First Commonwealth Financial Corporation (FCF) Q1 2022 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the First Commonwealth Financial Q1 2022 Earnings Call. [Operator Instructions] Thank you. Ryan Thomas, Vice President, Finance and Investor Relations, you may begin.

Thank you, Chris, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's first 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've 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. A reconciliation of these measures can be found in the appendix of today's slide presentation. Now I will turn the call over to Mike.

Thanks, Ryan. We were pleased to report that core earnings per share of $0.29 for the first quarter met consensus estimates. Pre-tax pre-provision net revenue or PPNR was down from last quarter largely due to a $2.3 million decline in PPP income and a $2.1 million decline in fee income, reflecting in part an anticipated decline in mortgage gain-on-sale income, which I'll return to in a moment. Excluding PPP, 8.8% loan growth in the first quarter was largely driven by the consumer lending categories of indirect, HELOC and mortgage and to a lesser extent by commercial real estate. This balanced loan growth is consistent with our long-term strategy of commercial consumer balance sheet diversification and granularity. We often talk about the impact of rising rates on our variable rate commercial loan portfolio but yields in the consumer categories are increasing in the current rate environment as well. For example, indirect lending witnessed a nice progression of rates over the course of the quarter, starting the quarter in the high twos and ending in the low threes as price increases took effect. All of these changes worked together to expand the core net interest margin by five basis points, and the March rate hike and any additional rate hike should result in further net interest margin expansion in the second quarter. As I mentioned, noninterest income or fee income was down $2.1 million quarter-to-quarter, primarily due to a $700,000 decrease in gain on sale of mortgage loans. Mortgage originations are actually still quite strong, but gain-on-sale margins are compressed. We also had a $600,000 seasonal decrease in interchange income, which we fully expected as fourth quarter interchange always benefits from holiday shopping. The quarter-over-quarter decline in swap income is mostly due to a $1 million gain in the swap derivative that we recorded last quarter. We expect swaps and interchange to bounce back due to seasonal factors and make up for slowing mortgage income, resulting in fee income of $26 million to $27 million per quarter for the remainder of the year, consistent with our previous guidance. Core noninterest expense was well controlled at $55.6 million given wage and other inflationary pressure. Like every company, we are battling wage pressure and worker shortages. We expect noninterest expense to hover between $56 million and $57 million per quarter this year, consistent with previous guidance as well. Charge-offs were light, and this was a good credit quarter on multiple fronts. Total nonperforming loans fell from $55.3 million at the end of the fourth quarter to $37.6 million at the end of the first quarter or 54 basis points of total loans. The reserve coverage ratio stood at 1.32%. Net charge-offs in the first quarter were only seven basis points. As we look forward, spread income should be positively impacted over the remainder of the year should interest rates increase as anticipated given the asset sensitivity of our balance sheet. Despite inventory challenges, momentum in indirect lending and purchase mortgage continued in the second quarter. Indirect lending booked an impressive $174 million in first quarter volume. Alongside healthy mortgage originations of $132 million in the first quarter, we saw gain-on-sale premiums contract. Our branch-based small business and home equity lending volume were off to a record start in the first quarter, and we carried good momentum there into the second quarter as well. In commercial banking and on the surface, commercial real estate loans grew some $93 million, but this was largely commercial construction loans moving to permanent CRE loans. Ohio is growing nicely, and the teams expect broad-based growth by loan type and geography over the remainder of the year. We also started to see an uptick in commercial line utilization rates in the first quarter as well from 35% at year-end to 39% on March 31. This is really the first significant uptick in this figure since the onset of the pandemic. SBA gain-on-sale income of $2.2 million in the first quarter of 2022 is more than double the gain-on-sale income in the first quarter of 2021. Importantly, the SBA business is growing steadily into another long-term revenue engine for our company. Our de novo efforts in equipment finance yielded their first leases and loans in the first quarter as their new technology platform coalesced after being built out from scratch. Some work on the technology infrastructure remains, but we are pleased with the progress we've made in such a short time. The deals booked are what we anticipated in terms of size, term and yield. These smaller-ticket financings included commercial trucks and trailers as well as agriculture, construction and manufacturing equipment such as machine tools. This capability is an exciting development for our company. So, despite the choppy environment and pressure on loan spreads, the path forward with 2022 revenue is broad-based growth, coupled with some anticipated interest rate increases. I'd also add that the adoption of our digital platform continues to grow at a brisk pace. In the first quarter, our overall active digital users grew at a 10% rate, and our active mobile users are growing at over 14% annually, highlighting how critical the channel is to our customers. Lastly, regarding our brand, for the fourth consecutive year, First Commonwealth Bank has been recognized by Forbes as one of the world's best banks. Three banks in Pennsylvania received this 2022 distinction, which is based upon survey results of bank customers using an independent analytics firm. We're proud of the recognition which comes from our customers and their view of our team. With that, I'll turn it over to Jim Reske, our Chief Financial Officer. Jim?

