Forbright, Inc.

Good day and thank you for standing by. Welcome to FORBRIGHT, Inc. Q2 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ben Wakana, Chief Public Affairs and Investor Relations Officer at Farbright. Please go ahead.

Thanks, Rivka. Before we begin, I'd like to remind listeners that remarks on this call may contain forward-looking statements that are subject to risk and uncertainties. Please refer to the Safe Harbor Statements found in today's earnings release and in our investor presentation for additional details. Management may also reference non-GAAP financial measures during this call. A reconciliation of non-GAAP measures can be found in our earnings release and investor presentation slides. Finally, I'll identify the speakers on the call this morning. They are John Delaney, Chairman and Chief Executive Officer of Fulbright, Inc., Don Cole, President and Chief Operating Officer of Fulbright, Inc., and Chief Executive Officer of Fulbright Bank, and Chris Lynch, our Chief Financial Officer. We'll also be joined for Q&A by Aaron Juda, our Chief Strategy Officer. And with that, I'll turn it over to John.

Thank you, Ben. And good morning, everyone. This is Forbright's first call as a public company, so we're very excited and grateful to our new shareholders and the research analysts who have become involved in the company and who have joined us this morning. At a high level, three things stood out this quarter. Loan growth was very strong. Credit trends continue to be favorable. and probably even more important, our outlook on credit is very positive based on the insights we have into our portfolio. And then finally, our digital deposit platform is outperforming what I would describe as our very high expectations for it. So let me go through some of these in a little more detail before I turn it over to Don. Our total loans were up about 275 million this quarter compared to the first quarter. and we continue to see very attractive lending opportunities across our six national lending strategies. And again, importantly, our pipeline in each of these businesses is very strong, which is why we would expect second half loan growth to be greater than first half because we see it accelerating as we go into the second half. Loan originations were up 13% compared to the first quarter. The growth was pretty evenly distributed across our lending strategies with healthcare and lender finance having the largest share of the $1.2 billion of new and upsized loan commitments for the quarter. Just as important, pricing and structures remained disciplined. Loan yields increased slightly by about three basis points in the quarter. and as I noted, our credit metrics remained very favorable. We were also pleased that our new asset finance business closed its first transaction this quarter. It was a small deal, but it was important because it was a few months ahead of schedule. As we've mentioned to some of our new shareholders, we're very excited about the team we've assembled for asset finance. They complement the other five lending teams very well. and just to put it in perspective the team that is running our asset finance business has collectively run a business in just that business that is bigger than all of Forbrite which puts into context why we're excited about that new team. So loan growth and credit remain strong and those are the two probably most important measures you'll hear from us in the future and again as we go into the second half of the year we feel very good about both of them. On the deposit side, the feedback we're getting from the market continues to validate our digital deposit gathering model. We've now crossed 100,000 accounts on our proprietary digital banking platform, and approximately 90% of those deposits are FDIC insured. As the quarter ended, our digital deposits were up 9% from the first quarter. which allowed us to decrease some of our other higher cost funding leading to a small improvement in cost of funds for the quarter. We successfully launched our digital deposit promotion capability at the end of the second quarter on June 15th it launched. It's performing meaningfully better than we projected. And that's good because it'll position us to have more deposits than we had planned at the end of the third quarter, significantly more. and it'll also position us to make progress on our cost of funds sooner than we had projected. We expect continued investments in technology to further enhance this capability so that we can have additional successful deposit gathering promotion, but we're pleased to be ahead of schedule with what we've launched thus far. And this is a good example of the value of a flexible API-driven technology stack rather than a cumbersome legacy core system. We saw an opportunity in the marketplace to add deposits. We launched this promotion capability very quickly, and we're reaping the benefits now. And I think it's also an example of the entrepreneurial culture that is pervasive across the Fulbright platform. Don will talk more about expenses in a minute. But I wanted to emphasize that we remain very focused on expense management and we are on track to meet our 2027 expense targets and perhaps even exceed them. And we talk a lot about expense management not only because spending less drives higher returns, but our aim is to continue to simplify the business, not tolerate distractions or unnecessary activities, Allocate our resources as intelligently as possible and create the capacity to invest more aggressively in technology and the strong growth opportunities we see in our business. So again, I'll turn it over to Don in a second, but as we head into the second half of the year, we have very high convictions about the key drivers of the business, loan growth, credit quality, funding costs, and operating efficiency. Execution is our central responsibility. We concentrate on the drivers that matter most, value our clients, producing responsible growth, maintaining rigorous credit and risk standards, managing expenses with intensity, allocating our capital intelligently, and investing in the capabilities that will strengthen the franchise for years to come. Our commitment is straightforward, focus on what matters, avoid distraction, and continuously improve the company. In my judgment, the second quarter was a good example of us doing just that. Don?

