Hello, and welcome to the Heritage Financial Corporation Q2 2023 Earnings Conference Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Jeff Deuel, CEO. The floor is yours. Please go ahead.

Thank you, Elliot. Welcome, and good morning to everyone who called in and those who may listen later. This is Jeff Deuel, CEO of Heritage Financial. Attending with me are Don Hinson, Chief Financial Officer; Bryan McDonald, President and Chief Operating Officer; and Tony Chalfant, Chief Credit Officer. Our second quarter earnings release went out this morning premarket, and hopefully, you have had the opportunity to review it prior to the call. We have also posted an updated second quarter investor presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, loan portfolio, liquidity and credit quality. We will reference this presentation during the call. Please refer to the forward-looking statements in the press release. We're very pleased to report another solid quarter with EPS in line with consensus. We continue to see pressure on deposit pricing in Q2, and we expect that to continue for the balance of the year. Deposit movement in Q2 was primarily tied to normal flows, including capital purchases with a lesser portion tied to alternative investments. FDIC insurance-related concerns have substantially subsided. We reported solid organic loan growth of 3% for the quarter as we focus on supporting our existing customers and pursuing new relationships with a primary focus on C&I. We are pleased with the positive trend of new commitments and new loan closings from our existing production teams and the newer teams added over the past year. We continue to manage expenses carefully, although we also continue to experience the impacts of inflation, mostly on compensation costs. Notably, our long-standing focus on credit quality and actively managing our loan portfolio continues to play out well for us. Staying focused on our conservative risk profile has enabled us to continue to report strong credit metrics and provides a good foundation as credit quality returns to more historical levels. We'll now move on to Don who will take a few minutes to cover our financial results.

Thank you, Jeff. I will be reviewing some of the main drivers of our performance for Q2 as I walk through our financial results. Unless otherwise noted, all of the prior period comparisons will be with the first quarter of 2023. Starting with net interest income, we experienced a decrease of $4 million or 6.7% in Q2 due mostly to an increase of $7.4 million in interest expense. This increase in interest expense resulted from a combination of an increase in our cost of interest-bearing deposits and an increased use of borrowings during the quarter. This was the main driver for the 35 basis point decrease in our net interest margin in Q2. As mentioned earlier, we had a solid loan growth of $124 million or 3% in Q2. In addition, yields on the loan portfolio were 5.19% for the quarter, which was 12 basis points higher than Q1 and contributed to an 11 basis point increase in yield on earning assets. Bryan McDonald will have an update on loan production and yields in a few minutes. Our cost of interest-bearing deposits increased 43 basis points to 0.92% for Q2. We continue to experience market pressure related to deposit rates. We are strategically increasing our deposit rates by product and working individually with our customers to maintain relationships. As a result of the current rate environment, we expect to continue to experience an increase in the cost of our core deposits, although at a slower pace than in Q2. The continued but slowing increase in this cost is illustrated by the cost of interest-bearing deposits being 1% for the month of June with a spot rate of 1.04% as of June 30. Overall, we experienced a decline in deposit balances of 3.3% for the quarter. The decline occurred primarily in…

Thank you, Don. I'm pleased to report that credit quality remained strong and stable through the first six months of the year. As of June 30, nonaccrual loans totaled $4.6 million, and we do not hold any OREO. This represents 0.11% of total loans and 0.07% of total assets. Nonaccrual loans declined modestly during the quarter and are now down by $5.8 million or 56% over the last 12 months. We did not move any loans to nonaccrual status during the quarter. The reduction came from payments on loans that were applied to principal. Page 25 of the investor presentation highlights the positive trends in our level of nonperforming assets. Delinquent loans, which we define as those over 30 days past due and still accruing represented 0.09% of total loans or $3.9 million at quarter-end. This compares favorably to $8.4 million or 0.20% of total loans at the end of the first quarter. Criticized loans, those risk-rated special mention and substandard, totaled just over $143 million at the end of the quarter. This is a modest decrease of $2.4 million from the end of the first quarter. Criticized loans have increased by $8 million since year-end 2022. However, over the past 12 months, they've declined by $23.2 million or 14%. Notably, over the same 12-month period, loans risk-rated substandard have declined by $35.8 million or nearly 38%. Overall, our entire CRE portfolio continues to perform well and has been stable through the first six months of 2023. Total criticized CRE loans represent just 2% of our entire loan portfolio. While we continue to closely watch our portfolio of office loans, we have yet to see any material deterioration in credit quality. At quarter-end, criticized office loans totaled approximately $25 million. This represents just over 4% of our total portfolio of…

