded by 24 basis points to 3.46%. Our most recent projections confirm our previous guidance of approximately four to five basis points of margin expansion for every 25 basis points of increase in overnight rates, assuming a deposit data of 22%. Through the second quarter, our deposit data was effectively zero, In the second quarter, we saw very little deposit rate movement from any of our local competitors. That changed in the first few weeks of July, with the number of banks in our local markets raising deposit rates, albeit in fairly small amounts.
spk06: We will no doubt need to follow suit.
spk05: Our non-interest expense was flat from last quarter and naturally contributed to positive operating leverage and a lower efficiency ratio for the quarter. Expenses have benefited from two things. a vacancy rate that is running higher than usual as we experience difficulty in filling open positions. And second, we switched healthcare providers at the start of the year, and our hospitalization expenses benefited from the switch. Hospitalization expense, for example, was $721,000 less in Q2 than the same quarter a year ago. As a result, our previous non-invasive expense guidance of $56 to $57 million per quarter remains unchanged. Provision expense of $4.1 million was driven 50-50 by loan growth and charge-offs of nine basis points for the quarter. We also built reserves by $5.1 million due to various inputs in the forecast reflective of expectations for a slowing economy. This increase, however, was largely offset by a decrease in qualitative factors, which was primarily driven by a $4.6 million due to lower COVID-related reserves as COVID fades into the rearview mirror. Our asset quality measures remain low, so we believe future provision expense will be driven more by loan growth and changing economic forecasts than by fundamental changes in our asset quality profile. We repurchased 715,307 shares last quarter at an average price of $13.50 per share and still generated $10.3 million of excess capital even after these purchases. exclusive of changes in other comprehensive income, or OCI. Our internal capital generation, combined with an ex-PPP tangible common equity ratio of 8%, or 9.1% ex-PPP and excluding OCI, gives us confidence to continue our modest pace of repurchase activity. Finally, our effective tax rate is 19.7%.
spk06: And with that, we'll take any questions you may have.
spk00: As a reminder, if you would like to ask a question, press star, then the number one on your telephone keypad. Your first question today comes from Steve Moss with B Reilly Securities. Your line is now open.
spk06: Good afternoon, guys. Hey, Steve.
spk08: Maybe just starting with loan growth here. So, you know, a distinctly consumer mix for the first half, as you mentioned. um do we think about the second half growth being a mixed shift from consumer to commercial or could we get both uh consumer and commercial growth on the second half and maybe therefore higher numbers yeah the um i i think they could be a little inversely correlated we had you know mortgage indirect branch-based lending kind of leading the way the majority of the growth uh with commercial and equipment finance
spk09: smaller portion. I think commercial can definitely grow. I think mortgage could tail off a bit. But we expect to be able to get there. And we look into the pipelines and we're pretty comfortable with, you know, there hasn't really been any kind of slowing down in the pipelines on the commercial side. And we're a little bit more bullish on the third quarter for commercial where we had more payoffs in the first half of the year. We also see an uptick there in CNI line of credit utilization, maybe more tailwind on the construction side, which was actually a headwind in the second quarter. Quite frankly, people were taking it to perm before the construction loan was even finished. And now with higher rates, that's not likely to happen. And so we also see some nice uptick in maybe grocery store to anchor, retail, industrial remains strong, multifamily, apartments. um so i think i think we feel good about the commercial side i think our guidance still we're pretty comfortable with uh you know we've been at 10 or so and and being right in that neighborhood nine ten percent okay perfect and then in terms of the uh margin here just kind of uh you know curious maybe maybe where you know where are loan prices
spk08: loan rates now and also kind of what you guys are expecting for margin expansion here in the third quarter? Tim, why don't you start us off?