Thank you, John. First, I'd like to echo John's welcome to our shareholders, both old and new, and to our analysts to this, which is our first earnings call as a public company. And to also echo John's description of our second quarter as a positive one, that sets us up for continued success in the back half of 2026 and beyond. I'll spend a few minutes touching on some additional drivers and key metrics from the quarter. On loans and credit, as John said, loan growth and credit performance were strong this quarter. Our core net charge-off rate, which reflects our six national lending strategies, was eight basis points, in line with the previous quarter. And the second quarter ended with total net charges of just $2.7 million, down from $4.1 million in the first quarter. Our limited credit issues are currently concentrated in our discontinued and shrinking legacy community bank and forward flow small balance portfolios, while our national lending businesses continue to perform very well. On expenses, as John said, we continue to maintain expense discipline in the quarter while investing in key growth areas of the business and absorbing the costs associated with becoming a public company. As we note in our investor presentation, expenses for the quarter were higher versus the first quarter, and they increased by about $7 million due to three very notable factors. First, there was an employee retention program that was implemented earlier in the year before our IPO. This program runs for three years, but the way the gap treatment works is that it recognizes over 60% of the expense over the first year. That resulted in $3.9 million of increased expenses during Q2. Pass-through of expenses relative to our solar servicing business resulted in an increase of $3.2 million. As a background, we advance these expenses through solar servicing on behalf of the loan owners who then will pay us back. The advances show up as expenses and the paybacks revenue and other non-interest income. These expenses can be volatile each quarter, but ultimately do not materially affect net income as they are grossed up through non-interest income. The third notable driver of increased expenses was from the acquisition of our corporate headquarter building during the quarter. The acquisition resulted in $900,000 of additional expenses during the quarter. But similar to solar servicing, ownership of the building brings with it rental income that offsets these expenses. And in the case of the building, the revenue more than offsets the expenses, resulting in about a $400,000 of pre-tax income net recognized during the quarter. We acquired the building primarily to give us strategic control over our primary office space But we also expect it to continue to generate a small net profit going forward. Excluding those discrete items, our operating expenses would have been relatively flat quarter over quarter, which is reflective of the operating leverage we strongly believe exists in the business. Further demonstrating that point, our headcount has remained relatively stable over the last six quarters, despite a roughly 40% increase in loans and the doubling of our digital deposits. In fact, if you exclude the employees in our solar servicing business, as it was added during the period, our headcount is up only a total of five people. The stability of our baseline expenses is why we are confident in our belief that our efficiency ratio can move from the 77% level it was in Q2 to our medium-term target of 50% or below, simply through executing on our strategy and growing loans in our national lending businesses and deposits on our digital platform. Well, as John said, just simplifying the business and focusing on the things that matter. Finally, on earnings and some additional key performance metrics, our net income was $4.1 million for the quarter, or $0.09 per share on a fully diluted basis. Net interest income was $63.1 million, up 6% from last quarter, and our net interest margin expanded by nine basis points this quarter. As our asset mix improved, loan yields increased modestly and cost of funds moved lower. That combination is important because it shows the model working on both sides of the balance sheet. Net of the solar servicing pass-through income, our core net interest income was relatively stable despite some government agency delays in processing transactions in our FHA HUD business that delayed some of our expected 2Q activity into the third quarter. We continue to be optimistic about that pipeline and its ability to contribute increasing levels of non-interest income to the bank. Finally, our pre-provisioned net revenue was up 15% from last quarter to about $19 million. In sum, the results this quarter add to our confidence in the fundamentals of our business. We saw our underlying margin dynamics move in the right direction, even as reported earnings absorbed the expected costs of the IPO and related public company transition items. With that, I'll turn it over to Chris for more detail on some other areas of the financials.