Thanks, Mike. Overall, loan growth is strong. Credit remains benign. Fee income is expected to grow as other sources rise up to replace lower mortgage gain-on-sale income, and costs are generally under control. In short, things are going well for First Commonwealth. The question on everyone's mind, however, is how the net interest margin and spread income will react in the anticipated rising rate environment. To address that, we first need to talk about balance sheet movements we've seen and that we anticipate. For us, the big story this year is the redeployment of excess liquidity into profitable loan growth. We had previously guided to high single-digit loan growth, and combined with equipment finance, we anticipate an earning asset growth of approximately 10% for the full year 2022. We reiterate that guidance as we see no slowing of loan demand. At the same time, we continued our strategy in the first quarter of allowing the securities portfolio to run off so that we can use that cash flow, combined with excess cash on hand, to fund loan growth. So far in 2022, our loan growth has exceeded internal targets, validating that strategy. The securities portfolio swelled from $1.3 billion at the end of 2019 to $1.6 billion at the end of 2021. As we put a measured amount of excess liquidity to work during the pandemic, it shrank $136 million in the first quarter. The growth of the loan portfolio, combined with the shrinkage of the securities portfolio, improved the mix of earning assets in the first quarter, leading to the five-basis point expansion in our core NIM to 3.22%. On the liability side of the balance sheet, deposits continue to flow in, leading to growth in excess cash over the course of the quarter to about $400 million at quarter end. This, along with the expected slowdown in PPP forgiveness, had a suppressive effect on the stated GAAP NIM. This cash should allow us to keep deposit betas low, however, especially if rate hikes are larger early in the tightening cycle while we will still have so much excess liquidity on hand. In terms of capital, like many other banks, rising rates resulted in a decrease in other comprehensive income or OCI. We have for several years now taken steps to protect equity against fluctuations in OCI by designating roughly a third of the securities portfolios held to maturity. And like most banks our size, OCI has no impact on our regulatory capital ratios. We had no share repurchase activity in the first quarter as our share price was higher than internal targets for most of the quarter. We have $20 million in share repurchase authorization remaining, however, and we expect to resume share repurchases in the second quarter to take advantage of current market conditions, especially given our continued excess capital generation capacity. Finally, some thoughts on how the rate environment will impact us. Given our asset sensitivity, we believe we are very well positioned to deliver an expanding NIM and increasing net interest income over the remainder of 2022. As we disclosed in the past, each 25 basis point rate hike generally expands our NIM by four to five basis points. Our latest simulations assume seven hikes this year, and net interest income in that scenario falls largely in line with consensus estimates. This run assumed the increases take place evenly over the year so larger increases sooner will be even more beneficial, especially since our current excess cash gives us the ability to respond relative competitive pressure to raise the deposit rates. Beyond the direct impact on our variable rate portfolios of rate hikes with higher rates, loan replacement yields should turn positive. For example, our auto loans have a 2.5-year life, and we are already seeing the runoff of lower yielding loans that were put on at the onset of the pandemic. For the sake of comparability with other banks, we published the impact of parallel yield curve shifts using both ramp and shocks scenarios. Our calculations show that in a 200 basis point ramp, our net interest income expands by $9.9 million or 3.4% over 12 months while of a 200 basis point shock scenario, our net interest income expands by $29.8 million or 10.2% over 12 months. Those figures assume 0% deposit pays for the first 50 basis point of rate hikes and 25% pays thereafter. We’ve been able to get our cost of deposits down to 4 basis points. And as I mentioned earlier, we still have about $400 million of excess cash, which should enable us to keep those deposit data as well. We expected to have positive operating leverage ex-PPP in 2022 with two hikes with seven or more, we’re quite confident that positive operating leverage year over year ex-PPP. And with that, we’ll take any questions you may have.