spk05: Yeah, so we are expecting continued margin expansion. We're on this call now while the Fed is meeting, so made the probably announcement today of 75 base points of increases. That benefits our floating rate portfolio. We've engineered the bank to be asset sensitive. About half is fixed, half of the portfolio is fixed, half floats. We'll benefit right away from that. So we do expect margin expansion. I could tell you all the replacement yields in the portfolio are up. The one exception you saw in the second quarter was some specials we had for home equity loans or some loans where you could get a teaser rate for a short period of time, and then it would click off after six months to a higher rate. So some of those loans, they come on board at a lower rate when they come on than the ones that are rolling off. Other than that, every category is up. So even the term loans are coming out at higher rates. So that trend is expected to continue in the second quarter for the second half of the year. I'll add one piece of code to that. I think I may have mentioned this last quarter, but it particularly benefits some of the shorter-term portfolios like Indirect Auto, which we're seeing, which only has a two-and-a-half-year duration. So we're seeing some of the originations that were done right at the beginning of the pandemic at low rates rolling off the books, and the new ones coming on at higher rates. And you keep pushing through rate increases on that product, and so the new ones are coming out at much higher rates.
spk08: Okay, so, you know, yes, so if half the portfolio, half the loan portfolio is floating right here, we just got to 75, you know, kind of seems like we should get something around, you know, loan yields should be probably like in the range of like 60 basis points or more higher for this quarter if we continue with this hike and then if we get one in September.
spk06: Yeah.
spk05: Yeah, it's hard. The way we've kind of been thinking about it is if there's 75 basis points today, it's hard to express exactly clearly the way you used to because of some of the timing and some of the lags. So some of those translate instantly, and some of those, there's a little bit of a lag or delay. So, for example, if a loan reprices the first of the month or the 15th of the month, it'll take a month for that to kick in. Some of the other loans will kick in right away. Generally, what we've been seeing is if there's 75 basis points, our NIMS should expand by 15 basis points as a broad rule of thumb. Okay.
spk09: Hey, Jim, any comment on just year-end projection or net interest margin, just giving assumptions around interest rates for the callers?
spk05: Yeah, to be even maybe more explicit than we have been, we did some projections ourselves internally just to see what would happen to the margin in a rising rate scenario. At the time we ran it, the futures market was predicting a Fed funds rate at a year-end of 3.75. I know other people are at different places. Some people would say 3, 3.25, 3.50. The day we ran it, the futures market said 3.75, so that's what we ran. And that showed a NIM for the fourth quarter this year in the low 370s for us. And that's not a core NIM because a core NIM concept for us will kind of run its course by the end of the year as the PPP rolls off, excess cash is burned up or redeployed rather in the loan growth. So that's really the real NIM for the bank in the low 370s in that scenario. Okay.
spk08: In terms of that scenario, kind of what deposit beta would you guys expect?
spk05: Yeah, so deposit betas are a little tricky. It's predicting customer behavior in the future, right? So we have a back-tested through-the-cycle beta assumption that we use and have used of 22%. Okay. We thought we were clever by assuming that a year or so ago that we'd have no beta at all for the first two rate hikes on the first 15 basis points, and It turns out we've had no beta at all from the first 150 basis points. But we do expect that to change. We think it's reasonable to assume that that beta will hold now that we see other competitors starting to raise deposit rates. And that's why we're being clear that we think we'll be raising some deposit rates too. The trick for that, just for your analysis, is the expectation that rates may fall. So if it's a through-the-cycle beta, and rates rise and stay there for a year or two, eventually the beta comes true. It turns out to be true. And we realize that full participation of the beta. If rates rise, and I forget what the, a couple, a week or so ago, the futures market was saying that rates would fall again sometime in the second quarter. Who knows? But if they fall again relatively quickly, we may not experience that full food cycle beta. And to the extent that we don't, that'll just benefit the margin.
spk06: Right. That's the way we think about it. Hopefully that's already a comfortable comment for you.
spk08: That is very helpful. I appreciate all the color and I'll step back to the queue here.
spk06: Thanks, guys. Thanks.
spk00: Your next question comes from the line of Carl Shepherd with RBC Capital Markets. Your line is now open.
spk06: Hey, good afternoon, everybody. Hi, Carl.
spk08: I wanted to follow up on Steve's question about growth and kind of the contributors of commercial and consumer. I heard you mention kind of mortgage maybe trailing off a little bit, but what are your expectations for auto, which is obviously you had a pretty good quarter.
