First Commonwealth Financial Corp (NYSE:FCF) Q2 2022 Earnings Conference Call July 27, 2022 2:00 PM ET
Company Participants
Ryan Thomas – VP, Finance and IR
Thomas Price – President, CEO & Director
James Reske – EVP, CFO & Treasurer
Conference Call Participants
Stephen Moss – B. Riley Securities, Inc.
Karl Shepard – RBC Capital Markets
Michael Perito – KBW
Frank Schiraldi – Piper Sandler & Co.
Matthew Breese – Stephens Inc.
Daniel Tamayo – Raymond James & Associates
Operator
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. [Operator Instructions].
Ryan Thomas, Vice President of Finance and Investor Relations, you may begin your conference.
Ryan Thomas
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 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 will turn the call over to Mike.
Thomas Price
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% 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 pretax pre-provision net revenue to $42.5 million in the second quarter, and that’s despite a $1.2 million decline in PPP income, noninterest 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 pretax pre-provision ROA was 1.77%. Over the last 4 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 second half of 2022, consistent with a high single-digit growth target.
Both our consumer and commercial lending businesses as well as the 5 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 C&I 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 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 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 and 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 or 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 2 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 time lines and supply chain challenges have delayed the realization of gain on sale income even for closed loans. 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 million 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 4 basis points. Our average noninterest-bearing checking deposit balances grew 10% annualized during the second quarter. It also bears repeating that our depository is comprised of 34% noninterest-bearing checking accounts, of which 66% are businesses. Over half of our $8 billion depositories and 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 remained 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 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 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.
James Reske
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 of an end. 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 to 5 basis points of margin expansion for every 25 basis points of increase in overnight rates, assuming a deposit beta of 22%.
Through the second quarter, our deposit beta was effectively 0. 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 very fairly small amounts. We will no doubt need to follow suit. Our noninterest 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 2 things: First, a vacancy rate that is running higher than usual as we experience difficulty in filling open positions. And second, we switched health care 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 noninterest expense guidance of $56 million to $57 million per quarter, remains unchanged. Provision expense of $4.1 million was driven 50-50 by loan growth and charge-offs of 9 basis points for the quarter. We also built reserves by about — 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 phases into the rearview mirror. Our asset quality measures remain low, so we believe future provision expense will be driven more by loan growth and change the economic forecast and 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%.
And with that, we’ll take any questions you may have.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question today comes from Steve Moss with B. Riley Securities.
Stephen Moss
It’s Steve. Maybe just — Mike, maybe just starting with loan growth here, so distinctly consumer mix for the first half, as you mentioned, do we think about the second half growth being a mix shift from consumer to commercial? Or could we get both consumer and commercial growth in the second half and maybe therefore, higher numbers?
Thomas Price
Yes. I think they could be a little inversely correlated. We had 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. But we expect to be able to get there and we look into the pipelines, and we’re pretty comfortable with 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 C&I, line of credit utilization, maybe more tailwind on the construction side, which is actually a headwind in the second quarter. Quite frankly, people were taking it the 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 anchor retail, industrial remains strong, multifamily apartments. So I think we feel good about the commercial side. I think our guidance is still — we’re pretty comfortable with — we’ve been at 10% or so and being right in that neighborhood, 9%, 10%.
Stephen Moss
Okay. Perfect. And then in terms of the margin here, just kind of curious maybe where are loan prices — loan rates now and also kind of what you guys are expecting for margin expansion here in the third quarter?
Thomas Price
Jim, why don’t you start…
James Reske
Yes. So we are expecting continued margin expansion. We’re on this call now while the Fed is leaving, so made the probes announcement today of 75 basis points of increases that benefits our floating-rate portfolio. We’ve engineered the bank to be asset sensitive. About half fixed-head performing fixed half float, so we’ll benefit right away from that. So we do expect margin expansion. I could tell you all the replacement yields and portfolio are up.
The one exception we saw in the second quarter with some specials we’ve had for home equity loans or some loans we could get like a teaser rate for a short period of time and then it would click off after 6 months to a higher rate to some of those loans they come on board at a lower rate when they come on to the ones that are rolling off other than that every category is up. So even the term loans are coming on a higher rates. So that trend is expected to continue in the second quarter and for the second half of the year.
I want to 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 where we’re seeing — which only has a 2.5-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 we keep pushing through rate increases on that product, and so the new worlds are coming at a much higher rate.
Stephen Moss
Yes. So if half of the portfolio — half loan portfolio is floating right here, we just got to 75. It kind of seems like we should get something around loan yield should be probably like in the range of like 60 basis points or more higher for this quarter if we continue with this high demand and then if we get one in September.
James Reske
Yes. Yes, it’s hard — the way we’re kind of thinking about it, and so if they’re 75 basis points today, it’s hard expressed exactly clearly the way you used to because of some of the timing and some of the lags. So some of that does translate instantly and some of there’s a little bit of a lagger delay. So for example, the loan reprices the 1st of the month or the 15th of the month, they’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 that they’re 75 basis points, our interest expand by 15 basis points as a broad rule of thumb.
Thomas Price
Jim, any comment on just year-end projection for net interest margin, just giving assumptions around interest rates for the colors?