Thanks, Don, and good morning to everyone. I'll start with capital and liquidity, which positioned the company well for continued growth. Capital ratios increased in the quarter with the closing of the IPO. CET1 ratios were 13% for the parent and 14.1% for the bank. Tier 1 leverage ratios were 10.4% for the parent and 11.2% for the bank. These do not reflect the $18 million of gross proceeds from the exercise of the over-allotment option, which closed in July. Cash and AFS investments a quarter end totaled over $2 billion, and our loan to deposit ratio was 83.5%, up approximately two percentage points from Q1. Turning to taxes, tax expense and the tax rate for the quarter were 9.2 million and 69%, which were up from 1.6 million and 12% in Q1. The increase was due to tax rules that limit deductions of executive compensation for public companies. This became effective for Fulbright with the IPO, an increased tax expense for compensation estimated to be disallowed for IRS purposes including a $5.6 million write-down of deferred tax assets at year-end 25 for stock compensation. Tax expense for the quarter was offset by a benefit of $1.1 million from accretion of the deferred credit, which reduced the tax rate by 8.6%. This relates to the deferred economic gain from the acquisition of solar services. For accounting rules, the transaction was treated as an asset acquisition, and the gain was recorded as a liability. The liability is recognized as a benefit in income tax expense as the acquired tax assets are realized, which were mainly NOLs. The estimated deferred credit balance at quarter end was 49.1 million. For the second half of this year, we estimate the tax rate to be approximately 20%, which is net of deferred credit accretion of approximately 10.5%. This is lower than the tax rate for Q2, which included the DTA write-down and two quarters of disallowed compensation expense since we were not a public company in Q1. For fiscal year 27, we estimate the tax rate to be approximately 17.5%, which is also net of deferred credit accretion of approximately 10.5%. This is lower than the estimated tax rate for the second half of 26 due to the declining rate impact of the disallowed compensation. The estimated tax rates exclude discrete type effects such as vesting restricted stock, option exercises, turrets for tax returns, et cetera. With that, I'll turn it back to John.

Thanks, Chris. And before we open up to questions, I just wanted to close by reiterating our view that a very significant shift is happening in banking. Again, in our opinion, to compete moving forward, banks will need to adjust to rapidly evolving needs of both their borrowers, who are increasingly national and specialized, and their depositors, who in this age of technology are seeking better rates and a much better digital experience. We believe we have built a business model and designed the platform, assembled the right talent and established a culture that uniquely positions Forbrite to thrive in this evolving environment for banking. So we're grateful that you joined us here this morning. And with that, I'd love to open it up to your questions.

Operator? Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Moshe Orenbach of TD Cowan. Your line is now open.

Great, and welcome back, John and team. I was going to start by saying, here we go again. Right. So I guess you talked about the loan growth and commitments and gave us some statistics and mentioned that loan growth should be accelerating into the second half. Maybe if you could just flesh that out a little bit more. Are there any of the verticals that you think are going to be sort of changing as you look through this and how you see that kind of shaking out? By how much could that acceleration be? And maybe talk about that a little bit, if you would.

