Amalgamated Financial Corp. Q2 FY2022 Earnings Call

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 Investors section of our website for an extended period of time. Additionally, a slide deck to complement today's discussion is also available on the Investors 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 $0.63 per share, a full $0.18 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 8 basis points, which is 1 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 financed 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 a 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 regarding 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 balanced 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 Amalgamated. You can see this in the success we had recruiting experienced executive 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 the 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 Amalgamated'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 healthcare and are supporting organizations that 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 were also some social moments to celebrate during the quarter. In May, we celebrated the contributions and influence of Asian Americans and Pacific Islanders to our history, culture, and achievements in the United States. June 15, 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+ 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 executive bankers and underwriters over the last year as Amalgamated 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 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 talent. 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.

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 pretax income. Beginning on Slide 5, we did not make any additional solar tax-equity investments during the second quarter of 2022 and maintained 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, for the second quarter of 2022 was $20.9 million or $0.67 per diluted share compared to $14.3 million or $0.45 per diluted share for the first quarter of 2022. Turning to Slide 7. Deposits at June 30, 2022 were $7.3 billion, an increase of $317.7 million from the first quarter of 2022. Noninterest-bearing deposits represented 56% of average deposits and 54% of ending deposits for the quarter ended June 30, 2022, contributing to an average cost of deposits of 8 basis points in the second quarter of 2022, a 1 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 compared to $1.1 billion as of March 31, 2022. Although difficult to predict, we anticipate political deposits to rise by another $100 million to $150 million during the third quarter and then run off approximately $500 million 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 was 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 pass-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 a result of increases on floating-rate yields from interest-earning assets, while cost and interest-bearing liabilities remained flat. Prepayment penalties earned as loan income added 2 basis points to our net interest margin for the second quarter of 2022 compared to 3 basis points in the first quarter of 2022. Core noninterest 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 the sale of non-performing commercial loans. Noninterest 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 expenses 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. Nonperforming 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 nonperforming 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 nonaccrual in the second quarter of 2022, partially offset by one $3.5 million nonaccrual multifamily loan that was paid off. While nonperforming 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 totaled 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 linked quarter basis is primarily driven by a specific reserve from the downgrade of one legacy commercial and industrial loan. Moving along to Slides 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 were 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 and follow 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-affected 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 held to 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, borrowing capacity, and low-cost deposit gathering franchise well protect 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 guidance 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 pretax pre-provision earnings of $110 million to $120 million, which considers the effect of the forward rate curve for the remainder of 2022, and net interest income of $220 million 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 million 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 million 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 and 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.

Our first question comes from the line of Chris O'Connell with KBW.

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

Sure. I think right now, at the last quarter when we gave the guide, we gave a fairly wide range. Moving us to the top end of the range in this particular quarter felt appropriate at this time. I think the biggest thing 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 is 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 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 there's certainly potential for it to exceed if things kind of continue on a current trajectory.

And on the deposit beta front, 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, if so, any magnitude or quantitative color would be great.

Yes. That's fine. Yes, 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 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 is going to play out, we want to take the most conservative assumptions possible in deposit betas past this recent 75 basis point rate rise.

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

Right now we're definitely seeing balance sheet contraction as we are modeling just to 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 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 that we see turn to cash as we head into the fourth quarter to fund the 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 nonpolitical 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.

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?

So the yields have been pulling up as we're bringing them on. Our yields kind of laid flat a little bit, and that's mainly the result of a couple of our portfolio 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-4s right now. Our pace is rising at sort of mid-4 or maybe even in the upper mid-4 range right now and the solar that we're doing is still in the 5 to mid-5 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.

And similar drivers of growth in the back half of the year that you guys have seen so far in the first half?

Yes, I would say the growth mix might change a bit. We've been primarily driven by residential and consumer sectors in the first half of the year. As we enter the second half, we may adopt a more cautious approach towards residential and consumer segments to ensure there are no issues in the consumer market or sentiment that could hinder our ability to lend more aggressively. Therefore, I anticipate a slower growth rate in the second half, with an increase in commercial and industrial lending, especially in multifamily and C&I areas, rather than in commercial real estate. We remain very cautious in the commercial real estate sector and are unlikely to engage actively there for the rest of this year.

And then if I could just do one last one. Just you guys made a number of comments on credit items. One, the de-risking of the CRE, what metro areas? And I guess, where and what types of CRE, and it seems like you're backing off the whole asset class. So maybe just kind of the thought process there? And then do you see any loss content in some of the NPAs and nonaccrual pick-ups this quarter and just framing what drove the classified early criticized asset decline?

I will address the commercial real estate aspect first. Most of our commercial real estate is focused in the Manhattan market, with minimal presence outside of our main regions, which also include San Francisco, Washington D.C., and Boston. We currently don't have any commercial real estate in Boston and only a very small portion in D.C. More importantly, we are closely monitoring office space to ensure that the properties we own can withstand an economic downturn. In our commercial real estate portfolio of about $140 million, office space is the main asset class we are closely observing with caution. We did engage in a commercial real estate transaction, specifically an office deal, this quarter for around $7 million, so we are not exiting this sector. However, we want to prioritize high-quality deals with solid security. Among the $140 million in our portfolio, all but one of the assets are in a pass grade situation, and they are all performing well, with none trending towards nonperforming or non-accrual at this time. Nevertheless, we are adopting a cautious approach with the overall portfolio and selectively refinancing credits that we believe may struggle in an economic downturn.