spk09: Yeah. Auto has been on a bit of a tear, um, with, um, in the footprint business. Uh, we really have continuing high record volumes in July. So the momentum seems a little uninterrupted and, uh, we had good experience through the last cycle with this business. Um, When the economics of the business get a little wacky, we let it run off for three or four years, probably, what, four or five years ago? Yeah. But when they're right, we stay with it. We're primarily used cars, in-footprint dealers that we might do other business with. We've grown it with a good team, good, tight underwriting. I think what average FICO is running 764. on the auto and on the rec about 784. No subprime, good loan to values, 83%. So we feel good about the business and it kind of complements our local geographies and it's just a nice service in each community we have to get to know the car dealers. And we also, we tend to do some floor plans and some other things with these good people. So, yeah.
spk05: Anything else? Yeah, if I could add, just because your question is about kind of volumes and how that might affect our projections for the second half, we just have not seen a slowdown in that business. And it's not because we're highly dependent on any one dealer. It's actually much more diversified than it has been in the past. It's due to sort of the geographic expansion across our footprint by adding new dealerships. But the volume has been very robust. And it's also because it's mostly used volume. New used car values are higher, so that helps the dollar value to volume as well. If there is any kind of hint of recession, that might be a place where consumers slow down a little bit. At least as Mike was talking earlier, we think our commercial borrowers are very bullish about the future, and we see a lot of strength there. But maybe if consumer confidence starts to wane a little bit, perhaps it will slow down the purchase of cars. But honestly, in our numbers to date, we haven't seen any hint of that.
spk06: Okay, that's helpful. Thanks.
spk08: And then as a follow-up, not that you didn't give us enough already, Jim, on the margin, but I wanted to ask, so we saw about an 18 basis point increase this quarter. It sounds like the deposit pricing is just starting to move in the last couple of weeks. So is there any reason that we shouldn't think about kind of a step up from 2Q to 3Q being somewhere in the range of what we saw this quarter? Sure.
spk05: Yeah, it could be. I mean, I do think, and we're trying to be judicious about our deposit beta assumptions. We think we have reasonable support for our assumptions, but if anything, we think we'll probably be able to lag those deposit betas, which will just give us some upside potential to the margin. The deposit behavior we're seeing is fascinating to watch because it's really moving in fits and starts. We see some of the larger banks moving money market accounts, but in very small increments. We actually saw one large bank in our market drop money market rates by one basis point this week. And then the smaller banks are offering some CD specials and throwing something out there, a rate, maybe one and a quarter for a 12-month CD, but then we saw some this week pull back on those and drop those special rates by 50 basis points. So maybe they're finding that their specials are far more successful than they think they're going to be and getting too much in closing deposits. So I think the whole issue is trying to figure this out. It's moving in fits and starts. We just think we're going to have to keep up. We have great low growth prospects. We're going to fund that organically with our own deposit growth. And so we're definitely going to keep up with that. But if anything, to directly answer your question, there's probably upside to the margin because there's probably going to be able to get the data for the third quarter to come in below that 22% target.
spk09: And the depository has been an overnight success story. I mean, we build it, and Jane and the team, regional presidents, we get deposits with all of the lending relationships. It's 66% of the non-interest bearing is commercial. And it's just a nice fundamental kind of strategic advantage. And we'll There's parts of that we can turn on. I mean, we haven't chased any rate-sensitive parts of those households, either business or otherwise, and we can do that.
spk06: Okay. Appreciate all the help and good work. Thank you.
spk00: Your next question comes from the line of Michael Peretto with KBW. Your line is now open.
spk06: Hey, guys. Good afternoon. Hey, Michael.