Sure. So we've got the six businesses, as you know, Moshe, and in the first or in the second quarter and probably for the first half of the year, lender finance and health care finance were our stronger contributors. But it was pretty balanced. I mean, they didn't meaningfully outperform the others, but they were the two stronger ones. And I would expect that to continue in the second half of the year, although our commercial real estate group has a very good pipeline in particular right now. And so I would expect them to do more in the second half than they did in the first half. The asset finance team, again, which is new and really has the potential over time to be as large as any business we have. You know, they'll obviously have a better second half than they did the first half because they literally closed their first deal, which was relatively small in the last couple of weeks of the second quarter. So I think it'll be pretty balanced. We're expecting good performance. And one of the reasons we're bullish on loan growth is just looking at the pipeline right now and the deals that are scheduled to close. It's just really promising. And we're very excited with the quality of the pipeline and feel very comfortable that we're going to have a good second quarter. on loan growth. And the other thing that I think is important, across kind of 24 and certainly into 25, we did see spreads compressing. We didn't see structures loosening, which is very important, because we wouldn't follow that, but we did see spreads compressing, and we stayed competitive while they compressed. That has largely abated at this point. I certainly wouldn't say they're widening, but they're certainly stable And again, just this week we did our deep dive, which we do once a quarter into the whole portfolio. From a credit perspective, we do that once a quarter. Obviously, the portfolio is monitored more regularly than that, but a very large group of people get together once a quarter to go through the whole portfolio. And I think we all left that meeting feeling very, very good about the credit quality in the portfolio. So we feel good about loan growth and we feel good about credit for the remaining of the year.

Great, thanks. And maybe just a quick follow-up on the other side of the balance sheet. Given the macro changes with respect to rate expectations, what are your thoughts from a deposit pricing standpoint as we are in the second half of this year now?

Yeah, I'll start on that, and then I may let Aaron chime in a little bit. But as I mentioned, our deposit promotion capability did extremely well, and it's positioning us to have more deposits at the end of the third quarter than we had planned. And that puts us, we think, in a position to improve cost of funds a little sooner than we anticipated. We anticipated doing something next year. We'll pull that into this year. Depending upon what happens with the rate environment, again, we certainly don't make any bets on this, but if there were to be a rate cut say it's a 25 basis point rate cut. Obviously, all our loans reset within 30 days. But I think we would look at not moving on the deposit side. I meant rate increase, sorry. Rate increase, if that were to happen in the fourth quarter, again, all the loans reset right away. But we're in a position where we would not have to follow that rate increase up. But Aaron, you want to add anything to that?

No, I mean, the only thing I would add is that the promotion, early success, we have dialed back a little bit on the marketing just based on that success. But the promotion is still on until the end of August. So there's still, we've got to let the promotion run out. We're going to see what we have in September. These balances build over time. And then I think we'll be better positioned to take a stronger view on timing of any price action. Thanks very much.

One moment for our next question. Our next question comes from the line of Ryan Nash of Goldman Snacks. Your line is now open.

Good morning, guys. Good morning, Ryan. Don, you know, you made a comment on expenses that you're on track for 27 or potentially to exceed your expectations. Maybe just put a finer point on You know, I think overall we've been fairly stable.

I think the key part I mentioned our headcount growth, which has been outside, you know, in the current year through June, I think we were slightly down. So I think we're managing and we're being very intentional about new hires. As we said, we believe we have a lot of operating leverage in the business. So one place we're beating is just straight up headcount, which is the biggest component, obviously, of our expenses. You know, some of those pastors get noisy, but if you take those out, we've been flat. And I think, you know, we John mentioned we are focused on expense management. We have some initiatives within the company to really analyze each group bottoms up and understand where we can add more efficiencies. and I think the early returns on that or the early reports are there some places we can save and we're excited about those. So when you look at a forecast where you kind of put in inflation adjustments, et cetera, we think we can continue to hold the line. And that's why I think we feel so bullish about 27, just looking at where headcount is today.

