Q2 2022 First Commonwealth Financial Corp Earnings Call

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 2nd 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 1 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.

Thank you, Emma. Good afternoon, everyone. Thank you for joining us today to discuss first Commonwealth financial corporations, and second quarter financial results.

Participating on today's call will be Mike Price, President and CEO , Jim Reske, Chief Financial Officer, Jane Grubens, 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 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 defer 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 the report.

Robust annualized loan growth of 10.8% XPPP, coupled with net interest margin expansion, the 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 TPP income.

Noninterest for 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 in the efficiency ratio fell to 55.87%. Core pre-tax, pre-provision RLA 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.

an 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, we're not meaningful in our repertoire of lending solutions just five to six years ago. We continue to build momentum and equipment finance ending the quarter with $21 million in footings. As we look at the second half of 2022. As we look at 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 roads.

Consequently, in the first half of 2022, we've realized only $2.9 million in gain and sale income. We expect the run rate of the SBA gain on sale income to return to our expected run rate of $2.2 million per quarter in the second half. $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 the 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.

at a $2.4 million to reserves that now stand at 1.31% of total loans. Our NPLs felt at $35.7 million or just 50 basis points of total loans while NPAs...

The 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 will open up and deliver you more information about the digital world, including the physical and digital online banking platform.RRR your

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 to our engagement center in the next year.

In addition, we have seen our TM services pressure management such as HVH positive pay and remote deposit capture increasing significantly over the past few years as we have upgraded and enhanced these tools for our businesses, but it's also added to the 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 Reffsky, 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 of the loan portfolio, combined with a 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 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 beta was effectively zero.

In the second quarter, we saw very little deposit rate moving 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 know that need to follow soon.

Our non-induced expenses flat from last quarter and naturally contributed positive operating leverage in a lower efficiency ratio for the quarter.

Expenses have benefited from two things.

First, a vacancy rate that is running higher than usual as experienced difficulty in filling out the positions.

And second, we switched healthcare providers to the start of the year, and our hospitalization expense is benefited from the switch.

Hospitalization expense, for example, was $721,000 less in Q2 than the same quarter year ago.

As a result, our previous not-and-is-expense guidance of 56 to 57 million dollars per quarter remains unchanged.

Provision expense of $4.1 million is driven 50-50 by loan growth and charge-offs of nine basis points for the quarter.

We also built reserves by about five by five point one million dollars due to various inputs in the forecast were effective expectations for a slowing economy. The economy. The 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 living room.

Our asset quality measures remain low, so we believe future provision expense will be driven more by long growth and change the economic forecast 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 XPPP-tange will come in an equity ratio of 8% for 9.1% XPPP 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.

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-Rider Securities.

Your line is now open.

Good afternoon, guys.

Steve, maybe just...

It might maybe just starting with long growth here. So, you know, the simply consumer mix for the first half, as you mentioned. Do you think about the second half growth being a mixed shift from consumer to commercial or do we get both consumer income or growth in the second half 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 could definitely grow. I think mortgage could tell off a bit. But we expect to be able to get there and we look into the pipelines and we're pretty comfortable with... 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 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 to anchor retail, industrial remains strong, multi-family apartments.

So 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. And then in terms of the margin here, just kind of curious maybe where are loan prices, loan rates now and also what you guys are expecting for a margin expansion here in the third quarter.

to the one I just started. Yeah, so we are expecting, we continue margin expansion. We're on this call now. A lot of that is leaving so major probably is announced in today's 75 base points of increases. That benefits our flu and report folio. We've engineered the bank, the asset sensitive. About half a six, a half full and proposed six half floats. A little better fit further away from that.

So we do expect margin expansion. I could tell you all the replacement yields in portfolio are up to the one exception you saw in the second quarter with some specials we have for home equity loans or some loans we could get on like a TGA rate for a short period of time and then it would click off after six months to a higher rate. So some of those out of the loans as they come on board, they're a lower rate when they come on and the ones that are rolling off so that every category's up. So even the term loans are coming out of higher rates.

