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 Q2 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 one. Thank you. Ryan Thomas, Vice President of Finance and Investor Relations, you may begin your conference.
Thank you, Emma, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation Q2 financial results. Participating on today's call will be Mike Price, President and CEO, Jim Reske, Chief Financial Officer, Jane Grebenc, Bank President and Chief Revenue Officer, and Brian Karrip, our Chief Credit Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We have also included a slide presentation on our investor relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements.
Please refer to our forward-looking statements disclaimer on page three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking 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.
Okay. Thank you, Ryan, and welcome everyone. A net income of $30.8 million produced core earnings per share of $0.33 for the Q2 of 2022, which was up by $0.04 over the Q1 . Robust annualized loan growth of 10.8% ex-PPP, 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 Q2 . That's despite a $1.2 million decline in PPP income.
Non-interest or fee income was up $535,000 in the Q2 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, ex-PPP, 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 H2 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 H1 of 2022, whereas we expect that commercial lending growth will pick up in the H2 of 2022 like last year. Commercial lending benefited from increased C&I line utilization, which grew to 43.5% in the Q2 , 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 5 to 6 years ago. We continue to build momentum in equipment finance, ending the quarter with $21 million in footings.
As we look to the H2 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 noninterest fee income as well. Although more normalized mortgage volumes have led to a decrease in gain on sale income over the last year, mortgage origination volume was actually up slightly in the Q2 compared to last quarter, leading to a $300,000 pickup to $1.6 million in mortgage gain on sale income. SBA origination volumes remained 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 Q1 to $800,000 in the Q2 , 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 loans. Consequently, in the H1 of 2022, we've realized only $2.9 million in gain on sale income. We expect the run rate of SBA gain on sale income to return to our expected run rate of $2-$2.5 million per quarter in the H2 .
On the liability side of the balance sheet, our average deposits grew 6.7% annualized in the Q2 , even as our overall cost of total deposits stayed anchored at 4 basis points. Our average non-interest-bearing checking deposit balances grew 10% annualized during the Q2 . 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 9 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 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 tool 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 few years as we have upgraded and enhanced these tools for our businesses that'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 Reske, our CFO.
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 on the loan portfolio, combined with the cost of deposits that stayed flat at 4 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 loan 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 4-5 basis points of margin expansion for every 25 basis points of increase in overnight rates, assuming a deposit beta of 22%. Through the Q2 , our deposit beta was effectively 0. In the Q2 , 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. We will no doubt need to follow soon. 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. First, a vacancy rate that is running higher than usual as we experience difficulty in filling open positions. 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-interest expense guidance of $56 million-$57 million per quarter remains unchanged. Provision expense of $4.1 million was driven fifty-fifty by loan growth and charge-offs of nine basis points for the quarter. We also built reserves by about for 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%. With that, we'll take any questions you may have.
As a reminder, if you would like to ask a question, press star then the number 1 on your telephone keypad. Your first question today comes from Steve Moss with B. Riley Securities. Your line is now open.
Good afternoon, guys. It's Steve. Hey, Mike. Maybe just starting with loan growth here. You know, a distinctly consumer mix for the H1 , as you mentioned. Do we think about the H2 growth being a mix shift from consumer to commercial, or could we get both consumer and commercial growth in the H2 and maybe therefore higher numbers?
Yeah. 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, with commercial and equipment finance, smaller portion. I think commercial can definitely grow. I think mortgage could tail off a bit. 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 Q3 for commercial, where we had more payoffs in the H1 of the year.
We also see an uptick there in C&I, line of credit utilization, maybe more tailwind on the construction side, which is actually a headwind in the Q2 . Quite frankly, people were taking it to perm before the construction loan was even finished. Now with higher rates, that's not likely to happen. We also see some nice uptick in maybe grocery store to anchor retail. Industrial remains strong, multi-family apartments. I think we feel good about the commercial side. I think our guidance still we're pretty comfortable with, you know, we've been at 10 or so and being right in that neighborhood, 9%-10%.
Okay. Perfect. In terms of the margin here, just kind of you know, curious maybe where you know, where are loan rates now and also kind of what you guys are expecting for margin expansion here in the Q3 .
Jim, why don't you start us?