Gotcha. And maybe if I could dig in a little bit deeper on some of the verticals, I think, John, you highlighted Commercial real estate seeing some good opportunities. You know, lender finance obviously was very strong in the quarter. Maybe just put a little bit of a finer point where you're seeing the best opportunities within there. And then, you know, to Moshi's question regarding, you know, the acceleration in the back half of the year, any sort of broad strokes do you think you can maintain or improve on the, you know, 5%-ish link quarter growth that you saw this quarter? Thanks, guys.

Yeah, I mean, I'll let Don chime in as well. I mean, as I mentioned, Brian, when I was talking to Moshe, we looked at the pipelines of all the groups, and they're really strong right now. And we have very good visibility across the next 90 days because there's effectively a schedule of deals that we expect to close because they're in some form of closing. Either we've signed them up and they're in diligence and the diligence is going well and we've aligned with the borrower around a closing date. or it's actually in the legal documentation. So in the near term, 30, 60, 90 days, that visibility is very good and we obviously feel good about it. But then just looking at the rest of the pipeline, I think in our pre-screen meetings, every Monday we have these pre-screen meetings with all the groups where they do what I just described. They pre-screen a deal before they sign it up and those meetings have been longer than they've been in a long time the last couple of weeks. And the quality of the deals are good and So I just think a little bit of it is anecdotal, but over time you get a feel for these kind of things. Just looking at the pipeline, looking what's in the queue just gives us conviction around loan growth improving. And I think now everyone's super focused. Obviously in the first half of the year we also had some distractions. We had the IPO and things like that, which you try not to have impact you, but let's face it, it does a little bit. So now everyone's laser focused on just execution.

Well, look, I would say also in the second quarter, we had a few fairly large payoffs and paydowns that we grew out of. I don't think we see quite as much of that in the third quarter. Those can always happen. But you can see the commitments in the second quarter that we'll fund up in the third. And just looking at where we are, frankly, quarter to date, we feel very strong about the third quarter numbers. Cool. Thanks, guys.

One moment for our next question. Our next question comes from the line of Jared Shaw of Barclays. Your line is now open.

Thanks. Good morning, everybody. Morning, Jared. Maybe just going back to the deposit discussion, it's great to see the strong 9% digital deposit growth this quarter. When you mentioned the ability to improve the cost of funds sooner, is that more You know, you could see continued acceleration of some of the brokered and wholesale funding going down or that you would have the flexibility and maybe desire to be more aggressive with pricing changes.

I would say it's a little bit of both. You know, the broker did come down. Some of those brokered CDs that we have are a little higher priced than our average. So there is a little bit of room there. It moves it a little bit. I would probably say it's more the latter just because of the size of that portfolio. And when you position yourself with the deposit balances so far ahead of your targets, you can manage your costs a little better because you don't need to grow quite as much going forward. And then when you look at, oh, sorry, go ahead.

No, no, I was just asking if Aaron wanted to add to that at all. No, that hit it.

Go ahead, Jared, keep going. When you look at how the... The back book is repricing. How's the retention been on existing balances?

Yeah, I mean, the retention on the existing digital deposit customers has been really strong, and it continues to be. We have still retained over 96% of customers who have opened an account with us are still funded today. So that's been really strong. And again, we haven't moved on that base rate since earlier this year, so that's stayed pretty stable. So really strong retention there, and then obviously really strong growth on the promotion side.

Okay, all right, thanks. And then shifting over to the fee income, when we look at what happened with solar services this quarter, anything to call out there? Because I think you were saying that some of those reimbursements were coming through other fee income. So what were some of the dynamics with the growth in solar?

So in the line item by business, those are in solar services. Sorry if that was confusing. So the growth in solar services was largely due to the growth in the pass-throughs. The baseline was stable to the slightly shrinking portfolio, but it's going to take a long time to run off. But the increase was due through the pass-throughs, as I discussed.

