Amalgamated Financial Corp.

Greetings, ladies and gentlemen, and welcome to the Amalgamated Financial Corporation Second Quarter 2022 Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions with instructions to follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jason Darby, Chief Financial Officer. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our second quarter 2022 earnings call. With me today is Priscilla Sims-Brown, President and Chief Executive Officer. As a reminder, a telephonic replay of this call will be available on the investor section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the investor section of our website. Before we begin, let me remind everyone that this call may contain certain statements that constitute forward-looking statements. within the meaning of the Private Securities Litigation Reform Act of 1995. We caution investors that actual results may differ from the expectations indicated or implied by any such forward-looking information or statements. Investors should refer to slides 2 and 3 of our earnings slide deck, as well as our 2021 10-K, filed on March 11, 2022, for a list of risk factors that could cause actual results to differ materially from those indicated or implied by such statements. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance. A presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP. A reconciliation of these non-GAAP measures to the most comparable GAAP measure can be found in our earnings release as well as on our website. Let me now turn the call over to Priscilla.

Thank you, Jason, and good morning, everyone. We appreciate your time and interest today. This morning, I will provide an update on the success that we are achieving, highlighted by a quarter where we posted record earnings as we execute our growth for good strategy. Our strategy is designed to accelerate loan growth and improve our profitability while managing our risk exposure prudently and growing our positive impact on society. I will then ask Jason to provide a more in-depth review of our financial results. The key highlights that I'd like you to take away from today's call are that we had record earnings of 63 cents per share of a full 18 cents from the first quarter of 2022. And our third consecutive quarter of nearly 5% net loan growth as our bankers generate new opportunities and we expand into new market segments. We had strong deposit growth of 4.6% to $7.3 billion and an enviable total cost of funds at eight basis points. which is one basis point lower than the previous quarter. We had 27 basis points of net interest margin expansion to 3.03% and a strong increase in our return on average assets to 1.01% from 0.78% in Q1. As I reflect on my first year as CEO at Amalgamated Bank, we have done what we said we would do. We have implemented our lending strategy, and finance those investments through our earnings. We lean deeper into our mission by lending to customer segments focused on sustainability, economic justice, community financing, and other social causes. We built a reliable lending platform staffed with experienced bankers, enabling us to sustain profitable growth, and we continue to develop our industry-leading deposit franchise. All of these accomplishments have resulted in financial performance that proves socially responsible banking and profitability can coexist to create our uniquely valuable franchise. One of our goals for this year is to become the most improved bank in the country as relates to financial performance metrics. I want to emphasize that we are taking a disciplined approach to our growth with a keen eye on expense control and how investment decisions affect our financial targets. As Jason will discuss further, we have worked hard to drive operational efficiencies and balance costs across the bank while adding new bankers and support infrastructure over the last four quarters. Living up to and building our brand nationally is another goal for our team, as this provides a significant competitive advantage in attracting talent to amalgamate it. And you can see this in the success we had recruiting experienced executives, bankers, and underwriters over the last year as Amalgamated moves closer to $10 billion in assets. Now, while we normally spend most of our time speaking about our financial performance during these calls, the world around us continues to evolve, and important social issues that we care about are taking center stage. I have said since I joined Amalgamated that profitable growth grows hand in hand with having a positive impact on issues that matter. Therefore, I'd be remiss if I didn't spend just a few minutes on this call sharing some thoughts on some of the more important topics on which this bank has been active since we last met with you. The Supreme Court's decision to strike down Roe v. Wade had a ripple effect throughout the country. We appeared in the media to talk about our view of the impact of Court's decision. We want to hire and retain qualified women. We want to give them opportunities to advance in their careers, and we want to deliver on our DEI commitment. The court's ruling impacts not just Amalgamate's ability to do so, but many other employers. So as a financial institution, we choose to lead on this issue from the perspective that our employees and their dependents have access