Amalgamated Financial Corp. Q1 FY2023 Earnings Call

Good morning, everyone, and welcome to the Amalgamated Financial Corporation First Quarter 2023 Earnings Conference Call. As a reminder, this call is being recorded. I will now hand it over to Mr. Jason Darby, Chief Financial Officer. Please proceed.

Thank you, Operator, and good morning, everyone. We appreciate your participation in our first quarter 2023 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 Slide 2 of our earnings deck as well as our 2022 10-K filed on March 9, 2023, 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. 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. Good morning, everyone. We appreciate your time and your interest today. Well, certainly, a lot has happened since our last earnings release and conversation. The market turmoil that has ensued following the collapse of Silicon Valley Bank and Signature Bank in early March has been all-consuming for markets the last 30 to 45 days. We are engaging employees, customers, and investors to help them understand the financial stability of their bank of choice. This time investment was actually invaluable as a means for reinforcing the already strong connection with each of our stakeholders. I've been so impressed by our entire bank's ability to rise to this occasion. As I've mentioned before, I truly believe we have the right team in place to manage through difficult situations and position us for continued success. Amalgamated Bank is unique in that at just under $8 billion of total assets, we rank high among the 200 top publicly traded U.S. banks in total asset size, yet are also able to have our executive management team engage directly with our customers and our partners to reaffirm trust and confidence. Our customers were able to see executive management as an extension of their relationship banker and also witness the value they themselves directly bring to the bank, which only served to strengthen the long-standing ties we have with them. We are quite fond of reminding our stakeholders that we are the same bank that we were before the closures, a conservatively run financial institution that's a good steward of our customers' money. It's also not lost on us or our stakeholders that we turned 100 years old on March 16, 2023. In a strange bit of irony, our centennial birthday comes at a time when history and stability are at the forefront of the banking discussion. Having a 100-year anniversary to us, our employees, and all of our friends and partners, there are very few banks that are in that 100 club. We just celebrated our centennial anniversary this past week by ringing the bell at NASDAQ with our employees who have been here for over 25 years. During this celebration, I was reminded that Amalgamated Bank has seen many turbulent periods over the last century, and we've come out stronger every time. We were founded in New York City in 1923 by immigrant textile workers in order to provide basic banking services to their families while in search of a better life for themselves. For 100 years, we have demonstrated that successful banking means doing what's right for our customers and doing what's right for the communities we serve. We have been committed to using our voice to advocate for responsible public policy, increased access to the financial system as it creates the kind of community change that positively impacts our customers and our employees. Ultimately, it's our belief that our mission and values resonate with our existing customers while continuing to attract new customers who share the vision. Our first quarter results, again, validate that mission. In fact, our results demonstrate the resiliency of our Growth For Good strategy as well as the strength of our customer relationships. We were able to deliver GAAP earnings of $0.69 per diluted share and core earnings of $0.74 per diluted share. We selectively grew loans by $92.2 million or 2.2%. And also, our PACE portfolio grew by $84.5 million or 9.3%. Additionally, we delivered net interest income of $67.3 million, which exceeded our expectations of $63 million to $65 million and a 21 basis point expansion in our loan yields that led to a 5 basis point increase in our net interest margin to 3.59%. While we expect earnings headwinds in the upcoming quarter that Jason will discuss in a bit, our mission-based banking model continues to prove that we can do well by doing good. Simply put, our first quarter results clearly demonstrate that the financial strength of this bank is still there and the competitive advantage that we hold in the market is still strong. Recently, there's been much talk about deposit granularity and susceptibility to runs on the bank. The conversation is understandable in the industry because it was a primary driver for the bank failures that occurred in early March. While we believe those failures can be attributed to other factors or business strategy decisions, nevertheless, I'd like to address our deposit granularity and share some key insights to help you better understand our primary funding