Operator, questions.

Certainly. [Operator Instructions] Our first question is from Russell Gunther with D.A. Davidson. Your line is open.

Hey, good afternoon, guys.

Hi.

Wanted to start on the loan growth conversation. Appreciate all of the color that you guys provided. First on the equipment finance piece. Nice to see that get going. Does your expectation for that related growth this year remain unchanged at this point?

Probably down slightly but not maturely. I don’t know that it affects our guidance previous guidance with loans, Jim, which were what 9%, 10%.

10% overall.

Yes. Is that helpful Russell?

It is, Mike. Thank you, guys. And then on the color around the utilization rate to 39 from 37, just a quick reminder, if you could about what that has been historically, and should we get there, what that might mean to growth going forward?

Yes, the 35 to 39 is the commercial line utilization rate. It’s not across the Board with construction and with consumer, but it’s meaningful because that had just hovered really at an all time low for the better part of two years on an a half a billion or so of outstandings that’s about in $20 million.

Okay.

So it just shows that they’re beginning to put their cash to work. And we see investment, we see an uptick in deal activity. We certainly see an uptick in small business. So I just think that business is going well. And for us from HELOCs to indirect to mortgage it feels pretty brisk.

Helpful, Mike, thank you. And then you guys spent some time in terms of the loan growth mix this quarter. Would you expect that kind of diversification to prove consistent with current levels or are you expecting commercial to pick up in the back half and potentially moderate your appetite around the consumer side? It’d be helpful to get your thoughts on loan mix as well.

Yesh. Just one thought and I’ll turn it over to Jane, Russell, consumer is leading the way we’ve kind of anticipated pressure on the consumer categories of indirect and mortgage and branch based lending, HELOCs primarily, over the last year or so, and it just hasn’t materialized. So my gut would tell me that probably commercial like in the second half of last year really gained momentum and perhaps consumer slows down a bit, but I’m – we’re pleased and by the resilience of the consumer side of the business and how it’s growing. Jane, you want to add to that or any other commentary?

Mike, I agree with everything that you said. The only thing that I would add is that we are not consciously turning from any one of the businesses. If consumers slow down a little bit, we’ll be well-positioned with commercial picking up, but we aren’t turning it away. I suspect it will slow a bit since so much of our closed down home equity lending is around refinances of existing first mortgages elsewhere. And as rates go up, that business is just going to naturally slow.

The irony is in the numbers as mortgage rates have ticked up, our pipeline has grown. And just kind of an unexpected outcome and we’ve also see the inventory build a bit in our backyard of houses for the available borrowers.

Well, that’s it for me guys. Thank you, Mike, Jane, for taking my questions. I’ll step back.

Thanks, Russell.

The next question is from Daniel Tamayo with Raymond James. Your line is open.

Thank you. Good afternoon, everyone. I guess first, I think in the last call you mentioned that you think you can keep the balance sheet overall assets under $10 billion through 2023. Just wanted to see if that was still the thought process.