So that trend is the expected to continue in the seven quarter of the year. I'll add one piece of color to that. I think I may have mentioned this last quarter, but it particularly benefits some of the shorter term portfolio is like indirect auto, which where we're seeing, we're talking about 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 we keep pushing through rate increases on that product, and so the new loads are coming out at much higher rates.

Ok so you know if

Yes, so if half the portfolio, half the loan portfolio is floating right here, we just got to 75, kind of seems like we should get something around, 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 .

Yeah. Yeah, that's right.

Yeah, it's hard to, the way we kind of think about it, is if there's 75 base points today, or if it's hardest press exactly clearly the way used to because of some of the timing and some of the lags. So some of it does translate instantly and some of it, there's a little bit of a lag or delay. So for example, the loan reprices, the first of the month or the 15th of the month, don't 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, an interest stand by 15 basis points.

To blew a little repot engine...

Hey Jim, any comment on just your end projection?

or net interest margin just giving assumptions around interest rates for the callers? Yeah, it could 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 the year end of 3.75. I know other people are at different places. Some people would say 3, 3.25 to 3.50. The day we ran it, the futures market set 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, redeployed rather in the loan growth. So that's really the real NIM law for the bank in the low 370s in that scenario.

In terms of that scenario, what deposit beta would you guys expect?

Yeah, so deposit betas are a little tricky, so predicting customer behavior in the future, right? So we have a back-tested through the cycle beta assumption that we use and have used 22%.

We thought we were clever by assuming that a year or so ago that we would have no beta at all for the first two rate hikes for the first 50 basis points. It turns out we have had no beta at all for the first 150 basis points. We do expect that to change. We think it is reasonable to assume that that beta will hold now that we see other competitors starting to raise deposit rates. That is why we are being clear that we think we will 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 data and rates rise and stay there for year two, eventually the data comes true, it turns out to be true. And to be realized that full participation of the data, if rates rise and I forget the couple, a week or so ago, the features market was saying that rates will fall again sometime in a second quarter, those, but if they fall again, so they quickly may not experience that full-fuse cycle data. And to accept that we do.

I wanted to follow up on Steve's question about growth and kind of the contributors of commercial and consumer. I heard you mentioned kind of mortgage may be trailing off a little bit but what are your expectations for auto which is obviously?

about growth and kind of the contributors of commercial and consumer. I heard you mentioned 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.

I always been on a...

a bit of a tear with some.

In the footprint business, we really have continuing high record volumes in July . So then the minimum 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 three or four years, probably what, four or five years ago? Yeah. And but when they're right, we stay with it. We're primarily used cars.

footprint dealers that we might do other business with. We've grown it with a good team, good tight underwriting.

I think what average fight goes 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's kind of compliments. And it's kind of compliments. And it's kind of compliments.

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 tend to do some floor plans and some other things with these good people.

Anything else to do? Yeah, if I could add, I just think that your question is about kind of the volumes of how that might affect the market for Jack and Sarfus, second half. We just have not seen a slow down in that business. And it's not because we're highly dependent on anyone in dealer. It's actually much more diversified than it is, but it's been in the past. It's sort of a geographic expansion across our footprint by adding dealerships. But the volume is very robust. And it's also because it's mostly used volume. New use car values are higher, so that helps to be...

All of value to value as well. If there is any kind of hint of recession, that might be a place we're consuming the slow down a little bit. Lisa is talking earlier. We think our commercial partners are very bullish about the future. We see a lot of strength there, but maybe if there's a consumer confidence, starts to wane a little bit. Perhaps we will slow down the purchase of cars, but honestly, in our numbers to date, we haven't seen any hint of that.

Okay, that's helpful, thanks. 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-base point increased 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 the step up from 2Q to 3Q being somewhere on the range of what we saw this quarter? So is there any reason that we should be in somewhere on the range of what we saw this quarter?

Yeah, it could be. I mean, I do think we're trying to be, I'm sorry, but we try to lead your dishes and not to deposit bait as much. But we try to lead your dishes and not to deposit bait as much.