Thanks, Tony. I'm going to provide detail on our second quarter loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed $212 million in new loan commitments, down from $228 million last quarter and down from $283 million closed in the second quarter of 2022. Please refer to Page 19 in the second quarter investor presentation for additional detail on new originated loans over the past five quarters. The commercial loan pipeline ended the second quarter at $473 million, down from $587 million last quarter and down from $537 million at the end of the second quarter of 2022. Loan growth was $124 million for the quarter, which is above historical levels due to lower prepay volumes and increased balances on construction loans closed last year. Please see Slides 20 and 21 in the investor deck for further detail on the change in loans during the quarter. Considering current market conditions, trends in our portfolio and customer base, our quarter end loan pipeline and the fact our new Boise team is just ramping up production. We anticipate a strong but moderately lower level of loan growth for the next couple of quarters. The deposit pipeline ended the quarter at $118 million and balances associated with new deposit customer accounts opened during the quarter totaled $46 million. Moving to interest rates. Our average second quarter interest rate for new commercial loans was 6.16%, which is 19 basis points higher than the 5.97% average for last quarter. In addition, the average second quarter rate for all new loans was 6.27%, up 26 basis points from 6.01% last quarter. The increase is due to a higher percentage of loans being closed under widened spreads implemented in 2023 versus working through the pipeline coming into the year that include pricing committed at lower levels. The market continues to be competitive, particularly for C&I relationships. The mortgage department closed $25 million of new loans in the second quarter of 2023 compared to $17 million closed in the first quarter of 2023 and $40 million in the second quarter of 2022. The mortgage loan pipeline ended the quarter at $13 million versus $25 million last quarter and $20 million at the end of the second quarter of 2022. With mortgage rates remaining at higher levels, we anticipate volumes will continue at the relatively low levels we have seen year-to-date. I'll now turn the call back to Jeff.

Thank you, Bryan. As I mentioned earlier, we're pleased with our performance in the second quarter. We're confident our well-established granular deposit franchise will continue to be an area of strength for us, and we have ample liquidity sources. Our relatively low loan-to-deposit ratio positions us well to continue to support our existing customers as well as pursuing new high-quality relationships. We will continue to benefit from our historically conservative approach to credit in our strong capital position, and we operate in a footprint that is economically vibrant. We will continue to focus on expense management and improving efficiencies within the organization. Overall, we believe we are positioned to navigate the challenges ahead to take advantage of any potential dislocation in our markets that may occur. That is the conclusion of our prepared comments. So Elliot, we are ready to open up the call to any questions callers may have for us.

[Operator Instructions] First question today comes from David Feaster from Raymond James.

Maybe just starting on the deposit front. I was hoping you could dissect some of the trends that you saw intra-quarter. It sounds like the majority of the deposit flows and the remix was more early in the quarter, which I'd guess are related to tax payments, and I think you mentioned normal flows. But just curious what you saw there in that maybe things have stabilized later in the quarter. Is that a fair characterization? And I guess what gives you confidence that things are stabilizing and just your strategy around continued core deposit growth going forward?

Do you want...

I think David that -- no, I was just -- you join in, too, Bryan. I was just going to say, I think you characterized it correctly. That's pretty much what we saw towards the end of the quarter, things started to settle down and became more steady. We are -- we have a deposit pipeline that we're working on. So I think it really boils down to where we're headed with rates just in general because the minute there's a change in the rates by the Fed. That kind of perks everybody's ears up and maybe starts the conversation again on deposits. Bryan, you might want to make some comments about the deposit pipeline and what we're expecting to see.