Yeah, and it's worth dwelling on that, just so everyone – Jared, obviously, you're tracking this, but I want to make sure everyone does, because it is somewhat of a – I'll just say a frustrating accounting treatment, but it is what it is. So we manage $8 billion of loans on behalf of a variety of loan owners in our solar servicing business. and as there's expenses, most recently litigation, because there's a lot of litigation going around the country around residential solar lending. Again, these eight billion of loans we manage for other people. We advance the litigation expenses and then we seek the reimbursement, which obviously we can get because we control all the cash. And so we don't have any exposure on that, but It does run through our P&L. When we advance the legal expenses, it's an expense. When we get it recovered, it's other income. I would have thought that would have been in some kind of a suspension because it's not really our money, but that's not the way the accounting works.

If I could just ask one final one. When you look at the loan yields this quarter and the growth in the loan yields, is most of that from mixed shifts? And if we are expecting to see continued good strength in the Healthcare and Lender Finance. Should we think that in a neutral rate environment, we still have a little bit of tailwind on yields there?

It was three basis points. We're pleased that it's stable. It was up three base points. We don't draw any real conclusion from that. Healthcare's got wider spreads of underfinance. Those were our two drivers. They kind of offset each other a little bit.

And real estate has pretty good spreads, and they grew. But, you know, makeshift will affect that a little bit. But we also have, it runs through there, discount accretion. And that can move up or down. I mentioned that we had some prepayments. So we probably got a little lift from our discount accretion in the second quarter for that number. So I would say spread, new loan spreads have stayed relatively stable. So We'd expect the loan spreads to stay relatively stable. Thanks.

One moment for our next question. Our next question comes from the line of Nathan Race of Piper Sandler. Your line is now open.

Hey, guys. Good morning. Thanks for taking the questions. I was wondering if you guys could just update us in just terms of the timing and, you know, plans to roll out the digital checking product. I think the plans were for early next year. Obviously, you're making some nice progress here in the second quarter in terms of improving the deposit mix. So, you know, just curious if you can update us on that product in particular and, you know, how you expect, you know, that to result in kind of the trend line in deposit costs, you know, over the next several quarters, particularly just given some opportunities to seemingly run off some additional higher cost deposits. Great.

We're going to let Aaron take that one. Nate, Aaron?

Yeah, so it's still on track, which is internal launch, friends and family, end of the year, and then the full product launch nationally in the first quarter. What I would say is in terms of how we plan to build that product, I think we've talked about this a little bit in the past, which is and this goes hand in hand with our promotion engine capabilities. We will continue to market the product primarily to our current customers and that's what the business case was built on. But I would say with the first quarter launch, we're really looking at a slow build over the course of 2027. It will contribute over the course of the year but probably pick up more so in the back half of the year and then into 28 and beyond in terms of the actual balances relative to the broader set of digital deposits. But in terms of the capability and the platform, it's in product, it's still ready to go in the first quarter.

Okay, great. Maybe changing gears a bit, just going back to the income discussion, I appreciate the commentary on the solar servicing portfolio and the outlook there. But just given some of the geographical differences between, you know, certain line items and the press release and the slide deck, I'm not sure if John or Don, if you can kind of help us with kind of thinking about the overall income run rate in the back half of the year and where you're seeing opportunities to grow across those various lines of business.