It is. Jim, do you want to expand on that?

Yes, no, it definitely is. We still think the loan growth absorbed the excess cash. I think last time I may have said that the loan growth would probably absorb all the excess cash and securities portfolio runoff sometime in the third quarter, it looks like now because the deposits are still flowing in that’ll probably take place in the fourth quarter, but we still think we’ll be able to standard $10 billion at the end of this year.

Okay. Terrific. And then as it relates to kind of preparing to cross that, that $10 billion threshold, do you expect any uptick in operating expenses over the next couple of years related to that?

Yes, there’s definitely some, there’s been some already as we kind of built out those area. I mean risk management compliance, all of those things have always been a strong focus for us anyway, but we have added in those areas. And so there’s some up to the expenses already reflected in our run rate and there’ll definitely more.

Okay. That’s helpful. And then maybe finally for me, just on the fee income guidance if you could kind of give a little more detail on what you’re thinking in terms of or what you’re assuming in terms of mortgage banking from here that allows you to get to kind of recoup that on the other side with the rest of the line items and fees.

I’ll start and let Jim finish here, but just we mentioned the mortgage side, we are expecting a bit of a downdraft there. What’s surprising is the volumes have been pretty resilient. And I just mentioned, that with the increases in rates, the – we’ve had a surge in our pipeline and it’s mostly from those who have been preapproved and they’re now finally able to get a whole, so that’s been a little bit of a surprise, but nevertheless, we expect that’ll come down from 2020 and 2021 highs. We feel that trust and brokerage has gone a good trajectory interchange is coming in right at budget. And we expect good things there and gain on sale and our SBA business we think will contribute nicely this year. Jim, what else?

Yes, I would’ve just emphasized that you just did Mike, the SBA, that’s really a nice trajectory. We didn’t highlight it enough, but it’s not half a million dollars quarter-over-quarter. We expect that to grow and take up a lot of the slack and mortgage gain on sale. So that’s a strong business. And then one other thing, the line item you see on the income statement, it’s a swap fee income just with a commercial being where it is in the first quarter that that swap fee income line is almost always commensurate with commercial lending. And so as commercial growth picks up over the course of the year as it seasonally we expect it to the swap fee income to grow as well.

I appreciate all that color. That’s all for me. Thank you.

Thanks.

The next question is from Michael Perito with KBW. Your line is open.

Hey, good afternoon.

Good afternoon.

I wanted to stick on the fee topic for a second here, just to kind of looking through the line items here, and you guys just spent some time on some of them, but I was wondering, just kind of two quick questions here, one on the trust income side. Can you just remind us what if any of that revenue can be impacted by fluctuations in the markets? And then secondly, just on the topic of overdraft just any – can you remind us what you’re doing there, how big that is and any thoughts as we see some larger banks continue to kind of deemphasize that, that line item?

Yes. Jane, why don’t you start with wealth management?

Sure. The fabulous thing about our trust business is that most of our clients are in have asked us to keep them from getting poor rather than to get them rich. So many of our clients are in fixed income, they don’t take big bets, they don’t take big risks. So market swings don’t hurt us the way you might expect. It’s a nice stable business for us.

Okay.

And on the over draft NSF, I – we’re pretty low incident rate for a bank of our size and we don’t expect an immediate or material impact. Jim, would you add to that?

Well, I don’t think the – it’s ever been a source of emphasis of fee income for the bank in general. I – in that, I think our few structures are generally pretty mild. And so compared to peers that’s certainly not in the area that we will be looking at growth income, given their enhanced regulatory scrutiny, but not a major source of growth, but fairly stable.

Okay. That’s helpful. And secondly, to piggyback on another question around the $10 billion asset threshold, the 10% earning asset growth for 2022, really puts you – if you have similar growth next year kind of puts you right up on the really or probably over realistically right at the earn assets are 9.8, 9.9. So just curious if you guys are at the Board level having conversations around the next 24-month plan here, I assuming no M&A materializes. I mean, is it fair for us to think that you’ll continue to manage the balance sheet below that level through the end of next year absent any M&A or what do you guys think about it that way just would love to hear any expanded thoughts.

