First Commonwealth Financial Corp /Pa/ Q2 FY2022 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 Second Quarter 2022 Earnings Call. 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'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.

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 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 timelines 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 on 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 are 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 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, which has 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. 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 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 $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 decrease 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 changes in 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.

Your first question today comes from Steve Moss with B. Riley Securities.

It's Steve. To start with loan growth, there was a noticeable consumer mix in the first half. Are we expecting the growth in the second half to shift from consumer to commercial, or could we see growth in both sectors leading to potentially higher figures?

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 being a 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. 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 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 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 being right in that neighborhood, 9%, 10%.

Okay. Perfect. I'm curious about the current loan rates and what expectations you have for margin expansion in the third quarter.

Jim, why don't you start...

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, 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 was with some specials we've had for home equity loans or some loans with teaser rates. Some of those loans come on board at a lower rate when they roll off. Other than that, every category is up. So even the term loans are coming on at higher rates. So that trend is expected to continue in the second half of the year. I want to 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 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 loans are coming in at a much higher rate.

If half of the loan portfolio is floating, we've just reached 75, and it seems like we should see the loan yield increase by around 60 basis points or more for this quarter, especially if demand remains high and we implement one more increase in September.

Yes, it's challenging to express the current situation precisely. If they are at 75 basis points today, the impact varies due to timing and delays. Some changes occur immediately, while others take time to materialize. For instance, loans that adjust on the 1st or 15th of the month will take a month to reflect the changes. Other loans may adjust right away. Overall, we've observed that while the rate is at 75 basis points, our interest tends to increase by about 15 basis points as a general rule.

Jim, any comment on just year-end projection for net interest margin, just giving assumptions around interest rates for the colors?

Yes. To be even 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 the futures market 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 confirmation. Because of the concept for us, it will kind of run its course by the end of the year as the PPP rolls off and excess cash is redeployed rather in the loan growth. So that's really the real win for the bank in those 3.70s in that scenario.

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

Yes. So deposit betas are a little tricky, so predicting customer behavior in the future, right? So we have backtested through the cycle of the 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 we would have no beta at all for the first 2 rate hikes. 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 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 your analysis is the expectation that rates may fall. So if it's through-the-cycle data, and rates rise and stay there for a year or so, eventually, the beta comes through. It turns out to be true. And we realize that full participation of the beta. If rates rise, I forgot, a couple weeks ago, the futures market was saying that rates would fall again sometime in the second quarter for those. But if they followed a route quickly, we may not experience that full through-the-cycle data. And to the extent that we don't, that will just benefit the margin. That's how we think about it. Hopefully, that's all color for you.

Your next question comes from the line of Karl Shepard with RBC Capital Markets.

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 has obviously had a pretty good quarter.

Auto has been on a bit of a tear within 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 and good tight underwriting. I think what average FICO is running 764 on the auto and around 784, no subprime, good loan to values, 83%. So we feel good about the business, and it complements our local geographies. 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. So anything else, Jim?

Yes, if I could add, just because your question is about volumes and how that might affect what our projections are in 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; 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. At 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 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.

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; 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?

Yes, it could be. I believe we are being careful about our assumptions regarding the deposit base. We feel confident in our predictions, but we expect to lag behind those deposit betas, which should provide some upside potential for the margin. The deposit behavior we are observing is interesting because it is quite erratic. We see larger banks shifting money market accounts, but only in small amounts. For instance, one large bank in our market recently reduced money market rates by 1 basis point. Meanwhile, smaller banks are promoting some CD specials, offering attractive rates for 12-month CDs, but we have noticed some pulling back on those and reducing the special rates by 50 basis points. They might be realizing that their offers are attracting more deposits than anticipated. The entire industry seems to be grappling with this situation. We believe we will need to adapt accordingly. We have excellent loan growth prospects that we plan to support organically through our deposit growth, and we are committed to keeping pace with that. To directly answer your question, there is likely upside potential for the margin because we may end up with data for the third quarter that is below the 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. 66% 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.

Your next question comes from the line of Michael Perito with KBW.

I wanted to take a moment to discuss noninterest income. Jim, you mentioned that the SBA gain on sales might return to the range of $2 million to $2.5 million per quarter. However, mortgage income is expected to be lower. As we consider other items, particularly in the trust area, is there potential for growth? If I remember correctly, your market-sensitive fees are limited, so is there a chance that these could decline in the near term if market levels stay low? Additionally, although not entirely in your field, I noticed a Mid-Atlantic competitor sold off an insurance business. Could you provide an update on how your insurance platform is performing regarding cross-selling and growth opportunities? Any information on that would be very helpful.