Yeah. We are expecting continued margin expansion. We're on this call now while the Fed is meeting, so maybe they'll probably announce today 75 basis points of increases. That benefits our floating rate portfolio. We've engineered the bank to be asset sensitive. About half is fixed, half the loan portfolio is fixed, half floats, so we'll benefit right away from that. We do expect margin expansion. I could tell you all the repricing yields in the portfolio are up. The one exception we saw in the Q2 was just some specials we had for home equity loans or some loans where you could get a, like a teaser rate for a short period of time, and then it would click off after 6 months to a higher rate.
Some of those loans come on board at a lower rate when they come on. They're the ones that are rolling off. Other than that, every category is up. Even the term loans are coming out at higher rates. That trend we expect it to continue in the Q2 and for the H2 of the year. I'll add one more piece of color 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 only has a two-and-a-half year duration. 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.
We keep pushing through rate increases on that product, and so the new loans are coming out at much higher rates. Hopefully that helps.
If half the portfolio, half the loan portfolio is floating rate yeah, 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.
The way we're kind of thinking about it is if there's 75 basis points today, it's hard to express exactly clearly the way it used to because of some of the timing and some of the lags. Some of it does translate instantly, and some of it there's a little bit of a lag or delay. For example, the loan reprices the first of the month or the fifteenth of the month. It'll take a month for that to kick in. Some of the loans, other loans will kick in right away. Generally what we've been seeing is if there's 75 basis points, our net interest margin expands by 15 basis points as a broad rule of thumb.
Okay.
Hey, Jim, any comment on just year-end projection for net interest margin, just giving assumptions around interest rates for the callers?
Yeah. I think 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 of 3.75 at year-end. I know other people are at different places. Some people would say 3.25, 3.50. On the day we ran it, the futures market said 3.75, so that's what we ran. That showed a NIM for the Q4 this year in the low 3.70s% for us.
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 into loan growth. That's really the real NIM for the bank in the low 370s in that scenario.
In terms of that scenario, kind of what deposit beta would you guys expect?
Yeah. Deposit betas are a little tricky. Predicting customer behavior in the future, right? We have 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 for the first 50 basis points, and it turns out we've had no beta at all for 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. 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.
We realize that full participation of the beta. If rates rise and I forget what the a couple of weeks or so ago, the futures market was saying that rates will fall again sometime in the Q2 . Who knows? If they fall again not so quickly, we may not experience that full through the cycle beta. To the extent that we don't, that'll just benefit the margin.
Right. That's the way we think about it. Hopefully, that's pretty helpful color for you.
That is very helpful. I appreciate all the color, and I'll step back in the queue here. Thanks, guys. Thanks.
Your next question comes from the line of Karl Shepard with RBC Capital Markets. Your line is now open.
Hey, good afternoon, everybody.
Hi, Karl.
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 had a pretty good quarter?
Yeah. (uncertain) been on a bit of a tear with in the footprint business. We really have continuing high record volumes in July, so the momentum seems a little uninterrupted. We had good experience through the last cycle with this business. 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 the average FICO is running 764 on the auto and on the rec about 784. No subprime. Good loan to values, 83%.
We feel good about the business, and it kind of complements, you know, our local geographies, and it's just a nice service in each community we have. We get to know the car dealers and we also tend to do some floor plans and some other things with these good people. Yeah. 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 H2 . 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 the geographic expansion across our footprint by adding new dealerships. The volume has been very robust, and it's also because it's mostly used volume.
We use car values are higher, so that helps the dollar value of the volume as well. If there is any kind of hint of recession, that might be a place where consumer slows 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. Maybe if consumer confidence starts to wane a little bit, perhaps it'll slow down the purchase of cars. Honestly, in our numbers to date, we haven't seen any hint of that.
Okay. That's helpful. Thanks. As a follow-up, not that you didn't give us enough already, Jim, on the margin.
Sure.
I wanted to ask. We saw about a 19 basis point increase this quarter. It sounds like the deposit pricing is just starting to move in the last couple of weeks. Is there any reason that we shouldn't think about kind of the step up from 2Q to 3Q being somewhere in the range of what we saw this quarter?
Yeah, it could be. I mean, I do think we're trying to be judicious about our deposit beta assumptions. I'm sorry, but we try to be judicious about our deposit beta assumptions. We think we have reasonable support for our assumptions. If anything, we think we'll probably be able to lag those deposit betas, which will just give 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 that 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.
The smaller banks are offering some CD specials and throwing something out there or a rate, maybe 1.25 for a 12-month CD. We saw some this week pull back on those and drop those special rates by 50 basis points. Maybe they're finding that their specials are far more successful than they think they're going to be and getting too much in inflows and deposits. I think the whole industry 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 loan growth prospects. We're gonna fund that organically with our own deposit growth. We're definitely gonna keep up with that.