to reproductive healthcare services. Accordingly, We've decided to provide financial assistance to our employees who seek related health care and are supporting organizations which want to do the same. Gun violence prevention is another issue that has sadly remained at the forefront. At Amalgamated, we are strong advocates for gun safety and better enforcement of laws. To make our case, I again had a chance to speak with both CBS News and CNBC to discuss our proposal for a merchant category code for gun stores. We have this for other retailers across every other industry. It allows us to identify suspicious activity made through the credit card network, and we can alert authorities when we see it. Doing so has helped us to mitigate mortgage fraud, human trafficking, and other crimes and we recognize our obligation to mitigate gun-related crimes as well. The last issue I'd like to comment on is climate change. We are again taking a leadership role in this critical area because of the outsized influence the finance industry has in curbing the world's carbon consumption. By way of example, we provided affirmative commentary on the SEC's proposed climate disclosure rules as we believe strongly in the intention of the rules And we've been managing our business in this way for quite a while. We will continue to speak loudly and passionately regarding climate change. And during the quarter, we released our 2021 Annual Corporate and Social Responsibility Report. This is our sixth edition where we showcase our environmental, social, and governance efforts to customers, employees, and to you as shareholders. And we announced our climate-related lending data with 31% in 2021 going to climate solutions. Given our support of these issues, I'm increasingly asked if the pursuit of advancing our mission and values could adversely impact our business. This is a natural question from the investment community in the current environment, given the experience of other public companies. I must highlight that our customers deeply and passionately share our mission and our values. They care greatly about doing business with a bank that invests their deposits in line with these values. This strong customer intimacy is a true competitive advantage for Amalgamated and one that is sustainable through a number of business cycles. While the issues I briefly touched on are complex and some rather somber, there are also some social moments to celebrate during the quarter. In May, we celebrated the contributions and influence of Asian Americans and Pacific Islander Americans to our history, culture, and achievements in the United States. Juneteenth, we celebrated another national holiday and afforded our employees a day of restoration, reflection, and strength. Pride Month also occurred during the quarter and was a wonderful opportunity to celebrate the LGBTQ plus community and advocate for continued improvement and protection of their rights. Taken as a whole, our social advocacy makes our record financial results feel all the more meaningful. Continuing to build our brand nationally is another goal for our team. Our mission and values also provide a significant competitive advantage in attracting talent to Amalgamated. You can see this in the success that we had in recruiting experienced executives bankers, and underwriters over the last year has amalgamated and moved closer to the $10 billion mark in assets. As I mentioned in previous calls, our four-pillar growth for good strategy is the fulcrum for our strategic decisions. Centered on building our business through our mission, focusing on segments that share our values and where we can take market share, developing and expanding our product offerings to grow our lending platform, and and improving the management of our data and technology to drive better efficiencies and effectiveness, we believe we are creating a differentiated bank. We are now increasing our focus on that fourth pillar. And in the second quarter, we recruited a highly talented individual from a major bank to lead our digital strategy. And we took steps to upgrade our information technology capabilities and talents. This sets the stage for the next phase of our strategic execution, and I'll have more to share on our planned investments during our third quarter call. While there is economic uncertainty ahead, we remain cautiously optimistic as our bankers continue to open amalgamated to large new markets with significant loan growth potential that we believe are less subject to economic or cyclical factors. Our loan growth and credit quality trend over the past three quarters has been exciting. Our bankers are quickly ramping their pipelines and deploying the liquidity that our deposit franchise generates to maximize risk-adjusted returns. This market opportunity, combined with our financial performance year-to-date, provides confidence in our ability to achieve the higher end of our revised earnings guidance We will also likely exceed our high single-digit loan growth guidance for the full year 2022. As we execute our growth for good strategy successfully, we believe that the market has begun and will continue to recognize the value in our bank. The best part is it feels like we're just getting started. Now let me turn the call over to Jason for greater depth on our financial performance. Jason?