I'll start and let Jim finish. But just we've engineered our mortgage and our SBA and our equipment finance is probably a year or so away from being totally optimized those to be gain-on-sale businesses, which just give us optionality with the balance sheet. Jim, what would you add?

Yes. No, I think you're just describing it accurately. We are pretty confident we'll be able to stay under $10 billion by the end of this year. I would say very confident. But next year, we'll try. And we do think about managing the balance sheet to stay under as long as we can. And so we'll try at the end of 2023, but it will be more difficult. A lot of it does depend on deposit inflows. If the deposit inflows keep coming in, then that makes it difficult to manage the size of the balance sheet. It's one of the reasons why we think we can keep deposit betas very low because we can manage those deposit costs to stay very low, allow deposits to run off a little bit; if that happens, put the bank into a borrowing position because it wants to get into in a borrowing position. If we get close to $10 billion, it gives you a lot of flexibility to manage our balance sheet by, as Mike said, during certain asset classes and gain-on-sales sources. You could sell a lot more mortgage production or other production or sell loan portfolios. If the banks of the cash position, there's no balance sheet flexibility because you can sell a loan portfolio and that just converts to cash and doesn't track the size of the balance sheet. But if you have borrowing that you can pay down with that, then you can sell off some assets, secures first, obviously, and then the loan portfolios, pay off borrowings and manage the size of the balance sheet. And so we see that with some excess cash. We'll have more of that flexibility next year, but it will be tight by the end of 2023. There's no way around that.

Yes. Just one other comment to your question is just the – we look at several M&A opportunities every year. As you know, we're pretty picky. And we haven't done one for a year or two, but hopefully, there – the deal just has to be constructive for both companies, and that's a little harder than just buying another bank. And it needs also to be not just accretive to our EPS and minimally dilutive to our tangible book value and within all the guardrails there, but it really – we have to feel like it's accretive to our longer-term profitability of the company.

That's all helpful. And then just one last question for me. Mike, I appreciate some of the digital adoption stat you provided at the end of your script there. Just wondering on the business banking side, if you can maybe just give us up-some-updated thoughts around where you guys are investing technology-wise today or what you think are some of the critical things you're looking into, just try to keep some of your edge and momentum in that business as we move forward.

I'll let Jane opine here in a second. And – but we did put in a nice TM platform for really mid-market and small business about 1.5 years ago with good adoption. But we do have a ways to go. We're ahead on the consumer side, and we're catching up on the business side. Jane, any color you want to provide?

Only that in addition to the treasury management work that we've done, we are doing some front-end loan system work this year. And we expect that to pay dividends for us. And then we're also looking at enhancements to the treasury management system that we've already put in. And we're looking – we are installing a new credit card platform for consumer and commercial later this year.

Those are kind of big things that I missed, Jane. Thank you.

Thank you, guys. I appreciate the color. Thanks for taking my question.

The next question is from Steve Moss with B. Riley Securities.

Hey, this is Gates Schwarzmann, Steve's associate. I may have – I disconnected earlier, so I may have missed this. But credit quality saw a lot of improvement this quarter. I'm just sort of curious, the reserve release was a little bit moderated. So what sort of expectations do you guys have in the reserve longer term? And how should we think about provisioning moving forward?

Yes. I'll start, and we have our Chief Credit Officer here as well. He may want to add to the answer. But we like the reserve where it is. We feel obviously that is adequate. One thing we were able to avoid as large releases last year that might have put us in a position where if there is any kind of economic difficulty going forward that we would have to – have a lot of provision expense to rebuild it. So in that sense, we're pleased that it's remained relatively stable. In a larger sense, it's going to be driven by charge-off rates and loan growth. Loan growth is pretty strong. Charge-offs are very low. And so those two kind of offset each other and I think set us up well. Brian, do you want to perhaps add to that?