And just the criticized asset decline driver?

I apologize for the criticized asset decline driver. I believe this is largely due to our thorough portfolio reviews. During the COVID period, we may have been overly critical on some credits, moving many assets into a substandard category, even though they were still performing and accruing. This situation likely led us to believe that reclassifying credits back to a pass grade was more probable than keeping them in substandard. I also want to acknowledge our credit team and the new relationship bankers we've brought on; they've conducted annual analyses and engaged with customers to verify the status of these credits. This has significantly contributed to improving our criticized asset quality. I estimate there's still about $50 million to $75 million of potential for improvement. However, I don't expect continued progress at the same pace, as the numbers are decreasing. Between the classified and criticized assets and what's already reported as nonaccrual, there's about $75 million in total assets. I believe there's a range within that $50 million to $75 million where we can still see improvements in criticized assets, assuming there are no negative shifts.

Our next question comes from the line of Janet Lee with JPMorgan.

I want to start with the noninterest-bearing deposits. I know that there is some seasonality to your deposits given political factors. In the second quarter, your noninterest-bearing deposits were 54% of your total. Given the ongoing 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?

Right.

So I'm sorry, just to make sure I got your question. You're asking about the mix between our DDA and IBA by the end of 2023?

Noninterest-bearing deposits to total deposits.

Yes. I would like this ratio to remain at 54%. However, I believe it will likely return to a 50-50 split, perhaps even slightly lower. I haven't conducted a detailed analysis, so this is somewhat of a rough estimate. For us to drop below 45%, there would need to be a significant change in our overall mix. Additionally, I think we are somewhat protected from rate fluctuations because we manage to generate a considerable amount through fundraising. Often, these fundraising initiatives are less affected by rates and more aligned with the values related to the fundraising purpose. When considering our total interest expense, we know it will change, especially as we approach the fourth quarter and the political deposits decline, which represent a substantial portion of the DDA. However, we have been successful in the past at rebuilding our political deposit base. Our typical customers are quite focused on banking with us and tend to be less concerned about the rates. Priscilla, do you have anything to add regarding the nature of the company?

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. And there's still a fairly low-interest rate environment as being as much of a driver of their participation.

And just to clarify on your residential 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 line item to see declines 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 ebbs and flows?

So on my residential comment, I think we'll still grow. I think it will 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 will be a bit of a product of us connecting our consumer business to our commercial franchise under our 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, too, as we get into the back half of this year and teeing up the business for the future years to come. So I don't see us as shutting down the business or going in a negative direction. I just think it will 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 or just going to stop completely on the residential side.

On the consumer side, I believe the demand is still present. We are considering consumer solar in a similar way, monitoring credit standards. We are not in a position to relax those standards to increase volume. We've noticed more competition entering the market for some of the flow, which has led us to pass on some opportunities while maintaining our expectations for credit quality and security on deals. Looking ahead to the second half of the year, with consumer demand being uncertain, we will approach the quality of the packages from these flow arrangements with caution. However, we are not planning to exit this business; it may just proceed at a slower pace. And can you comment on the trajectory of NIM assuming the forward curve through 2023? I know there's a lot of things that come into play, but just combining the fact that your earning asset yields are going to keep going up and then if your deposit cost increases, but probably obviously at a lagging pace versus earning asset yields, can we still see NIM expansion continuing through the end of 2023?

Yes, it’s challenging to predict. However, I am confident we will observe continued growth in the net interest margin. I’m unsure about the peak level, currently at 3.03%, but I believe there’s still potential for upward movement regarding NIM expansion. Key factors contributing to this include ongoing pull-through on the yield side from our loan portfolio. We haven't fully realized the impact of some higher-rate bookings from the latter half of this quarter, which will start to reflect in our results. Additionally, a shift from our securities portfolio to more loans in the second half of the year may further enhance the top line of the NIM. Naturally, deposit expenses will increase, making it somewhat difficult to predict the impact. However, if past betas are indicative of the present, I believe the margin could see a favorable outcome from this. 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 to 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 betas should behave differently from that past rate rise cycle because our customer mix is essentially the same as it was back then.

I don't know if this was covered if it was, I apologize. So the expense $138.5 million is that still maintained for full-year 2022?

Yes. I believe we are somewhat ahead of our expectations regarding expense management, which is positive. However, we anticipate some pressure on our compensation and benefits expenses, as well as on other investments in infrastructure that are essential for supporting our growth strategy and planning for $10 billion in the future. We will continue to make those investments. The target of $138.9 million or $139 million looks solid. If we end up below that, it will likely be due to run rate savings from data processing, which we are optimistic about. For now, we are maintaining our target. We may experience some increase in expenses in Q3 and Q4 compared to our performance in the first two quarters.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to Ms. 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.