Thank you, Priscilla. Net income for the second quarter of 2022 was a record $19.6 million or $0.63 per diluted share compared to $14.2 million or $0.45 per diluted share for the first quarter of 2022. The $5.4 million increase for the second quarter of 2022 compared to the preceding quarter was primarily driven by an $8.1 million increase in net interest income partially offset by a $0.6 million increase in provision for loan losses, a $0.6 million loss on sales of securities, and a $2 million increase in income tax expense related to our increased pre-tax income. Beginning on slide five, we did not make any additional solar tax equity investments during the second quarter of 2022 and maintain a total of three solar tax equity investments. Since these investments are mission aligned and offer attractive returns over time, we expect to make more solar investments in the future. Because of the income statement volatility associated with the accounting for these investments, we believe metrics excluding the timing impact of tax credits or accelerated depreciation is a helpful way to evaluate our current and historical performance. Exclusions related to solar tax equity investments were a $0.9 million loss in accelerated depreciation for the second quarter of 2022 compared to $0.1 million of tax credits in the first quarter of 2022. Core net income excluding the effect of tax credits and accelerated depreciation from our solar investments, a non-GAAP measure, the second quarter of 2022 was 20.9 million dollars or 67 cents per diluted share compared to 14.3 million or 45 cents per diluted share for the first quarter of 2022. turning to slide seven deposits at june 30th 2022 were 7.3 billion dollars an increase of 317.7 million dollars from the first quarter of 2022. non-interest bearing deposits represent 56 percent of average deposits and 54% of ending deposits for the quarter ended June 30, 2022, contributing to an average cost of deposits of eight basis points in the second quarter of 2022, a one basis point decline from the previous quarter. Deposits held by politically active customers were $1.3 billion as of June 30, 2022, an increase of $131.5 million as compared to $1.1 billion as of March 31, 2022. Although difficult to predict, we anticipate political deposits to rise by another $100 to $150 million during the third quarter, and then run off approximately $500 to $600 million in the fourth quarter when the congressional elections conclude. Turning to slide 11, total loans, net of deferred loan origination costs at June 30, 2022, were $3.6 billion, an increase of $178.2 million, or 5.1%, compared to March 31, 2022. The increase in loans, primarily driven by a $92.9 million increase in residential loans, mainly from direct originations, a $39.8 million increase in multifamily loans, a $36.9 million increase in our consumer and other loans due to solar loan originations from existing flow arrangements, and a $19.2 million increase in commercial and industrial loans, offset by a $13.2 million decrease in the commercial real estate portfolio as we selectively de-risk our exposure in metropolitan areas. Our continued focus on credit quality improvement in the commercial portfolio resulted in $15.6 million of payoffs of criticized loans, in addition to certain other past-grade loans. The yield on our total loans was 3.86% compared to 3.85% in the first quarter of 2022. On slide 12, net interest margin was 3.03% for the second quarter of 2022, an increase of 27 basis points from 2.76% in the first quarter of 2022. The significant increase in yields was the result of increases on floating rate yields from interest-earning assets, while costs on interest-bearing liabilities remained flat. Prepayment penalties earned as loan income added two basis points to our net interest margin for the second quarter of 2022, as compared to three basis points in the first quarter of 2022. Core non-interest income, excluding the effects of tax credits and accelerated depreciation from our solar investments, was $8.7 million for the second quarter of 2022 compared to $7.2 million in the first quarter of 2022. The increase of $1.5 million was primarily related to one-time beneficiary income on BOLI, as well as higher gains on sale of non-performing commercial loans. Non-interest expense for the second quarter of 2022 was $34.3 million, a decrease of $0.1 million from the first quarter of 2022. The decline of $0.1 million from the preceding quarter is primarily driven by a $0.9 million decrease in data processing expense related to the pass-through of certain trust department operating expense to related funds, offset by an expected $0.3 million increase in compensation and employee benefits, and a $0.4 million increase in residential lending foreclosure expense. Moving to slide 16, non-performing assets totaled $65.3 million, or 0.82% of period end total assets at June 30, 2022. an increase of $4.2 million compared with $61.1 million, or 0.80% of period end total assets at March 31, 2022. The increase in non-performing assets was primarily driven by the restructuring of $6.5 million in loans that are part of one borrower relationship, as well as two loans totaling $5.2 million that were moved to non-accrual in the second quarter of 2022, partially offset by one $3.5 million non-accrual multifamily