Yes. We are out actively meeting with our existing customers, trying to avoid outflows from those. Again, the outflows during the second quarter were excess funds just like the first quarter. But we're doing our best to retain those and then the sales force actively out calling, trying to get more deposits from existing customers as well as new. So that continues to be a focus.

Okay. Well, maybe could you touch on the competitive landscape, too? I mean, obviously, everybody is trying to do that same thing and grow -- retain their existing and grow as well. I'm just curious, has the competitive landscape remain relatively tame or are you seeing that pick up? And if so, where are you seeing competition from primarily?

Yes. It's been the large banks from the beginning of the Fed rate increase, which is -- which David is different than what we've seen certainly over the last decade, but it's been the largest of the banks that have been leading with some price specials on CDs and money market accounts. Of course, customers can also easily buy treasuries, and we've been facilitating that. So that isn't new this quarter, but I think that's the pressure in the market. Again, any excess funds, there's availability for higher rates. So it really comes down to the mix of operating relationships and granularity in the portfolio, and we're pleased with where we sit. We have got lots of operating accounts and never been a price leader in the market. But we'll just have to watch that competition, how much excess funds are left that potentially could go? And are we able to -- what percentage of those are we able to maintain with Heritage with the competition across the board, but the large banks are right in there.

I would add that -- I was just going to add that the deposit background is a little bit of a battlefield right now, as you say, David, everyone's competing for deposits. But in the midst of it, we are also procuring new customers and their deposits that might be associated with dislocation around us. So there's been some successes beyond the outflows that you're seeing.

Okay. That's helpful. And kind of maybe following up on that. Could you maybe touch on -- you gave the pipeline numbers, obviously, were down a little bit. First off, just curious how much of that is demand driven versus your appetite for growth may be slowing? And then if you could just talk about the pricing dynamics that you're seeing in the pipeline. But then to your point, are you seeing more opportunities for -- you guys have been pretty active in the disruption with new hires and market expansion. I'm just curious whether you're seeing any additional opportunities at this point?

So on the loan pipeline decline, it's really -- we've seen a surge in investor real estate requests, which we can only do a certain percentage of those anyway. So as we've closed out our existing pipeline of those opportunities we're just bringing less new non-owner occupied investor real estate request into the pipeline. That's the primary reason for the change, continuing to add C&I and owner-occupied opportunities to the mix and some investors, it's just less than what it was in prior quarters. In terms of kind of overall market demand, we are still seeing customers interested in borrowing and expanding just overall a little bit of slowing as we've come into this year. And then on the pricing side, as I alluded to in the comments, we were working through pricing quotes, spreads and some commitments that we made that were in the pipeline coming into the year. We've got a few more to close out in Q3. New pricing has been higher than what I referenced in terms of our numbers for closing rates this quarter. So we would expect to see the average rates move up as we continue through the year, similar to what we've seen in the last couple of quarters.

David, to Bryan's comment about there's only so much non-owner occupied real estate we can do. We do have the concentration management process that we adhere to. If you go to Page 23, you'll be able to see our -- how we stack up against interagency guidance from the standpoint that you'll see constructions popped up a little bit. That's part of what the new loan growth was tied to its deals that closed last year that are funding now. So it popped up to 49% in comparison to 100% guidance. And then you can see also on the total real estate, we're watching that closely because it has crept up to 268%, guidance is 300%. I think that, that's acting as a bit of a governor. Although I would add to that, we are still doing CRE. We're just being a lot more selective about what that is.

That makes sense. Maybe just the last part of that question, Jeff, I know it was a big one. But just -- are you seeing more opportunities for hires and market expansion. Obviously, you've had a lot of success, but just curious what you're seeing there from your perspective?

Sorry, we missed that. We -- where we're sitting now is we're always open to opportunities to add to the team if it's high-quality folks that fit culturally. But right now, while things are relatively quiet, people are not necessarily moving around in this environment. We have a lot to focus on with Boise and Eugene and what we've got down in the Portland, Vancouver area. I think anything that you might see us do in the near term is probably going to be kind of onesie, twosies probably not a lift out like we've done over the last year.