I will begin with our wealth businesses, which encompass trust and brokerage. At the start of the market downturn, brokerage provided a useful offset to the trust business as market values declined, leading to increased fee income from brokerage. This primarily involves retail brokerage, annuities, and savings instruments beneficial for retirees and those with surplus cash, helping to create balance. We have a strong belief in our insurance business, particularly its value for our commercial clients, and we also engage in some healthcare services, even though it is relatively small, generating around $1 million. We appreciate the impact it has on our clients. Michael Bartolini manages this area, and we typically provide clients with four to five quotes, which they appreciate. This has proven to be a great introduction to larger commercial relationships, demonstrating real savings for them. We genuinely value this business and have remained committed to it over the years. In terms of our fee income businesses, we've had a solid first half of the year and believe we can replicate that performance, having achieved $2.1 million in the first two quarters. We think the issues we've seen with the SBA segment are temporary. For instance, we have a $4 million project for a distillery, with half allocated to real estate and half to equipment, but everything is delayed by three to eight months. We've closed the loan, but we haven't realized the gain on sale yet, and we have about 31 similar projects awaiting completion. These will eventually come through our pipeline in addition to our ongoing business efforts. We are hopeful about achieving our projected numbers and remain optimistic about this segment. Card income has seen some improvement since the first quarter, although it hasn’t reached last year's levels. Consumer activity has increased, with people out buying groceries and dealing with slightly higher gas prices. We have maintained a strong card business supported by 280,000 active checking accounts, and our TM business has also grown. This has helped us counter the downturn in mortgages. We are committed to the mortgage business long-term, as it attracts new, creditworthy households that become cross-sell opportunities and establish our presence in the community, which is important. While we do not expect the explosive growth seen in 2020 and 2021 to continue, we anticipate steady improvement across all aspects, contributing positively to our business. It is clear there is a decline in mortgages following historic highs, but we remain optimistic.

Yes. In the insurance business, I mean, you guys seem to have 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, taking lot lending business or anything in that realm or...

We are currently focusing on equipment finance and are optimistic about the business. Entering new markets takes some time, but we typically get it right. We have recently launched a credit card platform and plan to expand on that. Our capacity allows us to manage two or three major initiatives at once. We have developed platforms for SBA, indirect auto, and mortgage over the years, making these sectors quite appealing.

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 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?

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 is to 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 is higher than it is right now. Just to give you a little color on that. We continue to generate capital internally; our 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 under-leveraged, and we don’t want to be over-leveraged, right? So we think that's a good way to replay 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, or if the market goes down and we trade a little lower, we'll be buying 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 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 excess capital.

Your next question comes from the line of Frank Schiraldi with Piper.

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?

Our branch count is likely appropriate for us, possibly slightly high, but as long as the stores remain profitable and are attracting deposits, having branches in these communities is essential. We are concentrating on enhancing our digital channels and expanding in that area. While we don't have any immediate plans, we continuously evaluate customer preferences. In the long run, we may be more optimistic about branches than others, as we have successfully managed significant consumer lending operations in those locations, led by Jane Grebenc and Joe Colos and their retail team. Customers have closed those loans at the branches. Although our branches are smaller, their operating costs are lower. Over time, we might consider the changes you suggest, but there is no urgency to implement them at the moment.

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 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.

There are always a few significant discussions, usually two or three each year. I understand there's considerable macro uncertainty, but the chance to collaborate with a strong franchise, improve efficiency, take advantage of their strengths in commercial or consumer sectors, and build operational leverage is appealing. We are constantly evaluating opportunities, mainly in Pennsylvania and Ohio. However, we need to align on price, which has been challenging for the last couple of years. Nonetheless, we are eager to grow through mergers and acquisitions. Since our recent transaction in Cincinnati, we've significantly expanded our capabilities in noninterest-bearing loans and fee income, which we hope to leverage through partnership with another entity.

Your next question comes from the line of Matthew Breese with Stephens.

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.

No, it has been part of our plan all year to redeploy that liquidity, and we have seen it play out as expected. The loan growth prospects are not slowing down. Earlier this year, we anticipated reaching the crossover point in the third quarter where we would redeploy all that excess cash into loan growth, and we are still on track for that. There are some off-balance sheet accounts that we have cleared from our balance sheet that we may bring back, likely amounting to a couple of hundred million dollars. We hope to redeploy that as organic growth as well. This leads to the question of the size of our balance sheet. We believe we will remain below $10 billion through the end of this year, but we likely will cross that threshold sometime next year.

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.

I appreciate your response, as it allows me to clarify. I want to emphasize that I'm not intending to alter our previous guidance. We are confident that we can remain below $10 billion this year. It will be tight at the end of next year, but we believe that with careful management of our balance sheet, we might be able to stay below that threshold until the end of 2023. However, eventually, we will need to surpass it. If we maintain strong organic growth prospects, we will continue to grow and move forward.

Yes. I mean, I think the team is also committed to the concept of operating leverage. And as we grow through $10 billion, we intend to be more profitable despite the impact there where we're at currently. An acquisition, even a smaller acquisition, coupled with the prospects we have in equipment finance and 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.

Your next question comes from the line of Daniel Tamayo with Raymond James.

Most of my questions have been asked, but just a quick follow-up on the last one. Given the amount of the Durbin hit, what would be the Durbin hit on an annual basis? Or can you remind us of that?

It's just about $13 million, $13.5 million.

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 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.

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 loans reprice upward, the shorter-duration portfolios like indirect auto that we already talked about would price upward, kind of 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 an interesting 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 might come down. They are low to lock in term funding feeling that they don’t want to do 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 generate swap fee income for us. So it's 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.

There are no further questions. I'd now like to turn the call back to Mike Price, President and CEO.

Thank you for your interest in our company. We feel like we've built a resilient company on the commercial and 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, our intention is to perform better in each of our lines of business to maintain operating leverage and have good credit quality. 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.

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