loan that was paid off. While non-performing assets increased, overall credit quality improved as criticized assets declined $43.5 million, or 24.3%, to $135.8 million on a linked quarter basis. The allowance for loan losses increased $2 million to $39.5 million at June 30, 2022, from $37.5 million at March 31, 2022, primarily due to increases in loan balances offset by improved credit quality. At June 30, 2022, we had $60.1 million of impaired loans for which a specific allowance of $6.1 million was made, compared to $58.2 million of impaired loans at March 31, 2022, for which a specific allowance of $4.6 million was made. The ratio of allowance to total loans was 1.08% at June 30, 2022, and 1.08% at March 31, 2022. Provision for loan losses total an expense of $2.9 million for the second quarter of 2022 compared to an expense of $2.3 million in the first quarter of 2022. The increase in the provision expense on a length quarter basis is primarily driven by a specific reserve from the downgrade of one legacy commercial and industrial loan. Moving along to slide 17 and 18, our core return on average equity and core return on average tangible common equity, excluding the impact of solar tax equity investments, We're 16.2% and 16.8% respectively for the second quarter of 2022. We repurchased $8.8 million of common stock under our $40 million share repurchase program that we announced during the first quarter. We also announced a $0.02 increase to our quarterly dividend, raising it to $0.10 per share. Importantly, we remain well capitalized to support our ongoing growth initiatives. Slide 19 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected during the second quarter, the Federal Reserve Board continued its cycle of interest rate increases with a 50 basis point increase at the May meeting, a 75 basis point increase at the June meeting, and a 75 basis point increase at yesterday's July meeting. The increases were expected in the fall of the initial 25 basis point increase at the March meeting which began the current cycle. Further, the Board messaged the increasing likelihood for additional rate increases through the remainder of 2022 with a potential retraction in 2023. As a result of long-term interest rates rising significantly during the quarter, our tangible book value per share declined by 4.6%, primarily driven by a tax-effective mark-to-market adjustment to the fair value of our available-for-sale securities portfolio. While we are cognizant of our decline in our tangible common equity, we are comfortable with our average tangible common equity at 6.07% for the fourth quarter, which was a modest decline from 6.68% from the previous quarter. Additionally, to reduce exposure to further interest rate volatility, We also transferred $277.3 million of available for sale securities to health and maturity during the quarter. We will continue to drive earnings through prudent deployment of our liquidity and believe our strong on-balance sheet liquidity position, borrowings capacity, and low-cost deposit gathering franchise well protects us from the realization of these recent market price declines. Importantly, fluctuations from mark-to-market adjustments have no impact on our Tier 1 capital position. As a reminder and evident through our strong second quarter earnings performance, The current rising rate environment provides a significant benefit in net interest income to amalgamated, which I will discuss further in a moment. Turning to slide 20, we are now seeing the benefits of executing on our growth strategy through a combination of deployment of liquidity and securities and increasing loan originations to drive earnings. Additionally, our asset-sensitive balance sheet structure was a significant factor in our record earnings in the second quarter as rates have materially risen. Although the forward curve suggests substantial rate increases through the remainder of 2022, we are leaving our full year 2022 guides unchanged, as there is much economic uncertainty looking forward to the second half of the year. That said, we feel confident that we will achieve the high end of our proposed ranges of core pre-tax, pre-provision earnings of $110 to $120 million, which considers the effect of the forward rate curve for the remainder of 2022, and net interest income of $220 to $230 million, which considers the effect of the forward rate curve for the remainder of 2022. Generally speaking, we estimate a range of $4 to $4.5 million increase in annual net interest income for each 25 basis point increase related to yesterday's Fed decision and a range of $3 to $4 million increase in annual net income for each 25 basis point move in short-term forward curve rates for the remainder of this year. As Priscilla noted, we are thrilled with the bank's record second quarter results and the consistent loan demand we've experienced is further supported by our robust loan pipeline as we look to the second half of the year. In addition, our balance sheet remains well positioned for rising rates, and we expect our deposit beta to remain low and in line with prior interest rate tightening cycles, which points towards continued margin improvement in earnings growth as we look to the second half of the year. And with that, I'd like to ask the operator to open up the line for any questions. Operator?