Don? So, you know, I'll take the last part of that. Chris is going to maybe look at some of the detail. But, you know, the biggest opportunity area to grow is the one I highlighted was kind of depressed a little bit in the second quarter. That's the FHA HUD business. As we've talked about, the way that business works is we refinance mostly our own portfolio of healthcare loans as a takeout through an FHA HUD guaranteed mortgage. And we make fees and points on those transactions. In the second quarter, and therefore we have pretty good visibility in our pipeline because those things take a while to get through. They need to be underwritten. They need to be submitted and approved, et cetera. And it's our own portfolio maturing. So we have a pretty good view of the portfolio. In the second quarter, some of the transactions we thought would go through got delayed because of some staffing issues within the agencies and the federal government. So some things that we thought would happen on the second happened on the third. And that's why the HUD earnings were only about a million dollars in 2Q. And we've already seen at least one of those transactions that was supposed to be 2Q happen in 3Q. That pipeline is growing because our portfolio is growing. And therefore, we think there's significant improvements as we go through the rest of the year. So that's the biggest growth engine of fees. You know, our loan and deposit fees should grow marginally as our loans and deposits grow. And the others should stay relatively stable, I would say. You know, I think Alliance Partners had a slight uptick in AUM this quarter. We're hopeful that that will, you know, it's come down a little bit over the last few quarters. We're hoping that will stabilize and start going up. But it would be slow growth there. And I think the solar servicing outside of the, you know, these gross ups should stay relatively stable. But those loans do run off a little bit, so it'll be a slight decline. But net-net, I think the direction is positive. because of the HUD. And then the one other thing I touched on, it's small, but it'll go through that item is, you know, we had the building, we had the building for two months. We'll have three months each quarter going forward. So that'll contribute, you know, more of like a million and a half ish of rental fee income, if you will. You know, whether we break that out, it's going to stay pretty small. And it's, you know, it's not really a strategic fee business. It's just something that comes along with owning it. But that'll be a little bit of an increase as we go forward.

Okay. That's helpful. Thanks, guys. If I could just sneak one more in on just kind of the outlook for charge-offs, to the extent you have any visibility in terms of kind of the magnitude of charge-offs going forward in some of those non-core portfolios. Obviously, a nice step down here in the second quarter versus the first quarter. But, you know, curious if you can kind of help us just in terms of your updated thoughts on the charge-off trajectory relative to what we've discussed in the past.

No real changes overall. You know, in the baseline, business. I mean, I know you focused on the non-core. On the core, you know, we feel really strong about the credit position. That's obviously the biggest dollars of the portfolio. In the non-core, they are running down. You know, they're going to continue to have charge-offs, especially in the tail. So I would kind of anticipate it, you know, it went up. It was a little higher in the first quarter, a little lower in the second quarter. You know, I think the second quarter, first quarter had a little bit of unusual activity in it that made it a little higher. So You know, I think, I don't know the exact forecast, but it's not going to move that much.

And remember, part of that is a portfolio of residential solar loans. So, you know, the reason there's regular charge-offs is because they are consumer loans. Yes. Where's that? That's $150 million at the end of the quarter. Roughly. You know, net of our, you know, area. So... and then there's some residual kind of small business flow programs we had with Bank Alliance, but they're under 100 million now. So, you know, we believe it's appropriately provisioned, shrinking, a little bit noisy, but there's nothing in there that would materially move the numbers off of what we described.

Got it. That's really helpful. I appreciate all the color and congrats on that. A great quarter out of the gates here. Thank you. Thanks.

One moment for our next question. Our next question comes from the line of Anthony Illion of JP Morgan. Your line is now open.

Hi, everyone. Following up on Nathan's previous question, your ACL, about 1%, does this feel like a good level, Don? And how should we think about the dollars of provision expense in the second half relative to the 6 million and 2Q.

Yeah, look, I would say, I think we talked about it, so we expect the ACL to slowly gravitate downward, largely because the portfolio we're just talking about, the runoff portfolio, has a significantly higher percentage, at least, than the base portfolio. The base portfolio runs closer to 70 basis points. So as that runs off, we expect it to run down. This quarter, it was a little bit stable. You can see a lot of it was in sort of the unfunded. We had some unfunded growth. So, you know, I would say, with loan growth, you know, it was only a little bit above where we expected. I would say I would expect it possibly to probably come down a little bit in the third quarter based on where we know we are. But, you know, with loan growth, we'll run in that three to five million dollar range, I would think, for sure. And don't take the forecast like baseline what we expect. But I think there's there's some let's put it this way. There's some positive head or tailwinds to the third quarter for sure.

Thank you. And then On NIM, you had nine basis points of NIM expansion in 2Q. NII also increased by about $4 million. It sounds like there's an opportunity to do better on funding costs from the campaign. Can you give us some color on how you're thinking about either NIM or NII in the second half?