spk07: I wanted to spend a minute on the non-interest income side. I think, Jim, you mentioned the SBA gain on sales should kind of jump back up to the two, two and a half million per quarter range. And mortgage should be kind of at lower levels. But just as we look into some of the other items here on the trust side, is there any room for that? I don't believe you guys have a ton of market-sensitive fees in there, if memory serves. But any reason for that to maybe take a step down here near term if the markets remain kind of at lower levels? And then just on the insurance side, not necessarily totally in your neck of the woods, but we saw Mid-Atlantic Peers sell an insurance business. And I was just curious if you could maybe give us an update on kind of how that –
spk09: platform is is kind of working for you guys in terms of you know cross-selling and growth opportunities and just an update there would also be helpful yeah i'll start with the wealth businesses which we call trust and brokerage the brokerage uh at the onset of um uh the downdraft in the market has been a nice hedge to the trust businesses the trust market values have fell and the fee income the brokerage is picked up and that is really retail brokerage and annuities and just nice saving instruments for retirees and for people that have some excess cash. So that's kind of balanced itself out. The insurance business we really like. We just like our value proposition for our commercial clients, and we do some health care there as well. And it's not terribly large. It's just several million dollars, and we make about a million dollars. We just like what it does for our clients. I mean, the person who runs that, a gentleman named Michael Bartolini, We're probably getting everybody four to five quotes. Customers love that. And you'd be surprised how that's an entree for a lot of good, larger commercial relationships when we can show them something that saves them real money. So we like the business a lot, and we've stuck with it over the years. But that's one aspect of the fee income businesses. We had a nice, healthy first half of the year with swaps. We probably can repeat that. We had $2.1 million in the first two quarters. SBA, again, we think that's an aberration with, you know, I'll just give you one example. We have a distillery. It's a $4 million project. Half of it's real estate, half of it's equipment. Everything is three to six to eight months late. So we close the loan, but we don't get the realization on the gain on sale. we probably have 31 projects like that. That's a lot. But that's all coming through the pipeline in addition to the volume and the ground game that we already have. So it's just going to show up later, but we expect to get to those numbers and we remain pretty bullish about the business. Card income is a wild card, although it came back over the first quarter. It's not at heights from a year ago, but it's, You know, people are in hotels, they're moving around, they're buying groceries, gas is a little higher. So, you know, we have a good card business tied to a lot of active 280,000 checking accounts. And then the TM business is up as well. So we've been able to kind of hedge, you know, the downdraft in the mortgage. And by the way, long-term, we're really committed to the mortgage business. We like it. It's new, young business. Credit worthy households, it gets cross sold. It's a, you know, it's a, you're planting a flag in each community. It's important to those communities. So it probably won't be the explosive growth that was a year ago or two, but we kind of expect it to be a nice steady state and just to continue to get better in each aspect and add to the business. There is a downdraft in mortgage, no doubt. Coming off of historic highs,
spk06: in 20 and 21. Is that helpful? Thank you.
spk07: Yeah, thank you. That was really nice of you. I mean, you guys seem to be having a good experience with the equipment finance expansion. I mean, have you guys ever thought about kind of trying to grow the premium, like P&C premium finance type of lending business or anything in that realm or?
spk09: We have. We just try to tackle one or two things at a time. I mean, right now we're focused on equipment finance. We're really excited and bullish about the business. We've been over on our way into businesses, which takes a little longer, but we tend to get them right. You know, we just put in a credit card platform. We'll look to add to that. So we just have a certain bandwidth to do two or three things at a time. We've built the platform on SBA.
spk07: um we've built the platform for indirect auto and mortgage over the years so but that's definitely an attractive business and then um lastly for me just the uh on the buyback appetite near term here i mean some of your peers have seen their their capital ratios get hit um from AOCI and things of that nature, at least tangible capital levels, not necessarily regulatory. But, you know, obviously you guys have managed to steer clear of that to a certain extent, and the capital ratios look pretty healthy. So just curious, and I saw you guys bought back some in the second quarter. You'll have about $10 million, I think, left or so on the authorization. Just any thoughts around, you know, how you guys might look to deploy that near term?
spk05: Yeah, so we still are buying back shares, and we think it's an appropriate way to return capital to shareholders. Obviously, the most important thing to do with your internally generated capital is support organic growth. Everyone will say that. We believe that as well. But we're really happy to be in the market buying back shares, in part because we think our fundamental value to the company, especially in the price earnings basis, is higher than it is right now. Just to give you a little color on that, we continue to generate capital internally. Like I was saying on the In my prepared remarks, the tangible common ratio, even after the OCI hit, is 8%. Excluding PVP and excluding the OCI is 9.1%. So we don't want to be undercapitalized. We don't want to be underleveraged, and we don't want to be overleveraged, right? So we do think that's a good way to replay the capital and give it back to shareholders. The one thing we've done, and we've mentioned this before, but we try to be clear about it, is that our buyback... appetite is a little price sensitive. So in the second quarter, we were buying up to $14 a share. So today, when we're over $14 a share, we're out of the market, not buying. But we were buying in the second quarter prices up to $14 a share, but it's price sensitive. So if there's a dip in the price, if there's a flash crash in the market, if the market goes down and we trade a little lower, we'll be buying up more shares and trying to take advantage of that kind of dip in price. So we're trying to be judicious about it. It's not It's not aggressive right now. There was a moment coming right out of the pandemic when we traded at book value. We were very aggressive at the buyback. That's why we characterized it as a moderate appetite, but we'll continue to do it as long as we're generating capital internally, excess capital.