If anything, to directly answer your question, there's probably upside to the margin because we're probably going to be able to get the data for the Q3 to come in below that 22% target.
The depository has been an overnight success story. I mean, we've built it, and Jane and the team, regional presidents, we get deposits with all of the lending relationships. 66% of the noninterest-bearing is commercial. It's just a nice fundamental kind of strategic advantage. 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.
Okay. Appreciate all the help and good quarter.
Thank you.
Your next question comes from the line of Michael Perito with KBW. Your line is now open.
Hey, guys. Good afternoon.
Hey, Michael.
I wanted to spend a minute on the non-interest income side. I think, Jim, you mentioned the SBA gain on sale should kind of jump back up to the $2-$2.5 million per quarter range. Mortgage should be kind of at lower levels. Just as we look into some of the other items here, you know, on the trust side, is there any room for that? You know, I don't believe you guys have a ton of market sensitivities in there, if memory serves. Any reason for that to maybe take a step down here near term if the markets remain kind of at lower levels?
Then just on the insurance side, you know, not necessarily totally in your neck of the woods, but we saw Mid-Atlantic peer sell an insurance business. You know, I was just curious if you could maybe give us an update on, you know, kind of how that platform 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 at the onset of the downdraft in the market has been a nice hedge to the trust business. As the trust market values have fell and the fee income, the brokerage has 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. 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 healthcare there as well. It's not terribly large. It's just several million dollars, and we make about $1 million. 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-five quotes. Customers love that. 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. We like the business a lot, and we've stuck with it over the years. That's one aspect of the fee income businesses. We had a nice healthy H1 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. We closed 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. It's just gonna 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 Q1 . It's not at heights from a year ago. But, 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.
The TM business is up as well. We've been able to kind of hedge, you know, the downdraft in the mortgage. By the way, long term, we're really committed to the mortgage business. We like it. It's new, young creditworthy 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. It probably won't be the explosive growth it 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 in 2020 and 2021. Is that helpful?
Yeah. Thank you. That was very helpful. In the insurance business, 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, PNC premium finance type of lending business or anything in that realm?
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 de novo-ed 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. We just have a certain bandwidth to do two or three.
Yeah
Big things at a time. We've built the platform on SBA. We've built the platform for indirect auto and mortgage over the years, so. That, that's definitely an attractive business.
Lastly for me, just on the buyback appetite near term here. I mean, some of your peers have seen their capital ratios get hit from AOCI and things of that nature. At least tangible capital levels, not necessarily regulatory. You know, obviously you guys have managed to steer clear of that to a certain extent and the capital ratios look pretty healthy. I mean, I saw you guys bought back some in the Q2 . Still 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?
Jim?
Yeah. 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 is to internally generate capital to support organic growth. Everyone will say that. We believe that as well. We're really happy to be in the market buying back shares, in part because we think our fundamental value of the company, especially on a 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 in my prepared remarks, the tangible common ratio even after the OCI hit is 8%. Excluding PPP and excluding the OCI is 9.1%. We don't wanna be undercapitalized.
We don't want to be underleveraged, and we don't want to be overleveraged, right? We do think that's a good way to redeploy 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. In the Q2 , we were buying up to $14 a share. Today we're over $14 a share. We're out of the market not buying. We were buying in the Q2 up to $14 a share.
It's price sensitive, so if there's a dip in the price, if there's a flash crash in the market or 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. We're trying to be judicious about it. It's not aggressive right now. There was a moment coming out of the pandemic when we traded at book value. We were very aggressive with the buyback. That's why we characterize it as a moderate appetite. We'll continue to do it as long as we're generating capital internally, excess capital. Hope that helps.
Thank you, guys.
Your next question comes from the line of Frank Schiraldi with Piper Sandler. Your line is now open.
Good afternoon.
Hi, Frank.
Just wanted to ask about, Mike, you mentioned in your remarks the significant customer use of the digital channel. You know, I know you guys just had a pretty big branch consolidation program, I think back in 2020. Just wondering as you look out, you know, your thoughts on additional programs. Is that something we could see in the near term? Just, you know, general thoughts on branch count here.
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 branches in these communities. We're really focused on accentuating the digital channels and growing there. We don't have anything in the works, but it's something we look at all the time in terms of customer preferences. 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 Grebenc and Joe Culos and the retail team, we've done a lot of consumer lending. HELOC, HELoan, installment lending out of those branches as we've called.