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Chris O'Connell with KBW. Please proceed with your question.

Morning. Good morning.

I just want to start on the, you know, the PP and RNNII guide. I guess just a little surprised that it didn't increase either on both, you know, the rate hikes through June relative to the ranges before. with just the March strike. And then also, you know, on the forward curve for 2022, which has also gone up since last quarter. So just hoping to get any color around that.

Sure. I think right now, you know, at the last quarter when we gave the guide, we gave a fairly wide range. You know, moving us to the top end of the range in this particular quarter felt felt appropriate at this time. I think the biggest things that we are still cautious of is exactly what's going to happen with the rate environment. Even as the forward curve predicts, there's never any absolute certainty where the Fed's going to move in terms of the upcoming rates. I think that's kind of one thing to think about. And then the other is just, is there going to be a behavior in deposit expense or deposit beta that might be different than what you know, we've seen in the past. So I think we just try to take a little bit more of a conservative approach in the kind of the update to our guidance for this quarter. But we do feel very strong that the top end is attainable. And, you know, there's certainly potential for it to exceed if things kind of continue on a current trajectory.

Okay, got it. And on the deposit beta front, I mean, what are you guys, I guess, assuming in the guidance? And do you have plans to move up deposit rates this quarter? And I guess, you know, if so, any, you know, magnitude or quantitative color would be great.

Yep, that's fine. Yeah, you know, it's interesting because we really didn't have a cost of funds change in the second quarter, so... if you think about beta in that sense, there was almost no move to it, but we know that that's not going to hold. We actually did do some deposit repricing in the middle part of June that you'll start to see that deposit interest expense take hold as it moves throughout the second half of the year. I think in our model, the implied beta on that simple deposit reprice was about 5%, but we look at it kind of at a, let's just say, a 10% blended total cost of funds for the first 75 basis points that we just saw yesterday, and then any incremental rates we're modeling out at 25% total cost of funds beta. So that might be a little bit conservative, but again, us not really knowing kind of how the whole situation's going to play out, we wanted to take the most conservative assumptions possible and deposit betas past the you know, past this recent 75 basis point rate rise.

Okay, that makes sense. And for the political deposit moves, what are your expectations on kind of, you know, how to fill the gap in the fourth quarter there? Are you going to be kind of trying to let cash or assets run off or do you expect to utilize short-term borrowings until the pickup in the next quarter?

Great question. Right now, we're definitely seeing balance sheet contraction as we are modeling, I should say definitely, we're modeling balance sheet contraction for the fourth quarter as the political deposits run off as the congressional elections conclude. That said, we're not really seeing any need to get into borrowings. We feel that the combination of the, let's call it $500 million we have in cash right now, $230 million or so of that is in short-term maturing repo agreements or resale agreements that we see turning to cash as we head into the fourth quarter to fund growth initiatives. And then any offsets to growth that we would need that isn't funded through cash, we still think we're going to have modest non-political deposit growth through our normal customer channels. And then in the event that we still need additional cash to support growth initiatives, we have a fairly significant amount in our short-term AFS portfolio that we could trade out of at close to par value. So we feel on a liquidity basis, we're pretty well covered in that the likelihood of borrowing is fairly small.