composition. Our deposit franchise is a true differentiator for us, and it has experienced strong organic growth since segmenting our customer base in 2015 and recruiting constituent-focused bankers to gather deposits. We have grown our mission-aligned core deposit base from $2.7 billion then to $6.6 billion today, a compound annual growth rate of 12.8%. Our customers are change-makers. They are the individuals, organizations, and businesses in our six key segments of labor, sustainability, philanthropy, social efficacy, not-for-profit, and political. What they all have in common is that they care about what their money does in the world. Our deposit franchise is comprised of customers that have banked with us for decades, given our shared values and our union heritage. In fact, $3 billion of our core deposits are from labor union-related customers. To further illustrate our deposit granularity, we are introducing a designation of super-core deposits. Those are deposits that are in our core segments with account duration in excess of five years. Our super-core deposits totaled $3.5 billion or 53.6% of our total core deposits. Most significantly, the weighted average life of these deposits is 17.2 years. I'll say again, 17.2 years. This is the type of stickiness that defines our deposit base and contributes to our top 20 ranking in terms of deposit quality. When thinking about susceptibility to runs on deposits, we believe Amalgamated is as insulated as any bank in the country; this is something a 100-year-old bank can say with confidence and pride, having been tested repeatedly throughout history. Stating the obvious, our customers' money is safeguarded by our liquidity and our capital. We have long been carefully managing our balance sheet, having maintained our asset sensitivity while rates were low, resisting the urge to chase yield and sacrifice liquidity. Our discipline with our securities portfolio proved to be a real tailwind when rates rose quickly, and I was delighted to return much of that benefit to shareholders in the form of substantially improved performance metrics. Over the past few quarters, we have significantly reduced our asset sensitivity, and we've also been selectively reducing our securities portfolio as we have grown our loan portfolio. Importantly, our available-for-sale securities portfolio had an effective duration of only 1.8 years at quarter-end. We ended the first quarter with cash and immediate borrowing capacity of $2.6 billion and another $868 million of two-day capacity from unpledged securities, resulting in $3.4 billion of two-day total liquidity. Our two-day total liquidity covered 79% of our total uninsured deposits. Perhaps more importantly, our immediate liquidity covers 137% of those deposits that don't fit into the super-core category that I spoke about earlier. Amalgamated has a differentiated position in the market as a values-based bank that has been run conservatively with long-tenured client relationships. We have never wavered from our mission of being America's socially responsible bank and are seeing the benefits of this as individuals and organizations increasingly care about how their money is invested. This societal change is still in the early innings and Amalgamated is positioned to benefit as we pursue the next leg of our Growth For Good strategy. We recognize the headwinds presently facing the industry, and our strategy is able to pivot and adapt as needed. We will continue to explore a digital transformation, given the opportunity we see to tie our commercial business into a reimagined consumer business and also accommodate the needs of our customers to maintain pace with ease of transaction technology. We are carefully managing our expense base and are closely watching the economy. Investments still need to be made, but as was the case with our lending strategy, we will make disciplined choices funded through profitability with a requirement for timely returns.

Thank you, Priscilla. Net income for the first quarter of 2023 was $21.3 million or $0.69 per diluted share compared to $24.8 million or $0.80 per diluted share for the fourth quarter of 2022. The $3.5 million decrease for the first quarter of 2023 was primarily a result of a $0.6 million loss related to the sale of a portion of the Silicon Valley Bank senior note we held, a $0.5 million increase in provision expense, a $3.0 million increase in non-interest expense, and a $0.8 million increase in income tax expense, offset by a $1.6 million increase in non-interest income, which excludes the loss related to the Silicon Valley Bank senior note sale. Beginning on Slide 5, there were no exclusions related to solar tax equity investments for the first quarter of 2023. 