That's perfect to answer. We utilized Moody's as part of our tool set, and we continue to see what you see in terms of GDP unemployment. And then we factored our decisions, things like fuel costs and the ongoing war.

Very helpful. And could you give us a reminder as well into the variable rate mix of – or sorry, not the variable rate mix, but the duration of the securities book?

Duration of securities book was about – actually extended a little bit with the rise in rates. We just calculated at the end of the first quarter, it's about 5.5 years. And it's that actually duration that kind of drives the OCI because when we compare it to the – that plays the movement of that spot on the yield curve to calculate the OCI.

Awesome. And you guys have gone over a lot of the drivers for loan growth. I'm just sort of curious, what geographies are you guys really seeing a lot of the strength?

It's pretty broad-based. Most of the strength is in Ohio. We have bigger books in Pennsylvania. That being said, our community PA market, which is really places like Indiana, Greensburg, Punxsutawney, Dubois, Altoona, Bedford, Somerset, they did – they had a great quarter, probably clipping along at – ex-PPP at about 7%, which was really – a lot of this is macro, but a lot of it is just the leadership teams that we have in the field and the job we're doing. Just so impressed. We have regional presidents in Northern Ohio, Central Ohio and Cincinnati, all for the last couple of years growing 15% plus and really lighten it up. And so I just feel good about our broad-based momentum across the geography. Northern Ohio is probably leading the way, followed by Cincinnati, Columbus and then community PA and then Pittsburgh. Pittsburgh has by far the biggest book.

Thanks for taking my questions.

The next question is from Matthew Breese with Stephens Inc. Your line is open.

Good afternoon. The majority of my questions have been answered, but I will just piggyback on the M&A question to get a sense for whether or not we're any closer to a deal today than we were three, six months ago.

Not really.

It's the same strategic financial factors that drive it then as it is now. So…

Yes. I mean we've really gotten to the table on a couple of things, maybe two or three things in the last couple of years. And really nice companies and just – somebody was willing to pay a little bit more or maybe they decided to – they could get more and they're still trying. And God bless them, it's America. And you got to come together as one and really each company together has to be better than those two companies apart and just has to work. And maybe we're too tentative, maybe tentative, I don't know. But I think – I don't know, I've just been doing this a long time, and it has to really be constructive for both sides and it has to be financially – and then culturally, the companies have to come together and have forward momentum just almost out of the gate. And we have a team that I think we could manage a lot of execution risk. I mean Jane, Brian, Jim, Norm Montgomery, our CIO, I mean we really have people that could put a bank together and have done it multiple times in the past. So that's not what makes us double clutch. It's – it just has to work financially. We work too hard. We have twice the oars in the water on the revenue side that we had a half a decade ago. And we can continue to increase the profitability, and we will over a period of time. And these deals have to fit. It's really that simple. And they have – ideally, they add some demographics that are attractive as well.

If I can just add, Mike used the word tentative to and seek if. I think the word we prefer is disciplined because we have lots of looks. We've looked at, I think, Mike, we say – actually, I know the number because we tabulate it, over 60 deals since I've been here at least to do the five we've done. So we're very disciplined in our approach. It really has to work. And we're just – we're not going to overpay or overreach just to build a larger bank. We want things that make sense for us strategically and financially.

And we want three to four to five or six quarters later for you to see the results in the numbers unequivocally. We don't even have to explain it. Our ROA went from 60 a decade ago, and it just trundle about 5 or 10 basis points every year and – all things being equal, of course, but that's kind of what needs to happen.

All my other questions have been answered. I appreciate it. thank you.

Thank you.

The next question is from Frank Schiraldi with Piper Sandler. Your line is open.