Okay. That's helpful.

And if you could just go through what the loan origination yields are coming on at now and where you see the drivers of loan growth in kind of the back half of the year.

Sure. So the yields have been pulling up as we're bringing them on. Our yield kind of laid flat a little bit, and that's mainly the result of a couple of our portfolios actually having a little bit of a lower yield. than the previous quarter. So when we think about kind of what's coming on right now, we're still seeing multifamily coming on in the low to mid fours right now. Our pace is rising. It's sort of mid four, maybe even in the upper mid four range right now. And the solar that we're doing is still in the five to mid five range. So we're seeing a lift kind of across the board on the assets that are coming on. And I would expect our loan yield to continue to pull up as we get into the following quarters.

All right, and similar drivers of growth in the back half of the year that you guys have seen so far in the first half?

Yeah, I would say the mix of the growth might flip a little bit. I think we've been heavily led by resident consumer in the first half of the year. And, you know, we may take a little bit more of a hawkish view on resident consumers as we get into the second half of the year just to make sure that there's no fractures in the consumer market or in consumer sentiment that would, you know, maybe prevent us from being able to lend a little bit more aggressively. So I would expect that maybe to be a little bit of a slower growth rate in the second half and maybe a little bit more of a pickup on the commercial and the CNI space to fill the gap. to build a growth map, particularly in the multifamily and in our, sorry, I was surprised I was trying to say the multifamily in the CNI space. Not so much in CRE. I think we're still very, very cautious in CRE and not, you know, not really actively moving in that space probably for the rest of this year.

Okay. And then if I could just do one last one, just you guys made a number of comments on credit items, you know, one, the de-risking of the CRE, you know, what metro areas and I guess, you know, where and what types of CRE and, you know, it seems like you're backing off the whole asset class. So maybe just kind of the thought process there. And then, you know, if there, do you see any, you know, lost content in some of the MTAs and non-accrual take-ups this quarter? And just, you know, framing which will be the classified or the criticized asset decline.

Yeah. So I'll take the CRA side of it. CRA side of it first. The majority of our CRA, you know, is centered in the Manhattan market. And really, we don't have that much that's outside of our core geographies, you know, which also includes San Francisco, D.C., in Boston. I don't believe we have any CRA in Boston and maybe a very, very small amount in DC. But I think more importantly, it's really the office space that we've got our eyes on and making sure that the properties that we have are properties that are going to be able to withstand an economic downturn. So when we look through office right now, There's really nothing. We have about, let's say, $140 million in our CRA portfolio. It's office. That's really the asset class within CRA that we're watching and kind of taking a very cautious approach on. We have actually done a CRA deal, an office deal, during this quarter for about $7 million. So I wouldn't say that we're out of that business. It's just we want to make sure we're finding the best quality deals you can find with strong security. But back to kind of those office deals, right now of that $140 million, every one of them is in a pass grade situation right now that we're watching. And I think one, I'm sorry, everyone except for one, one is a special mention. So from a performance point of view, they're all paying and none of those particular assets are trending towards non-performant or non-accrual at this time. But again, I think we're just taking a costage approach on the portfolio overall and selectively refinancing away credits that we don't think would be strong in an economic downturn. Then kind of moving towards the question on non-performers, I think we had a little bit of an uptick in our non-performers. I think it's largely driven by the restructuring of one asset that's part of our legacy leverage portfolio from from years ago that we kind of sold down as much as we possibly could. It's one of the last four credits that we had. We did a modification on that particular deal. The good news with that deal is it's still paying. We only have a very small reserve that's set up against that particular credit. It's about $6.5 million of book balance. Really, the modification, we kept it as an accruing TDR, but the modification's just designed to extend the term on this credit as the equity sponsor is working at a company sale. So we feel pretty good about our ability to be repaid in full on that particular deal, and I think that's the primary driver of our non-performing uptick for this quarter. Otherwise, I felt like we were stable to even slightly down in terms of the asset movement.