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. Core net income, excluding the impact of solar tax equity investments as a non-GAAP measure, for the first quarter of 2023 was $23.0 million or $0.74 per diluted share compared to $27.2 million or $0.87 per diluted share for the fourth quarter of 2022. Turning to Slide 7. Deposits at March 31, 2023, were $7.0 billion, an increase of $446.4 million in the fourth quarter of 2022, while core deposits declined 1% to $6.6 billion, primarily related to pension customer timing, client diversification for yield or insurance, and slowed new customer acquisition. Through April 21, 2023, total deposits decreased by approximately $206 million to $6.8 billion. Total deposits, excluding brokered CDs, decreased by a modest $5 million and core deposits decreased by $12 million. Non-interest-bearing deposits represent 48% of average deposits and 43% of ending deposits for the quarter ended March 31, 2023, contributing to an average cost of deposits of 81 basis points in the first quarter of 2023, a 47 basis point increase from the previous quarter as numbers were negatively impacted by the shift of borrowings to broker deposits. Our cost of funds, excluding brokered CDs, was 61 basis points, up 29 basis points from the previous quarter. Moving to Slide 8, at a more granular level, our high-quality deposit base is comprised of long-tenured relationships with mission-aligned commercial and consumer customers, totaling $3.5 billion of deposits. As Priscilla mentioned, we view this as our super-core deposit base, which uniquely displays important insight into our impact customer segments. At quarter-end, the total uninsured deposits were $4.4 billion or 62% of total deposits. Excluding uninsured super-core deposits of approximately $2.5 billion, remaining uninsured deposits were approximately 25% to 28% of total deposits with immediate liquidity coverage of 137%. As Priscilla mentioned and consistent with prior quarters, we have maintained significant liquidity with cash and immediate borrowing capacity of $2.6 and $868 million of two-day capacity from unpledged securities, resulting in $3.4 billion of total two-day liquidity. We believe our core deposit base has demonstrated stability and resiliency in the early innings of post-bank seizures. Looking at our core deposits by impact segment on Page 9, all segments showed consistent balances for the past several quarters with the noted exception of political balances, which were expected to run off in the fourth quarter of 2022 with the conclusion of the congressional elections. Turning to Slide 10, deposits held by politically active customers were $678.1 million as of March 31, an increase of $34.5 million on a linked-quarter basis. As noted on our previous call, we expect political deposit flows to rebuild in the first quarter of 2023 following the typical pattern of seasonality. Additionally, we've experienced $26.9 million of incremental political deposit inflows through April 21, 2023. We expect political deposit inflows to increase throughout 2023 and into 2024 in anticipation of the next presidential election. Jumping ahead to Slides 13 and 14, the book value of our investment securities portfolio decreased $110 million during the quarter, primarily as a result of $148.4 million in strategic sales and $49.2 million in traditional securities paydowns, offset by $84.5 million in net PACE assessment growth. Floating rate represented 47% of total securities, excluding PACE assessments at quarter end as we have continually reduced that ratio over the past several quarters to reduce our asset sensitivity and protect our earnings streams. Our unrealized loss positions in our available-for-sale securities portfolio was $117 million or 6.6% of the total portfolio balance. Importantly, our AFS portfolio duration was only 1.8 years, reflecting our conservative investment decisions. Turning to Slide 15. Total loans receivable, net of deferred fees and costs at March 31, 2023, were $4.2 billion, an increase of $92.2 million or 2.2% compared to December 31, 2022. The increase in loans was primarily driven by a $95.3 million increase in multifamily loans and an $18.4 million increase in residential loans, offset by a $7.9 million decrease in our consumer loan portfolio and a $7.7 million decrease in the commercial real estate portfolio as we continue to reduce our exposure. During the quarter, we had $5.6 million of payoffs of criticized or classified loans as we continue to focus on improving the credit quality of the bank's commercial portfolio. The yield in our total loans was 4.40% compared to 4.19% in the fourth quarter of 2022. As noted a moment ago, our commercial real estate portfolio has been a portfolio we have been de-risking for the past several quarters. At quarter end, we had $70.8 million in office-only exposure across eight credits with an average LTV of approximately 38%. Of the eight credits, all are past grade with the exception of two special mentions. On Slide 16, net interest margin was 3.59% for the first quarter of 2023, an increase of 5 basis points from 3.54% in the fourth quarter of 2022. The margin increase was driven by continued loan growth with increases in yields and higher average balances of interest-earning assets, offset by increased rates and average balances of interest-bearing liabilities, particularly in interest-bearing brokered certificates of deposits amid our focus