spk06: Hope that helps. Thank you, guys.
spk00: Your next question comes from the line of Frank Chirotti with Hyper. Your line is now open.
spk04: Good afternoon. Just wanted to ask about, Mike, you mentioned in your remarks the significant customer use of the digital channel. And, you know, I know you guys just had a pretty big branch consolidation program, I think, back in 2020. But just wondering as you look out, you know, your thoughts on additional programs, is that something we could see in the near term? And just, you know, general thoughts on branch count here?
spk09: You know, our branch count is probably right for us, maybe a little high, but as long as the stores are profitable and they're gathering deposits and you have to have brands in these communities, we're really focused on accentuating the digital channels and growing their And we don't have anything in the works, but it's something we look at all the time in terms of customer preferences. And I think longer term, we might be just a little bit more bullish on branches than most because we, you know, through the cycle here, led by Jane Grabenz and Joe Koulos and the retail team, we've done a lot of consumer lending. HELOC, HELO, installment lending out of those branches, as we've called. And those customers have closed those loans in those branches. So they're a little smaller, but their costs are a little lower. And so I think we have an inclination over a period of time to do what you suggest, but we're not in any hurry right now to do it.
spk04: Okay, that's helpful color. And then, you know, just a standard question on M&A. I know you guys have talked about how picky you are on the acquisition front. Um, and just wondering, given the macro uncertainty, is this a time where you continue to, uh, to pursue and look at deals? Is it, you know, would you say less likely, uh, in the near term to get something done? Just give them given the, the uncertainty out there and then just kind of interested in, in, uh, any color on, on, um, you know, the level of conversations in the marketplace in general on that front.
spk09: You know, there's always a couple meaningful conversations, two or three every year. And I know there's a lot of macro uncertainty, but the opportunity to partner with a good franchise, get some efficiency, leverage their strengths on the commercial or the consumer side, and create some operating leverage is... I think it's just attractive, and we're looking at it all the time, and mostly in Pennsylvania and Ohio. And we just... you just have to get there on price, which we haven't been able to do for a couple of years. But, uh, yeah, we're, we're, we would like to grow, um, through MNA leverage. I mean, just since we did, uh, first financial in, or not first financial, but, um, in Cincinnati, the deal there, um, we've, uh, you know, just added a lot to our non-interest bearing, our, our, our loan and our fee income capacity that, um,
spk06: you know, we really can hopefully deliver through somebody else's chassis as we come together. Okay. All right, great. Thank you. What's that? Foundation. Foundation, sorry.
spk09: I had a Freudian slip there, I guess.
spk00: Your next question comes from the line of Matthew Brees with Stevens. Your line is now open.
spk10: Good afternoon. Hey, just one on liquidity. You know, we're back down to call it $300 million on cash and cash equivalents. Just curious your comfort level here or if there's more to go.
spk05: No, it's been part of the plan all year to redeploy that liquidity, and we've seen that play out just as we expected. So the loan growth prospect's really not slowing down. At the beginning of the year, we expected to hit the crossover point sometime in the third quarter where we would redeploy all that excess cash. into loan growth, and we're probably still on track for that. There are some off-balance sheet accounts that we have that we swept off balance sheet that we could probably bring back on balance sheet, probably a couple hundred million dollars of that. But hopefully we deploy that as organic growth as well. So that kind of leads to a question of the size of the balance sheet. Just to go there for a moment, we do think we'll stay below $10 billion through the end of this year, but then probably cross over sometime next year but stay below December 31st of this year.