Hi guys. I wanted to follow up on NII. Jim, I think you said that your assumptions include 7 hikes this year. And in that scenario, NII falls largely in line with consensus estimates. So I just wanted to – I don't know how specific you wanted to get there, but I just wanted to sort of check that number. I have consensus NII as 290 for the year. And again, I don't know how specific you want to get, but is that kind of – was that what you – was that the implication? Or did I miss that?

Yes. Frank, very close, very close. The number I had was the latest consensus was 289.3. And that's why I kind of phrase it the way I did because I didn't see any need to give corrective guidance to say high or low or either way. In fact, the way I kind of read that is to say it tells you that in the aggregate, you and the other analysts that cover us have roughly seven hikes baked in for us this year. So that's how I know rather than beyond tolling each of you and asking you how many hikes you have in your model. When we ran that, we got so close. It's probably because our analysts have about seven hikes baked in. So, but that's the number I have, Frank.

Okay, great. And then also your point on the 25 bp or what you get on a 25 bp increase in rates. You mentioned the 4 to 5 basis points in NIM. And I just want to make sure I'm thinking about that correctly. You note, as it makes a lot of sense, that deposit betas are going to start off lower and then move a little bit higher over time. Does the 4 to 5 basis points – is that more sort of steady because you do have some floors on the commercial side and those kind of move lockstep in terms of betas on both sides of the balance sheet? Or what's the way to think about that?

Yes. On the commercial side, we're in the aggregate; we're in the money on the floor. So the floors won't be a hindrance to a direct translation of rising rates in the commercial portfolio. So we're not really worried about that. I was giving you and reiterating this lease before on the deposit betas, 0% betas for the first two hikes because those are in all our assumptions. I think the reality is, unless we see real deposit runoff, the excess cash gives us the ability to err on the side of even lower deposit betas. So that might make some of them an expansion even better than those models would suggest. But the 4 to 5 basis points is pretty consistent with what we've said in the past when we've done other simulations. And we did this latest simulation with the seven hikes and ended up being about the same thing. But of course, even if you did four hikes and stopped, there are follow-on effects of re-pricing the portfolio even afterwards. So it's continued to flow going back in a simulation if you do four and then stop. And the ensuing quarters after that, it continues to drift up wires re-pricing your loan portfolio. All the fixed stuff gets re-priced over time in addition to what prices in any given quarter when there's a rate hike. But oddly enough, when we went in with seven, it still ends up being about 4 to 5.

4 to 5, okay. Okay, great. Thank you.

You bet. Thank you.

The next question is from Karl Shepard with RBC Capital Markets. Your line is open.

Good afternoon everybody.

Hi, Karl.

I wanted to ask, I was looking back at your 2022 strategic things, and one of them was growing households. What do you think the strong consumer loan growth you guys have put up the last couple of quarters could mean for the value of the franchise longer term?

Well, I think – I mean mortgage is a great source of new households, and it's also a great source of new home equity loans. We don't do, I would say sophisticated profitability analysis by customer that I would – like our larger bank brethren, but I think its material. I also think that with the brand that we have in – particularly in Western Pennsylvania, I also think we benefit from a lot of the indirect households that we bring in as well. In small business households, the team does a nice job of cross-selling the consumer side of the bank and then on the consumer side, trying to identify the – those that own small businesses. So that's a big part of our household growth. But I mean, in terms of thinking about the lifetime value of the household, we think about it that way. When we do teasers, we have to get the rest of the business. So we had some teasers on HELOCs from time to time. I think we have one out there right now. And it's predicated on getting the checking account, getting the debit card swipes and everything now. Jim, do you want to add to that or Jane?

I'll just jump in and start and, Jane, you could add too, but I just think – as you can tell, we always think about this, there's so much more we could be doing. But we do think that this balanced approach we have of consumer and commercial lending, balanced, diversified balance sheet really does build long-term franchise value. Because a bank that's entirely focused on commercial or CRE like a lot of banks our size won't have that kind of broad-based household growth. And so we do think that builds long-term franchise growth and I appreciate you even highlighting it. And Jane, I don't know if you'd add anything.