to retain deposits. No prepayment penalties were earned in loan income in the first quarter of 2023 compared to a 1 basis point contribution to net interest margin in the fourth quarter of 2022. Core non-interest income, excluding the impact of solar tax equity investments as a non-GAAP measure, was $7.5 million for the first quarter of 2023 compared to $7.3 million in the fourth quarter of 2022. The increase of $0.2 million was primarily related to losses on the sale of non-performing held-for-sale loans during the fourth quarter of 2022. Core non-interest expense, a non-GAAP measure for the first quarter of 2023 was $38.6 million, an increase of $3.1 million from the fourth quarter of 2022. This was primarily due to a $2.4 million increase in compensation and employee benefits comprised mainly of an expected increase in payroll taxes, given timing of corporate incentive payments, temporary personnel costs, and benefit insurance costs incurred during the quarter. Additionally, professional services increased from carryover costs related to year-end audit work and data processing increased mainly as a result of sales tax refunds collected in the fourth quarter of 2022. As noted on last quarter's call, we anticipated our non-interest expense to rise to approximately $36.75 million to $37 million to counter the effect of certain accrual releases and refunds recognized in the fourth quarter. Moving to Slide 19. Non-performing assets totaled $38.7 million or 0.49% of period-end total assets at March 31, 2023, an increase of $10.1 million compared with $28.6 million or 0.44% on a linked quarter basis. The increase in non-performing assets was a result of the Silicon Valley Bank senior note and one construction loan placed on non-accrual in the first quarter of 2023, offset by a $1.1 million charge-off of a multifamily loan. Our criticized assets increased $3.4 million or 3% to $110.3 million on a linked-quarter basis. On January 1, 2023, the current expected credit loss (CECL) methodology for establishing the allowance for credit losses was adopted, which increased the allowance for credit losses on loans and securities for on and off-balance sheet credit exposures. During the quarter, the allowance for credit losses on loans increased $22.3 million to $67.3 million at March 31, 2023, from $45 million at December 31, 2022. The initial adoption of the CECL standard increased the allowance for credit losses on loans by $21.2 million to recognize the day one cumulative effect, primarily attributed to our consumer solar portfolio. The allowance for credit losses on held-to-maturity securities was $0.7 million to recognize the day one cumulative effect primarily attributed to commercial and residential paid securities. Additionally, the allowance for expected credit losses on off-balance sheet loan exposures was increased by $2.6 million to recognize the day one cumulative impact of adopting the CECL standard. The ratio of allowance to total loans was 1.61% at March 31, 2023, and 1.10% at December 31, 2022. The ratio of allowance to non-accrual loans was 224.74% at March 31, 2023. Provision for credit losses totaled $5 million for the first quarter of 2023 compared to $4.4 million in the fourth quarter of 2022. During the quarter, the bank recognized a $1.2 million impairment charge on the SIVB senior note and an additional $1.1 million of provision expense related to the charge-off of a multifamily loan. Adjusted for these items, our provision for credit losses was $2.7 million under the new CECL standard, primarily driven by solar charge-offs, portfolio growth, and changes in the economic forecast used to calculate the allowance. Continuing to Slide 21, our core return on average equity and core return on average tangible common equity, excluding the impact of solar tax equity, were 18.6% and 19.2%, respectively, for the first quarter of 2023. We repurchased $2.4 million of our common stock during the first quarter and have $25.6 million of remaining capacity under our $40 million share repurchase program. Additionally, we have declared our quarterly dividend of $0.10 per share. As previously noted, we are judiciously managing our capital position based on the state of the current economic and banking sector volatility. Our capital position held steady at 7.50%, and our common equity Tier 1 ratio is stronger than that of our peers given our lower risk weightings, which we believe is noteworthy considering the capital impact of our adoption of the CECL standard. Slide 23 shows a reconciliation of the change in tangible common equity and related tangible book value. As expected, the Federal Reserve Board continued its cycle of interest rate increases in the first quarter of 2023, though the committee reduced its pace of increases by declaring a 25 basis point increase at each of the February and March meetings. Currently, we anticipate further rate increases to occur in May with potential interest rate reductions to occur by the end of 2023 or early 2024. As a result of our $21.3 million quarterly earnings and an $11.4 million improvement