Our next question comes from Matthew Clark with Piper Sandler.

First on just the funding mix going forward. Loan growth slowed. Let's just say you cut it in half. That would imply net loan growth of about $65 million. That's consistent with the cash flows you kind of coming off the investment portfolio in the upcoming quarter. I guess I'm trying to get a sense for, do you think deposits can stabilize here, maybe even grow? I'm trying to get a sense for should we be assuming the borrowings continue to increase here or not?

That's a tough question. So I'll be happy to pass that one to Don. And I would just say, Matt, the circumstance we find ourselves in is deposits have essentially stabilized and started to trend a little bit up at the end of the quarter, but we expect that the competition for deposits will continue as the year progresses, especially with the potential for a rate hike. So I don't know if we can expect lots of deposit growth, but I think we would steer towards maybe deposit stability, and that will be dependent on what rates do during the rest of the year. Don, you probably have a couple of comments you'd like to add to that.

Sure. Matthew, the -- you're right on the investments. They're throwing off on average. In fact, we had to put a new slide in our deck this time on cash flows. So hopefully, you can look at that. But at least uses a lot of the need for funding on the loan side, depending on how much we actually end up funding this quarter. If we -- I would say at this point, we are not expecting to do any more borrowings. But at the same time, even if we have deposit stabilization or growth in Q3 that we probably won't pay down anything either just because we -- you just never know what's going to happen around the corner at this point, and we've got some pretty attractive rates on our borrowings. And so I'd probably -- and in fact, we're earning -- especially once the Fed raises rates, our -- cost of those borrowings are the high 4s, and we'll be earning overnight in the low 5s. And so I'm hesitant to pay those down until we really start -- everything really starts stabilizing and maybe even seeing rate cuts. So I don't think -- I'm not expecting to borrow more unless we see another surge of deposit runoffs. But again, probably not going to pay them off.

Okay. And then just a couple more on the funding side. Can you quantify the pipeline of deposits? And also what was the timing of the transfer from FHLB to BTFP? Just trying to get a sense for if we saw the full quarter benefit of that.

Well, I'll start -- maybe Bryan can talk about the deposit pipeline. The actual blended rate, I don't remember exact timing, I think it was May. But the blended rate for these funds is 4.74%. So it was only slightly different than we showed on the information. And there's a slide deck on that -- slide in the slide deck on that, too. But the go-forward blended rate is 4.74%.

And Matthew, on the on the deposit pipeline, it was $118 million, and this is just balances associated with new deposit customers coming to the bank. It doesn't count deposit funds from existing customers or outflows and that sort of thing, and we opened about $46 million. And the balance is associated with the accounts for brand-new customers we opened last quarter was about $46 million. Customers open the accounts, and that's typically a transition process for them to -- particularly for the commercial customers to move banks. So it doesn't typically all come within a week or 30 days, that sort of thing.

Got it. And then last one for me. Just wanted to clarify the spot rate on deposits. Was that interest-bearing -- that $104 million was interest-bearing, not total right?

Correct.

We now turn to Jeff Rulis with D.A. Davidson.

A question on the -- you covered the loan growth pretty well on both pipeline and expectations and sort of where we're headed. I think one of the wildcards as you called out this quarter on the advances or existing lines and draws on that. Is there any seasonality to that? And any visibility that -- is it maybe Q2, Q3 are generally stronger there? Just trying to layer on an element based in addition to your kind of guidance comments.

Yes. Jeff, if you look at Slide 20, it has the detail on the construction commitments at the bottom, and that's really what's driving the bulk of the net advances you see on Page 21, which was really the difference quarter-over-quarter. We had really similar balances on originated loans, similar levels of prepays payoffs. So it was really the difference in those net advances that drove the higher loan growth versus last quarter. So with the level of construction commitments where they are something similar to last quarter would be pretty reasonable.

So yes, I'm looking at 20. I mean if those are kind of trending up, this may be a bigger piece in terms of maybe advances and combining that with Jeff's comments about as a percent of capital, you got some room to comfortably grow there. Is that fair to say this is a piece that we could talk incrementally more about?