James Reske
Yes. 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 the year-end of 3.75%. I know other people are at different places, some people would say 3%, 3.25% to 3.50%. On the day we ran up to future markets at 3.75%. So that’s what we ran and that showed a NIM for the fourth quarter this year in the low 3.70s for us. And that’s not a [indiscernible] in because of [indiscernible] concept for us will kind of run its course by the end of the year as the PPP rolls off excess cash has burned up redeployed rather in the loan growth. So that’s really the real win for the bank in those 3.70s in that scenario.
Stephen Moss
In terms of that scenario, kind of what deposit beta would you guys expect?
James Reske
Yes. So deposit betas are a little tricky, so predicting customer behavior in the future, right? So we have back tested through the cycle of beta assumption that we use and have used about 22%. And we thought we were clever by assuming that a year or so ago that you have — we have no beta at all for the first 2 rate hikes on the 50 basis points, and turns out we’ve had no data at all for the first 150 basis points.
So — 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 truth for that, just for your analysis is the expectation that rates may fall. So if it’s a through-the-cycle data, and rates rise and stay there for a year or 2, eventually, the beta comes true. It turns out to be true. And we realize that full participation of the bed.
If rates rise and I forget with a couple — a week or so ago, the futures market was saying that rates will fall again sometime in the second quarter for those. But if they followed in rutile quickly, we may experience that full through-the-cycle data. And to the extent that we don’t, that will just benefit the margin. That’s where we think about it. Hopefully that’s all color for you.
Operator
Your next question comes from the line of Karl Shepard with RBC Capital Markets.
Karl Shepard
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.
Thomas Price
Auto has 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. And 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 3 or 4 years, probably, what, 4 or 5 years ago. 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 sub prime, 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 anything else, Jim?
James Reske
Yes, if I could add, just because your question is about kind of volumes and how that might affect what our project in are 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 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, we used 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. Least, as Mike was talking earlier, we think that our commercial borrowers are very bullish about the future, and we see a lot of strength there. But maybe if there’s 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.
Karl Shepard
Okay. That’s helpful. 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 a 19 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 should not think about kind of the step-up from 2Q to 3Q being somewhere in the range of what we saw this quarter?
James Reske
Yes, it could be. I mean, I do think — and we’re trying to be — sorry, we try the judicious about our deposit base 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 an upside — 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 dropped money market rates by 1 basis point this week. So — and then the smaller banks are offering some CD specials and throwing something out there or a rate if you wanted 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 specialists are far more successful than they think they’re going to be and getting too much inflows in deposits. So 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 be — have to keep up. We have great loan growth prospects. We’re going to fund that organically with our 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.
Thomas Price
And 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% noninterest — of the noninterest-bearing is commercial. And it’s just a nice fundamental kind of strategic advantage. And 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.
Operator
Your next question comes from the line of Michael Perito with KBW.
Michael Perito
I wanted to spend a minute on the noninterest income side. I think, Jim, you mentioned that the SBA gain on sales could kind of jump back up to the $2 million, $2.5 million per quarter range. Just — 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 peer sell an insurance business.
And I was just curious if you could maybe give us an update on kind of how that platform is kind of working for you guys in terms of cross-selling and growth opportunities? And just an update there would also be helpful.
Thomas Price
Yes, 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 it 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. 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 $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 4 to 5 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 just — we like the business a lot, and we stuck with it over the years. That’s one aspect of the fee income businesses.
We had a nice healthy first half of the year with we probably can repeat that. We had $2.1 million in the first 2 quarters. SBA, again, we think that’s an aberration with — 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 3 to 6 to 8 months late. So we closed the loan, but we don’t get the realization on the gain on sale.
We probably have 31 projects like that. What? 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 loud card, although it came back over the first quarter. It’s not at heights from a year ago. But people in hotels, they’re moving around. They’re buying groceries, gas is a little higher. So we had 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 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 credit-worthy households, it gets cross sold. It’s — you’re planting a flag in each community. It’s important to those communities.
So it probably won’t be the explosive growth it was a year ago or 2, 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 down draft in mortgage, no doubt, coming off of historic highs in ’20 and ’21. Is that helpful?
Michael Perito
Yes. In the insurance business, I mean, you guys seem having a good expense at the equipment finance expansion. I mean, have you guys ever thought about kind of trying to grow the premiums like P&C premium finance take lot lending business or anything in that realm or…
Thomas Price
We have. We just have — we just tried to tackle 1 or 2 things at a time. I mean, right now, we’re focused on equipment finance. We’re really excited and bullish about the business. De novo our way into businesses, which takes a little longer, but we tend to get them right. We just put in a credit card platform. We’ll look to add to that. So we just have a certain bandwidth to do 2 or 3 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 but that’s definitely an attractive business.
Michael Perito
And then 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 OCI and things of that nature. At least tangible capital level is not necessarily regulatory. But obviously, you guys have managed just to clear that to a certain extent, and the capital ratios look pretty healthy. So just curious, I saw you guys bought back some in the second quarter, still have about $10 million, I think, left or so on the authorization. Just any thoughts around how you guys might look to deploy that near term?