And just the criticized asset decline driver.

Oh, I'm sorry, the criticized asset decline driver. Right. So that, again, I think this is us really getting through a lot more of our portfolio reviews. I think, again, this is a little bit of a function of us being overly critical on certain credits during our COVID period and moving a lot of assets into a substandard category, even though technically they were still performing and still accruing. I think kind of being in that spot led us to a place where moving credits down or back to past grade was probably a more likely outcome than the fact of them staying in substandard. But I also hand it to our credit team, and I really give a lot of credit to the credit folks and also the new relationship bankers that we've brought on board. They've really gone through the portfolio and done the the annual analysis and gotten with these customers to make sure that these credits are, in fact, you know, what we think they are. And that's been a huge driver in us being able to kind of continue to move that criticized asset quality back to a normal space. You know, when I look at the remainder, you know, I still think there's about $50 to $75 million of room for improvement. I don't think we'll continue to improve at this clip because it's just, you know, the numbers are just shrinking. But between what we have in classified and criticized and what's already reported as non-accrual, there's about $75 million in total assets there, Chris. And I think there's a space between that $50 and $75 million where we can continue to see criticized improvements. That's, of course, barring any movements the other direction.

Great. That's all I had. Thank you. Thanks, Chris.

And our next question comes from the line of Janet Lee with J.P. Morgan. Please proceed with your question.

Hello. Hi, Janet. Hi. I want to start with the non-interest-bearing deposits. I know that there is some seasonality to your deposits given political, but so in the second quarter, your non-interest-bearing deposits were 54% of your total deposits. Given the ongoing FEDS quantitative tightening, where do you think this number will go by the end of next year?

I'm sorry, by the end of next year, meaning 2023? So, I'm sorry, I just want to make sure I got your question. So, you're talking about the mix between our DDA and IBA by the end of 2023?

Non-interest-bearing deposits to total deposits.

Yes. So I would love for this ratio to stay at 54%. You know, I do think it'll normalize back to 50-50, maybe even slightly below. I don't think, you know, I really haven't modeled it out, so I'm sort of taking a little bit of a flyer on this. But I think, you know, for us to get below 45%, that'd be a pretty significant shift in the overall mix. The other thing is I think we're somewhat insulated from, from a move to rate because we're able to drive so much through fundraising. And in a lot of cases, the fundraising activities are less sensitive to rate and kind of more placement in terms of the bank that is lining up with the values of whatever the fundraisers are for. So when we think about kind of overall interest expense, it's certainly going to change. It'll definitely change too as the political deposits run off heading into the fourth quarter because that's a significant chunk of the DDA. But as we've seen in the past, you know, we've been able to rebuild the political deposit base pretty well. And our normal segmented customers really, you know, are very tuned into being able to bank with the bank and a little bit less so on rate. I know, Priscilla, do you have anything you want to add on the nature of the customers?

No. I think that's absolutely right. They're with us because they want to be here. and are not thinking of these deposits as much in this still fairly low interest rate environment as being, you know, as much of a driver of their, the rate being a driver of their participation.

Okay, that's helpful. And just to clarify on your resi loan, comment before. Are you still expecting growth in this area in the back half, but at a slower pace? Or do you expect this light item to see the climbs in the back half of 2022? And can you also comment about the demand for consumer solar loans and whether this is more resistant to sort of the economic absent flows?