Yes, you'll see the balances on those construction loans move back up to something closer to what would be a little bit more normal level that you can see back in 2020 was quite a bit higher. So we obviously came into the pandemic and then didn't do a lot of new construction commitments through the pandemic. Those loans funded out and we ended up at a lower point coming out of the pandemic and so building back up. And then, of course, you -- a lot of those loans are paying off to perm options outside of parities in some cases. There's a chunk of low-income housing, a big chunk of low-income housing that we finance and most of the component we finance don't have perm debt or if they do, it's very nominal. So it's really that when do you peak and then see the prepay activity pick up again coming out of the pandemic when does it turn? But we have more room to run up before that happens.

Yes. I guess, Bryan, if I look at 2020, I mean that's more like a 60% outstanding balance to commitments and you're less than half of that today? Or basically saying that you would expect it to revert to historical levels?

Yes.

Okay. Okay. And maybe just a quick one for Don on the margin. I think you said expect some compression on the margin in the third quarter, not at the magnitude of the second. But then you talked about margin stabilization thereafter. Can I get sort of the time that was just Q4 and beyond? Or what was -- I didn't get the time line on that expectation?

Well, I'm not sure I gave a time line. I think I mentioned more of a scenario where if we saw a stabilization of both balances and starting to see the stabilization of the costs, at least we're to a point that they weren't going up any more than our yield on assets, then we would see some margin stabilization. It's hard to predict when that's going to happen. But I do think that it's going to be a decrease in margin this quarter in Q3 will be much less. Again, probably evidenced by it was 3.56% for the quarter, it's 3.54% for June, I do think we'll continue to see compression, but much lower.

Okay. All right. Got it. And maybe a last one, Jeff, I...

And just real quick, just to be clear, maybe not very definitive, but I'm probably thinking more in the high 3.40s kind of range for that for this next quarter.

Okay. That's helpful. Yes. And I didn't say that you put a timeline on it. I just missed it. Okay. And Jeff, on the capital light cash every quarter, but CET1 nearly 13%. And I think you had talked pre-pandemic, I thought you were kind of close to a deal or maybe my radar was off, but it was -- you were having conversations and maybe that's off on the sideline for a bit. But I guess just more specifically the buybacks, is that in discussion with your Board, is that pretty active? Or just looking for other areas of capital as you grow it and maybe if M&A is on the sideline for a bit? Just wanted to revisit your priorities on capital use.

Yes. Well, Don probably would be best to apply to the buyback strategy. But on the M&A side, we were close to something before the pandemic set in and set that aside, that's not available anymore. We -- as we've said in more recent quarters, we're staying close to all the banks we know and like. We continue to have ongoing conversations just in general, just to stay acquainted and stay -- keep the story fresh, but nothing imminent or urgent. And I wouldn't expect anything to present itself that we'd be interested in probably for the balance of the year at a minimum. Don, do you want to talk about buybacks?

Sure. We were kind of picking at it a little bit this year, but we don't expect to really be heavily involved in buybacks at this point for this year.

And that's more a product of the macro environment? Or I mean, if growth is maybe mid, high single digit, just trying to get a sense for why that -- is it valuation? What's the driver of why you don't think you'll be too active?

It's a combination of allowing us to grow certain aspects of our loan portfolio in addition to potential recessionaries that could be coming down the line. So we're just kind of at this point waiting and again, that's going to be very active at this point as a result.

I think it's also an indicator of our generally conservative nature.

Our next question comes from Andrew Terrell with Stephens.

Jeff, maybe if I could start. You mentioned in your opening remarks something around just the tune of credit quality returning to more normalized levels. And I understand kind of that's maybe the macro backdrop right now, but credit really seems still really strong and heritage. I was curious if you could maybe just elaborate on what fronted that comment in the prepared remarks? And then where specifically you have concerns in the portfolio, if any, or what you're watching more closely across the book right now?