Thank you.

Well, one thing, you know, we're going to end the third quarter with a lot more liquidity. So the loan-to-deposit ratio, even with strong loan growth, is going to go down. I'm not saying anything incorrect there, am I? No, you're saying exactly right. And where we think the cost of funds improvement will really start manifesting itself, if you will, because of the stronger deposit position, is post-third quarter.

Yeah, look, we talked about some of the improvement in this. Somebody asked about mix shift, and it wasn't mix shift within loans. It was our loan-to-deposit ratio went up. So, mixed shift in the second quarter was between cash and loans. Unfortunately, that's going to reverse itself a little bit, but there's some obviously serious positives around the cash that we talked about. So, there's probably some headwinds in the third quarter, and then the serious tailwinds in the fourth quarter, if you think about the full year.

Yeah, it's a good problem to have, what we have in the third quarter, which is loan-to-deposit ratio going down, lots of excess liquidity positions us to, as I said, pull forward some of our plans on cost of funds improvement.

Given those comments, is there a finer point on what you expect NIM to come in at in 3Q?

I don't think we have. I mean, it's not going to be materially different.

Thank you.

One moment for our next question. Our next question comes from the line of Robert Ruschow of Wells Fargo. Your line is now open.

Hey, good morning. I guess most of my questions have been asked, but just a quick one on deposits. I think you're around the highest on the savings rate currently, and I think you'd prefer to be a little bit below the top rate. Is that still the case going forward, and is there anything you'd say about competition for deposits and rate being paid by competitors there?

Yeah, happy to address that. So, I mean, what I'll remind everybody is that right now our base savings rate is 385, and we've got a promotion running. The promotion is you get, for new customers with a $1,000 balance, you get a 30 basis point bump on that base rate through the end of the year, so through December 31st, regardless of when you start. You know, our digital banking team did a lot of work around where's the right place to be when running a promotion like that. and we are very pleased with the results of the promotion and the cost of acquisition associated with being at that 30 basis points and getting a really attractive rate on the market, right? So at the top of the market. That's worked out very well for us. It positions us very well to improve our cost of funds sooner than maybe we otherwise expected. But yes, I mean, I think that to your point, that base rate is what we're really focused on and I do think that where we are today relative to the market, is where we want to be to better. We look at that sort of effective Fed funds number, and that's over time where I think where we want to land.

And I think you said something there, Aaron, not to be too forward, but I'll ask you to expand on it a little bit, which is cost of acquisition.

Yeah, I mean, look, you know, this thing is always, you know, digital rate and cost of acquisition, right? Those are the two levers you're pulling, right? So even in this current upcoming quarter, right? I mean, you know, we've talked a little bit about putting on a lot of cash early in the quarter here as a result of the success. There's some modest uptick in rate from the 30 basis points. We've also dialed back some of our marketing as a result because the cost of acquisition has been so competitive in the quarter. So we've seen really strong results from using this promoted tool here. And by the way, our promotions are only going to expand once we have the full capability set of the promotion engine. So right now, it's a sort of very basic bump to the base rate on the savings account. But that will evolve to multi-product promotions to cash promotions, to other tools which will come through various other parts of the P&L, and also all with a focus on grinding down the all-in cost of funds, so the rate, the OPEX, and the cost of acquisition associated with it.

Great. Thank you for taking my question. Thank you.

I'm showing no further questions at this time. I would now like to turn it back to John Delaney for closing remarks.

Well, I'll close by just expressing my appreciation for the research analysts who called in this morning and asked very thoughtful questions. And to our shareholders that are on the line, we're available for any follow-up questions you have where we can spend more time talking about the quarter. And we look forward to any opportunity to engage with any of you whenever you'd like. We're here. Let us know if you have any questions, but we appreciate your time and we feel obviously good about the quarter and good about the prospects going forward. So thank you.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.