Yep. Yeah. So, yeah, on my resi comment, I think we'll still grow, I think it'll be at a slower pace than what we've been able to do in the first half of the year. So I don't think we're going to be in a declining portfolio position. I think the origination pipeline that we've generated and the team that we have in the residential space is strong. I think also it'll be a bit of a product of us connecting our consumer business to our commercial franchise under our common common leadership of our chief revenue officer, and I think business banking in general is going to be something that we're looking a little bit more to as we get into the back half of this year and teeing up a business for the future years to come. So I don't see us as kind of shutting down the business or going in a negative direction. I just think it'll be much slower in the second half of the year than the first, but I would not signal, and I hope I didn't, that we're exiting. We're just going to stop completely on the resi side. On the consumer, I think the the demand has still been there. I think we're kind of thinking of consumer solar very similarly. Watching credit standards, I don't think we've been in a spot where we're willing to lower standards to get some volume. We've seen some more competition that's entered the market for some of the flow. And in certain cases, we've passed. And in other cases, we've been able to stick to what we've expected or what we want in terms of credit quality or credit security on those deals. But again, kind of looking into the second half of the year and with the consumer being a significant question mark, I think we'll be just very cautious about the quality of the packages that come off these flow arrangements. But I don't think we'll be exiting that business either. It just might be at a much slower pace.

Okay, that's helpful. And can you comment on the trajectory of NIM assuming the forward curve through 2023. I know there's a lot of, you know, things that come into play, but just combining the fact that your earning asset yields are going to keep going up and then if you, you know, if your deposit cost increases, but probably, you know, obviously at a lagging pace versus earning asset yields, can we still see NIM expansion continuing through the end of 2023?

Yeah, very difficult to predict, but I do feel comfortable that we should see continued expansion in the NIM. Where that tops out at, I'm not exactly sure, but where we're sitting at 3.03 right now, I think there's still room to move on the upside from a NIM expansion point of view. And I think the primary drivers there are There's still pull-through that's going to happen on the yield side from our loan portfolio. I don't think we've seen all the full effect of some of the bookings. We've had higher rates towards the second half of this quarter, so you'll start to see that coming through. And I think there's still a mixed process that'll occur in the back half of the year as we shift a little bit out of our securities portfolio and more into loans. In that sense, I think there's an opportunity to expand the top line of the NIM. Obviously, the deposit expense will rise up, and it's a little bit difficult to predict, but if past betas prove to be reflective of current betas, I think the margin could benefit quite nicely from that. I think one last thing that could contribute to margin expansion would be a little bit of balance sheet contraction as we get into the fourth quarter. Right now, we still have excess deposits. We're carrying on average about $200 million, probably more than we would like, and we would see that cash balance coming down, deposits coming down in the fourth quarter with the political runoff, and that should free up a little bit of margin return as well.

The only thing I would add to that is just maybe to give the historical view. When we look back to that 2017, 2018 time period, our deposit beta was only 3% compared to the market at approximately 20%. So we don't see any reason why our deposit beta should behave differently from that past rate rise cycle because our customer mix is essentially the same as it was back then.

Okay. Just last question. I don't know if this was covered. If it was, I apologize. For the expense, 138.5, is that still maintained? for full year 2022?

Yeah, I think we've been a little bit ahead of where we thought we'd be in terms of expense management on the good side. We're still expecting some pressure to come through on our compensation and benefits lines and some other investments that we're looking to make in infrastructure to help keep this this business well positioned for growth and thinking about, you know, $10 billion down the road and the type of infrastructure we need. So we're going to keep making those investments, but I think the target of that, you know, $138.9 or $139 million is very good. If we come in under, you know, it'll probably be just on run rate saves through data processing, which, you know, we're hopeful for, but right now we're still sticking on the target. So we might see some quarterly expense expansion in Q3 and Q4 from where we've come in for the first two quarters.

Okay, great. Thanks. You're welcome. Thank you.

And we have reached the end of the question and answer session. I'll now turn the call back over to Mrs. Priscilla Brown for closing remarks.

Thank you, Operator, and thank you, everyone, for joining our call this quarter. We look forward to working with you to answer your questions individually as we move through the next few days. And have a good day.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you, and have a good day.