Yes. And Tony, you might want to join in with this response. I think it's primarily, Andrew, from the standpoint that credit is so clean right now that it feels a little abnormal to us. And when Tony was reflecting on quarterly charge-offs historically before the pandemic were $700,000 a quarter, and we're showing, what, $49,000 this quarter. That's not normal in our minds. So our belief is that trends will return to normal at some point. We just don't see it coming from any specific category right now. As Tony outlined, everything is pretty stable right now. There's a lot of talk about recession downturn, soft or a hard landing. I think that we're waiting for the -- that to present itself in whatever form it's going to be, but I don't think we have anything specific in mind, quite frankly. And I also think that contributes to Jeff's question about capital. We're just generally conservative in nature, and we're going to keep our chips to play with and hold them until we see how things are going to play out. Tony, you may want to add to that.

Yes. Thanks, Jeff. Andrew, the normal is kind of a relative term here. What we're really talking about is it's been a very, very slow move back to a normal credit environment. When we look through 2022, we were seeing net recoveries on a quarterly basis, we don't think that's normal. And now that we're starting to see a little -- a few more losses as we go, that seems like, again, a very, very slow move to normal. Just internally, you're seeing maybe companies that had some management issues that were maybe covered by the stimulus money in the system. Now those management issues are leading to maybe a few more credits that are moving into our special assets team to manage and just some things like that, very modest at this point, very, very slow move. But we can kind of sense it turning just a bit as we go through each of the quarters in 2023. As far as areas we're looking at, as I mentioned, clearly, like every bank, we're keeping a close eye on our office loan portfolio. It's been stable. We took that deep look at it, the non-owner occupied portion of that office portfolio in the second quarter, and we'll continue to look for areas that we think are posing more of a risk and do some more of those special reviews as we go through the next several quarters, I'm sure.

Okay. I appreciate it. And actually, if I could just follow up on the office loan portfolio review. And I guess as you look throughout that portfolio, it sounds like focused on maybe some of the loans above the average size, $1.5 million plus. I guess what did you find from just an average occupancy standpoint as you went throughout the process? Did you take a stab at reappraising or revaluing properties, just using comp-type math for any transactions that have occurred nearby? And have you seen any real changes in loan-to-value at the deep dive?

Yes. I mean we were looking at those on a selective basis is, Andrew. I mean, for example, if we saw one where there was some significant potential rollover risk, we were kind of saying, what would the impact be on net operating income? And we are probably spending more time looking back at debt service coverage than loan-to-value. The average loan-to-value in that portfolio is pretty low. So we have not -- while we would look at that, the expectation is you probably have an issue with debt service coverage before you have an issue with loan-to-value. So I'd say most of the issues -- when we looked at those 52 loans, we did end up with a few that we consider to be in a yellow or a caution category. Nothing that would warrant a downgrade, but we'll continue to look at those. And it almost always comes back to some significant leases that had some potential rollover in the next 12 months. We just want to keep looking at that to see if that causes a problem with debt service coverage.

Understood. And do you have average occupancy across those 52?

We didn't calculate that. And we're looking kind of at a more one-off each loan on a kind of a standalone basis.

Got it. Okay. And sorry, I might have missed this earlier in the prepared remarks, but an estimated tax rate moving forward?

Yes, that was 16.3%.

We now turn to Kelly Motta with KBW.

Most of might have been asked and answered already. I appreciate all the color across multiple items. I guess turning back to the loan growth and kind of what you've done with your expansion to Idaho and your Eugene. Maybe if you could provide how much of the incremental growth is coming from kind of newer open branches and how those are tracking relative to what you've laid out in terms of your expectations?

Kelly, this is Bryan. Slide 10 of the deck has detail on a couple of the MSAs, Seattle at the top and then the one at the bottom Oregon, includes all of the new teams, excluding Boise, which just opened here this year. So you can see there that in 2022 and then the quarterly numbers after that. So you can see the growth since those teams started reflected there in that. Of course, we have some existing teams down there in the market as well. But we put the slide in there just trying to show a picture of how the market's changing with those new teams. And then to your other question in terms of how the loan growth is performing relative to the targets that we set out, we're at those targets or above them versus what we had originally anticipated.