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 of a margin.

The deposit behavior we're seeing is fascinating to watch because it's really moving and fits and starts. We see that some of the larger ranks 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. So, and then the smaller banks are offering some CD specials and throwing something out there, or a rate, maybe one of the 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 of an inflows in the profits. I think the whole industry is trying to figure this out, but moving in fits and starts.

We just think we're going to have to keep up. We have great, long-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 further.

Fair court are determined below that 22% target.

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 and 66% of the non-interest sparing is commercial. And the...

It's just a nice fundamental kind of strategic advantage. And we, as part of that, we can turn on. I mean, we haven't shaved any rate-sensitive parts of those households out of business or otherwise. And we can do that.

Okay, appreciate all the help and good work.

Thank you.

Your next question comes from the line of Michael Pareto with KVW. Your line is now open.

Hey guys, good afternoon.

Michael.

I wanted to spend a minute on the not interesting come side. I think Jim you mentioned the SBA game on sale should kind of jump back up to the 2 2 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, 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 sensitive fees in there if memory serves, but any reason for that to maybe.

take a step down here in your term if the markets remain kind of at lower levels and then just on the insurance side

You know, not necessarily totally in your neck of the woods, but we saw a mid-Atlantic peer selling insurance business. And I was just curious, have you come in to 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. Brokerage at the onset of

the down draft in the market has been a nice hedge to the trust business. The trust market value has had fell and the fee income, the brokerage has picked up. That is really retail brokerage and annuities and just nice saving instruments for retirees and for people that have some excess cash. That's balanced itself out. The insurance business we really like, we just like our value proposition for our commercial clients and to do some healthcare 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 just like the business a lot and we stuck with it over the years.

But that's one aspect of the fee income businesses. We had a nice, healthy, first patch 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, with the stillery, it's a $4 million project, half of its real estate, half of its equipment. Everything is three to six to eight 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. 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 just finished show up later, but we expect to get to those numbers and we remain pretty bullish about the business. Cardin come as a wild card, although it came back over the first quarter. It's not at heights from a year ago, but coisa? Bye.

You know people in hotels are 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 two hundred and eighty thousand 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 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 a, you know, it's a, you're planning 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 expected to be a nice steady state and just to continue to get better in each aspect than at the business. There is a down draft in mortgage no doubt. Coming off of historic hides in 2021.

Is that helpful?

Thank you, thank you. We need shoes. If there's something, you guys seem to be having a good experience at the equipment and finance expansion. I mean, if you guys ever thought about kind of trying to go with the premium, like P and C premium finance, type a lot, lending business, I think about normal. I think about normal. I think about normal.

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 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 two or three things at a time. We've built the platform on SBA.

necessarily regulatory. But obviously you guys have managed to steer clear of that to a certain extent and the capital ratio looks pretty healthy. So just curious and I saw you guys bought back some in the second quarter. We still have about 10 more minutes.

million I think left or so on the authorization, if any thoughts around how you guys might look to support that there Trump.

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 return to generate capital is 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 a 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 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 under-capitalized, we don't want to be under-leveraged, and we don't want to be over-leveraged, right? So we do think that's a good way to redeploy the capital and give it back to shareholders.

The one thing we've done, 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 at 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. So, the next quarter, we're going to be buying up more shares. So, the next quarter, we're going to be buying up more shares.

trying to take advantage of that kind of dip in price. So we're trying to be judicious about it. It's not aggressive right now. There was a moment coming around 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, but we'll continue to do it as long as we're generating capital internally, than just putting in excess capital.

So that helps. Thank you guys.

Your next question comes from the line of Frank Charade with Hyper. Your line is now open.

Good afternoon. Great. 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 have been doing. And I know you guys are doing a lot of work. And I know you guys are doing a lot of work.

see in the near term and just general thoughts on branch count here.

You know, our branch count is...

Probably right for us, maybe.

A little maybe a little high but we as long as the stores are profitable and they're gathering deposits and.