spk10: Okay. So that's a little bit of a change. It felt like you had the optionality to stay below $10 billion for longer. Could you walk us through the thought process there? Is it just that growth has been stronger for longer than you anticipated and there's only so much of liquidity and securities you can deploy or just general confidence and strength in the business to offset some of that lost earnings?
spk05: I appreciate you asking the question. It gives me a chance to clarify. I don't mean to change the previous guidance. We're confident we can stay below $10 billion this year. It'll be close at the end of next year. It'll be close. So perhaps with some careful balance sheet management, we could hover below at the end of 2023. But at some point, you just have to cross over. So if we have good organic growth prospects, we'll grow through it and we'll just keep on going.
spk09: Yeah, I mean, I think the team is also committed to the concept of operating leverage. And as we grow through the $10 billion, we intend as an $11 or $12 billion bank to be more profitable despite Durban and the impact there than where we're at currently. And, you know, an acquisition, even a smaller acquisition coupled with the prospects we have with equipment finance and other continuing to expand projects Our fee income businesses, we expect they can be more profitable, whether it's pre-tax, pre-provision, or ROA, even with the Durban impact in a relatively short period of time.
spk10: Understood. All right. That's all I had. I appreciate you taking my questions. Thank you.
spk06: Thank you.
spk00: Your next question comes from the line of Daniel Tomeo with Raymond James. Your line is now open.
spk01: Hi, good afternoon. Most of my questions have been asked, but just a quick follow-up on the last one. Have you given the amount of the Durban, what the Durban hit would be on an annual basis? Can you remind us of that?
spk06: It's just about $13, $13.5 million.
spk01: Terrific. Okay. And then a quick follow-up, just not to beat the dead horse on the margin discussion, but this is more of a high-level question. So I'm not necessarily looking for guidance, but just your thoughts on how this may play out. In terms of, you know, we're going to get the margin expansion the rest of the year, and then assuming we don't get any more rate hikes and rates kind of stabilize toward the back half of the year, toward the end of the year, how would you expect the margin to trend into 2023 given, you know, expectations for deposit costs to be coming up, but then you've got still half your loan portfolio fixed that would eventually be replaced? pricing higher. So just thoughts on if you're expecting a peak in the margin and then maybe a decline or perhaps continue to trend upward slowly. Thanks.
spk05: It's a great question because it's part of the margin dynamic that is hard to predict and often difficult to communicate and misunderstood. But there are follow-on effects. So in the quarters in which the Fed raises rates. It hits the variable rate portfolios instantly. But that kind of scenario you just outlined would actually be pretty good for us because you'd see a lot of the medium-term term loans reprice upward. The shorter-duration portfolios like indirect auto that we already talked about in two and a half years all churn and reprice upward. You would see if that kind of rate environment stabilizes, probably slower adoption of deposit ratings. still probably will hit that 22% through the cycle, but it'll just extend the cycle and reduce pressures on deposit rates. That kind of cycle is probably good for us. Let me just give you one more bit of color on this, because this is interesting, the dreaminess question. There are some of our customers, and particularly more sophisticated, larger commercial customers, that are savvy to the idea that rates might go up, but then also might come down. And so they are low to... lock in term funding, feeling that what they don't want to do is do five or seven years. So it's a rising environment, but they don't want to lock in funding now because they think rates are going to fall relatively quickly. So they're the kind of customers that prefer the back-to-back swap product we have, and it leaves us with a variable rate exposure, and they'll generate swap fee income for us. So it's just interesting to watch that kind of behavior. But in that kind of scenario where rates kind of rise and then it stops,
spk06: we can end up probably doing very well. I appreciate that, Collar. Thank you. That's all I had. Thank you. Thank you.
spk00: There are no further questions. I now would like to turn the call back to Mike Price, President and CEO.
spk09: Thank you for your interest in our company. We feel like we've built a resilient company on the commercial and the consumer side with Lots of different solutions for our clients. We've built a robust fee income engine. And even if we get into a lot more macro headwinds, our intention is to perform, to get better in each of our lines of business, to maintain operating leverage, to have good credit quality. Invariably, there are even unique opportunities for growth. And we're excited about the future of our company and the things that we've mentioned today and more to come. Thank you.
spk00: This concludes today's conference call. Thank you for attending. You may now disconnect.
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