Great. That's super helpful. Maybe last for me and then I'll step back. There's obviously been a lot of focus on several markets out West, Seattle, Portland. Can you give us an update on kind of what you're seeing and any relative differences across your markets that we should be aware about?

I think, Kelly, we continue to see the major metro areas improve. Just as an example, if you use -- we typically use the level of road traffic as the example. And this morning, I just heard more than one person complaining about how bad the traffic is, which is an indicator of vitality in the region. But the downtown areas are coming back slowly. Seattle is looking better and better. Bellevue has always looked great through the whole pandemic. Portland is a little bit slower to come back, but they are making progress. I've been down there a few times over the last couple of months. And I can -- there's more activity on the street during the day. There's more restaurants open, and it -- none of the downtown areas have that flawless feeling that we felt during the depths of the pandemic. It's also a summertime here, so the sun is out every single day. It makes it a lot nicer too. So things are looking up.

I'll step back. I appreciate the color and never thought we'd be cheering traffic, but good to hear.

Yes. It is an odd ball, irony. But we're happy to see it too and lots of trucks moving things around as well.

[Operator Instructions] We now turn to Tim Coffey with Janney.

Jeff, I want to see if I can put some context around your comment at the beginning of the call about deposit pressures remaining through year-end. Are you talking about the expectation that deposit rates could increase materially from where they are now or that they would remain in kind of the range of where they're at right now?

I think it was more from maybe what I mentioned earlier that when the Fed raises rates, there's on top of the existing competition for deposits I think that it also catches people's attention, while they're reading the newspaper or whatever. And it causes them to I think, approach us and ask if there's potentially something we can do. That's more of what I was referring to. I don't think they're going to go up wildly. I just think that there will be -- there's going to be ongoing pressure through the end of the year at a minimum. Hopefully, that makes sense.

Okay. It does. It does. And gels with kind of the pipeline commentary as well as the spot rate commentary, too. So that makes sense. And then, Tony, so a lot of the provision in this quarter was built off of loan growth. If loan growth were to slow from here, would the provision conceivably come down?

Yes. Don, I'll probably let you take that one.

Sure. Tim, overall, our -- you might say the rates, we actually have, I think, a chart in the deck on this is that does kind of a flow. And again, most of it was due to just volume. And so yes, if volume decreased, the balances decreased, then the overall provision would probably decrease. But the percentage would probably not, right? The percentage has been pretty steady, growing a little bit as we've -- as there's been a change in some mix, but very little. So it will be somewhat dependent on balances. But if you're talking -- I wouldn't sure if you're talking about the overall balance or more the percentage?

I’m talking about both, two-sided question.

I don’t expect the percentage to change a whole lot at this point. But again -- and as a percentage doesn't change then, of course, the provision expense will depend on the other factors as part of the calculation, which is the balances of the loans and then also the charge-offs, which has been very minimal.

Right. So that remain kind of where they are -- yes, sorry.

I was just going to say that we've mentioned our conservative nature, which is not a surprise to anybody. But I think that it would be our desire to keep that as high as we can, quite frankly, just as a cushion against anything that might come at us. But it is formulaic and we have to follow the rules. So I think you'd see us trying to keep it as high as we can.

Yes. Yes, that all makes sense. And then a follow-up for you, Don. The noninterest expense expectation for 3Q, what was that again?

That we're expecting that to be back up in the low 42s.

Okay. Okay. Perfect.

Yes. It was lower this quarter, again, because of some reversal of some accruals.

This concludes our Q&A. I'll now hand back to Jeff Deuel, CEO, for closing remarks.

Thanks, Elliot. Since there's no more questions, we'll wrap up this quarter's call. We thank you for your time, your support and your interest in our ongoing performance, and we're looking forward to seeing several of you in the coming weeks at some of the investor events. Thank you. Goodbye.

Ladies and gentlemen, today's call has now concluded. A replay of today's conference call will be available for the next seven days. You can access this by diving 1929-458-6194 and then entering the access code 925696. We'd like to thank you for your participation. You may now disconnect your lines.