Thomas Price
Jim?
James Reske
Yes. 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 generate capital and support organic growth, everyone will say that, we believe that as well. So we’re really happy to be in the market buying back shares in part because we think we’re our fundamental value of the company, especially on a price earnings basis as higher as it is right now.
Just to give you a little color on that. We are — we continue to generate capital internally, I was saying on the in my prepared remarks, the tangible common ratio, even after the OCI hit is 8%. And excluding PPP and excluding the OCI is 9.1%. So we don’t want to be over capitalized.
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 shape and get 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, 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 different price. So we’re trying to be judicious about it. It’s not — it’s not aggressive right now. There was a moment coming out of the pandemic trading at book value. We were very aggressive with the buyback. That’s why we characterize it as a moderate appetite, but we’ll continue to do it as long as we’re generating capital internally, excess capital. Hope that help.
Operator
Your next question comes from the line of Frank Schiraldi with Piper.
Frank Schiraldi
Just wanted to ask about, Mike, you mentioned in your remarks the significant customer use of the digital channel, and I know you guys just had a pretty big branch consolidation program, I think, back in 2020. But just wondering, as you look out your thoughts on additional programs? Is that something we could see in the near term? And just general thoughts on branch count here?
Thomas Price
Our branch count is probably right for us maybe a little high, but we — 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 there.
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 through the cycle here, led by Jane Grebenc and Joe Colos and the retail team, we’ve done a lot of consumer lending, HELOC, key loan 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.
Frank Schiraldi
Got you. Okay. That’s helpful color. And then just a standard question on M&A. I know you guys have talked about how picky you are on the acquisition front. And just wondering, given the macro uncertainty, is this a time where you continue to pursue and look at deals? Is it — would you say less likely in the near term to get something done, just given the uncertainty out there? And then just kind of interested in any color on the level of conversations in the marketplace in general on that front.
Thomas Price
There’s always a couple of meaningful conversations 2 or 3 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 yes, we’re — we would like to grow through M&A leverage. I mean, just since we did first financial and — or not First Financial, but in Cincinnati, the deal there, we’ve just added a lot to our noninterest bearing — our loan and our fee income capacity that we really can hopefully deliver through somebody else’s chassis as we come together. What’s that?
Operator
Your next question comes from the line of Matthew Breese with Stephens.
Matthew Breese
Just one on liquidity. 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.
James Reske
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 prospects really not slowing down.
We expect to — 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, that’s we’re probably still on track for that. There are some off-balance sheet accounts that we have that we’ve swept out balance sheet that we would probably bring back on balance sheet, probably a couple of hundred million dollars of that.
But we’ll hopefully, redeploy that as organic growth as well. So — and 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 some time next year. But stay below December 31 of this year.
Matthew Breese
Okay. So that’s a little bit of a change. It felt like you had the optionality to change 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 loss driven would love some color there.
James Reske
I appreciate you answer the question. It gives me a chance to clarify. I don’t mean to real change the previous guidance. So we do — we’re confident we can stay below $10 billion this year. It will be close at the end of next year. It will be close. So perhaps with some careful balance sheet management, we could hover below the end of ’23. But at some point, you just have to cross over. So if we have good organic growth prospects and we’ll grow through it, and we’ll just keep on going.
Thomas Price
Yes. 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 billion or $12 billion bank to be more profitable despite turbine and the impact there where we’re at currently. And 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 whether it’s pretax pre-provision or ROA, even with the Durbin impact in a relatively short period of time.
Operator
Your next question comes from the line of Daniel Tamayo with Raymond James.
Daniel Tamayo
Most of my questions have been asked, but just a quick follow-up on the last one. Have you given the amount of the Durbin? What the Durbin hit would be on an annual basis? Or can you remind us of that?
Thomas Price
It’s just about $13 million, $13.5 million.
Daniel Tamayo
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 not necessarily looking for guidance, but just your thoughts on how this may play out. In terms of we’re going to get the margin expansion in the rest of the year. And then assuming we don’t get any more rate hikes and rates kind of stabilize towards the back half of the year towards the end of the year.
How would you expect the margin to trend into 2023 given expectations for deposit costs to be coming up and then you’ve got still half your loan portfolio fixed that would have been eventually be 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.
James Reske
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 portfolio 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 [indiscernible] price upward kind of late in stabilize, probably slower production of deposit betas still probably will hit that 22% through the cycle, but don’t just extend the cycle and reduce pressures on deposit rates. That kind of stuff is probably good for us.
Maybe just give you one more bit of color on this because this is interesting in domain of 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 and 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 2, 5 or 7 years. So it’s a rising environment that they don’t want to lock in funding now because they think rates are going to fall relatively quickly.
So they are the kind of customers that prefer the back-to-back swap product we have. And they will — it leaves us with a variable 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 are going to rise and that stops we can end up probably doing very well.
Operator
There are no further questions. I’d now like to turn the call back to Mike Price, President and CEO.
Thomas Price
Thank you for your interest in our company. We feel like we’ve built a resilient company 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.
Operator
This concludes today’s conference call. Thank you for attending. You may now disconnect.
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