Those customers have closed those loans in those branches. They're a little smaller, but their costs are a little lower. 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.
Got you. Okay. That's helpful color. You know, just a standard question on M&A. I know you guys have talked about how picky you are on the acquisition front. Just wondering, given the macro uncertainty, is this a time where you continue to pursue and look at deals? You know, would you say less likely in the near term to get something done given the uncertainty out there? Just kind of interested in any color on you know, the level of conversations in the marketplace in general on that front.
You know, there's always a couple meaningful conversations, two or three every year. I know there's a lot of macro uncertainty. 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. Mostly in Pennsylvania and Ohio.
We just have to get there on price, which we haven't been able to do for a couple years. Yeah, we would like to grow through M&A leverage. I mean, just since we did Foundation Bank or not Foundation Bank, but in Cincinnati, the deal there, we've you know, just added a lot to our non-interest bearing or our loan and our fee income capacity that you know, we really can hopefully deliver through somebody else's chassis as we come together.
Okay. All right. Great. Thank you.
Thanks, what's that?
Foundation.
Sorry. I had a Freudian slip there, I guess.
Your next question comes from the line of Matthew Breese with Stephens. Your line is now open.
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?
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. The loan growth prospects really are not slowing down. At the beginning of the year, we expected to hit the crossover point sometime in the Q3 where we would redeploy all that excess cash into loan growth. We're probably still on track for that. There are some off-balance sheet accounts that we have that we've swept off-balance sheet that we could probably bring back on balance sheet. Probably $200 million of that. But we'll hopefully redeploy that as organic growth as well. 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. Stay below December thirty-first of this year.
Okay. 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 Durbin? Would love some color there.
No, I appreciate you asking the question. It gives me a chance to clarify. That means we're gonna 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. Perhaps with some careful balance sheet management, we could hover below at the end of 2023. At some point, you just have to cross over. If we have good organic growth prospects and we'll grow through it and we'll just keep on going. Yeah. I mean, I think the team is also committed to the concept of operating leverage.
As we grow through the $10 billion, we intend as an $11-12 billion bank to be more profitable despite Durbin and the impact there than we are than where we're at currently. You know, an acquisition, even a smaller acquisition coupled with the prospects we have in with equipment finance and other continuing to expand our fee income businesses, we expect we can be more profitable, you know, whether it's pre-tax, pre-provision or ROA, even with the Durbin impact, in a relatively short period of time.
Understood. All right. That's all I had. I appreciate you taking my questions. Thank you.
Thank you.
Your next question comes from the line of Daniel Tamayo with Raymond James. Your line is now open.
Hi, good afternoon. Most of my questions have been asked, but just a quick follow-up on the last one. Have you given what the Durbin hit would be on an annual basis? Or can you remind us of that?
Yeah. It's just about $13 million-13.5 million.
Terrific. Okay. A quick follow-up, just not to beat the dead horse on the margin discussion, but this is more of a high-level question. Not necessarily looking for guidance, but just your thoughts on how this may play out. In terms of, you know, we're gonna 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? You've got still half your loan portfolio fixed that would eventually be pricing higher.
Just thoughts on you know if you're expecting a peak in the margin and then maybe a decline or perhaps continue to trend upwards slowly. Thanks.
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. There are follow-on effects. In the quarters in which the Fed raises rates, it hits the variable rate portfolios instantly. That kind of scenario you just outlined would actually be pretty good for us because you'd see a lot of the medium-term loans reprice upward. The shorter duration portfolios like indirect auto that we already talked about with 2.5 years all churn and reprice upward. You would see if that kind of rate environment stabilizes, probably slower the adoption of deposit rates. 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. I just think this is interesting and germane to this 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. They are loath to lock in term funding, feeling that what they don't want to do is do five or seven years. 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. They are the kind of customers that prefer the back-to-back swap product we have. It leaves us with a variable rate exposure.
It generates swap fee income for us. It's just interesting to watch that kind of behavior. In that kind of scenario where rates can rise and then it stops, we can end up probably doing very well.
I appreciate that color. Thank you. That's all I had.
Thank you. Thank you.
There are no further questions. I'd now like to turn the call back to Mike Price, President and CEO.
Hey, 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. Even if we get into a lot more macro headwinds, you know, 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 is even unique opportunities for growth. We're excited about the future of our company and the things that we've mentioned today, and more to come. Thank you.
This concludes today's conference call. Thank you for attending. You may now disconnect.