You have to have your answer 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, you know, through the cycle here, led by Janger Benz and Joe Kulos and the retail team, we've done a lot of consumer lending, heat lock, heat loan, installment lending out of those branches.

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?

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 then we're looking at it all the time and mostly intensively in Ohio. And we just, uh,

You just have to get their own price, which we haven't been able to do for a couple of years. But yeah, we would like to grow through M&A, leverage, I mean, just since we did First Financial in, or not First Financial, but in Cincinnati, the deal there, we've, we've been talking about it with first straight getting started.

You know, we've just added a lot to our loan and our fee income capacity that 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. Had a Freudian slip there.

Your next question comes from the line of Matthew Brief with Stevens. Your line is now open.

Good afternoon.

They just want on liquidity, you know, we're back down to call it 300 million on cash and cash equivalents. It just carries your comfort level here. It just carries 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 plan since we expected. So, with the long-roof prospects, we're not slowing down. We expect to, at the beginning of the year, we expected to hit the cross-error point sometime in the third quarter, where we would redeploy all that excess cash into long-roof, and that's probably still on track for that. There are some off-balance sheet counts that we have that we swept out balance sheet to be the part that we've got on balance sheet.

probably a couple hundred million dollars of that. But hopefully we deploy that at 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 worth $10 billion for the end of this year, but then probably cross over sometime next year. But stay below, and send up your universe of this year.

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 loss? Durbin, we'd love some comment. No, I appreciate you asking the question. It gives me a chance to clarify. I don't mean to really change the previous guidance. So we're confident we can stay below 10 billion this year. We'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 23. But at some point you just have to cross over. So if we have good organic growth prospects and 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. And as we grow through the $10 billion, we intend as an $11 or $12 billion bank to be more profitable to spiked urban and the impact there than we're at currently. And an acquisition, even a smaller acquisition coupled with the prospects we have in... Our third company, I do notk

with equipment finance and other continuing to expand.

Our fee income businesses, we expect we can be more profitable, whether it's pre-tax, pre-prevision or RLA, even with the urban 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 the amount of the Durban, what the Durban hit would be on an annual basis, or can you remind a disability? Can you remind a disability?

It's just about 13, 13 and a half million dollars.

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 stabilized toward the back half of the year toward the end of the year. How would you expect the margin to to trend into 2023 given you know expectations for for deposit cost to be coming up but then you've got still half your loan portfolio fix that would eventually be.

pricing higher. So just thoughts on

you know, if you're expecting a peak in the margin then maybe decline or perhaps...

continue to trend upward 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, but there are follow-on effects. So in the quarters in which the Fed raises rates, it hits me very well, very portfolio-sensitently, but that kind of stare, you just outline would actually be pretty good for us because you'd see a lot of the median term loans, reprice upload, paid, and...

Shorter duration portfolios like indirect auto we already talked about with two and a half years I'll turn and break price upward you would see if that kind of rate environment stabilizes Probably slower the adoption of deposit papers still probably will hit that 22% through the cycle But they don't just extend the cycle and reduce pressures on deposit rates That kind of cycle is probably good for us Any of you one more bit of color on this I just because this is interesting the germane of this question

There are some of our customers, and particularly, most of this good, and larger commercial customers that are savvy to the idea that rates might go up, and then also right come down. And so they are low to lock in term funding, feeling that they're what they don't want to do, it's to 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 they will, it leads us to the variable rate explosion and they'll generate swap fee income for it. So it's just interesting to watch that kind of behavior. But in that kind of scenario where rates can rise and it stops, we can end up probably doing very well.

I appreciate that, Keller. Thank you. That's all I had. Thank you. Thank you.

There are no further questions. I now would like to turn the call back to Mike Price, President and CEO . Hey, thank you for your interest in our company. We felt like we built a resilient company on the commercial and the consumer side with lots of different solutions for our clients. We built a robust the income engine. And even if we get into a lot more macro headwind, our intention is to perform, to get better in each of our lines of business.

to maintain operating leverage, to have good credit quality, and, verably, there's 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.

This concludes today's conference call. Thank you for attending. You may now disconnect.