I don't know the answer to the question. It's a really interesting one. But I think our real value is in the fact that our people are growing high-quality earning assets in markets with less than robust demographics and growing much faster than their competitors. And I think it's our people who are the assets really because we're outgrowing our typical competitors. Whether it's that the competitors don't see the markets as important enough or whether the competitors just don't have people who are as good as ours, our people are outperforming the markets.

Yes. And to Jane's credit, she and the team in small business, commercial, small business and consumer are relentless about getting the non-interest-bearing checking account and having that as a cornerstone of the relationship. And you see that in our cost of funds and how that's steadily improved over the last half decade.

Okay. That's helpful. I guess another question I had, too, as I think you mentioned doubling the number of revenue oars in the water. I'm curious what the digital investments you guys are making. You seem like a pretty friendly place to do business. What kind of success do you have in bringing talent into the organization, maybe more recently?

I'm sorry...

Brining talent into the organization, what kind of success we're having with that.

Yes. We really have had a nice run in getting producers to come and work for us, whether it's on the SBA side, the mortgage side, the commercial banking side, the TM side and mostly from really capable people from larger banks and some from similarly sized banks. But I think a lot of that has to do with culture. Our leadership team has been in place for a period of time. And we're pretty hands on. We're out in the market. Jane has a lot; and as our Greg, our Head of Commercial Lending; and Joe, our Consumer Lending Head. Jane, what would you add to that?

I think there's two things. The first is, I agree with Mike. We've had a good run of hiring talent. A big part of it is we pay fairly and we will let the athletes run. We don't micromanage to all sorts of minutia, and I think folks appreciate that. But we have the same issues bringing entry-level talent into the organization. We're constantly looking for entry-level talent.

Great comment. Is that helpful?

Yes. Very helpful. Thanks everyone.

Thank you.

[Operator Instructions] The next question is from Russell Gunther with D.A. Davidson. Your line is open.

Hey, thanks for taking the follow-up guys. Just circling back around the $10 billion in asset conversation, could you just quickly remind us of what that Durbin hit would be? And then, Jim, to your expense comment, are you able to quantify or characterize what that might be? And as we've talked about the revenue growth in terms of rates, in terms of equipment finance, is that revenue growth enough to absorb related pressures and still demonstrate that positive operating leverage?

Yes. Yes, great question. I would say that the Durbin hit is about $13 million, and we published that number. So it's about $13 million to cross the $10 billion line and lost interchange income. The soft costs we have estimated is between $1 million and $2 million. But I can't tell you is how much of that we've already absorbed because we've already absorbed some of that and how much of that will be a little more of a crescendo as we get closer. We've done a lot of $10 billion preparedness planning. We have an internal task force set up to review it. We review it with our Board and regulators and everybody else. So we feel like when it comes, we'll be very ready. And like I said before, we have always had a very strong enterprise risk culture. It's been a very strong emphasis of ours. So we have no doubt that we'll be prepared. I just can't quantify for you how much additional cost it will be once we cross that line. It will definitely be something, though.

We have plans to offset it, and the plans include everything from equipment finance, the more robust credit card to just continuing to grow the regions of our bank. And I think we'll blunt that, if not overtake it, perhaps even in equipment finance alone. But I think that will take a couple of years to materialize.

Yes. The timing may not be exactly right, but ultimately, it will be.

Yes.

Thank you both. I appreciate it.

We have no further questions at this time. I'll turn the call over to Mike Price for any closing remarks.

Thank you. Interesting times. I appreciate the terrific questions. As I always say, we're excited about the future of our company to grow. It's a privilege to do what we do in the communities and help be a part of the economic vitality of each of these small talents and big cities, and its fun. Thank you so much. Appreciate your interest in our company.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.