in accumulated other comprehensive loss due to the tax-effective mark-to-market on our securities portfolio, our tangible book value per share, a non-GAAP measure, improved to $16.42 as of March 31, 2023, as compared to $16.05 in the prior quarter. We also remain pleased with our tangible common equity to tangible assets of 6.43% for the quarter in comparison to 6.30% from the previous quarter, reflecting our continued practice of safeguarding our conservative balance sheet. We remind investors that we publicly set a general tangible common equity minimum of 6% back in the second quarter of 2022. On the fourth quarter call, we provided our anticipated outlook for net loan growth to moderate to approximately 2% to 3% sequential growth in 2023, led mainly by our commercial portfolios. During the first quarter, we met our 2% target and expect net loan growth to remain unchanged at an approximately 2% to 3% run rate for the remainder of 2023. Growth in loans and PACE are generally expected to be funded with reductions in securities. Turning to Slide 24. In consideration of recent events, we have updated our full year 2023 guidance as follows: core pre-tax pre-provision earnings, excluding the impact of solar, of $133 million to $140 million and net interest income of $248 million to $255 million, which considers the effect of reduced deposit growth and the forward rate curve for the remainder of 2023. Going forward, we estimate an approximately $0.5 million decrease in annual net interest income for a parallel 25 basis point increase in interest rates, reflecting higher beta assumptions and changes in deposit mix. To conclude, we remain focused on growing our capital position, minimizing potential borrowings and balance sheet leverage, and managing expenses. We do expect our net interest margin to compress by 15 to 20 basis points in the near-term as pressure on deposit costs continues. As a result, we anticipate our net interest income to decline to approximately $62 million to $63 million in the second quarter of 2023. Looking forward, we will continue to remain competitive in order to maintain and attract deposits as we work to reduce our borrowings while providing liquidity to support our Growth For Good strategy. Our results this quarter demonstrate the strength of the bank as well as the mission-based differentiation that we share with our customers and communities. And with that, I'd like to ask the operator to open up the line for any questions.

Our first question comes from Alex Twerdahl with Piper Sandler.

First off, I was hoping you could give us a little bit more color on the moving parts in deposits and specifically kind of what you saw during the quarter with respect to the non-interest-bearing decline and sort of the re-shifting, if that's something that accelerated in March and the wake of what happened at some other banks? Or if that's something you saw over the course of the quarter? And then hoping you could give us the updated thoughts on deposit betas, just sort of given all the changes we saw over the last couple of months?

Sure, Alex. I'm happy to take that question. We noticed a shift from non-interest-bearing to interest-bearing accounts starting to accelerate in the fourth quarter of 2022, which we had already included in our 2023 guidance. After the bank seizures in early March, we observed even more acceleration. We've offered a reciprocal product for a while, and we were prepared to present this to our customers who were seeking security for their demand deposits. We believe this shift was significantly influenced by customers wanting insurance. At the same time, we have been accounting for this potential shift in our business model, as it's vital to meet our customers' needs. Regarding deposit betas, we have consistently stated that betas are increasing with each Federal Reserve rate hike, and our outlook remains unchanged. For any upcoming rate increases, we're estimating interest-bearing betas to be around the mid-50% range. Last quarter, excluding some consumer CD repricings, we observed a beta of about 45% to 50% in the fourth quarter. This does not include any deposit repricing we've executed recently. The key focus for us is to concentrate on customer needs and ensure we are aligned with their expectations, while also being cautious with our deposit portfolio for now and in the foreseeable future.

Okay. Stepping back, I'm considering the various groups you serve, some of which depend on donations and contributions. If we enter a recession, people might be less willing to donate to different causes. I'm interested in how you plan to manage the bank and adjust the business model in the event of a recession. What are your thoughts on preparing for that situation?

That's a good question. In future quarters, we can provide a clearer understanding of specific segments. Some are more affected than others. We are not just discussing charitable organizations that receive funds, but also those that are donor-based. There is a cyclical nature to many of the deposits, which tend to complement each other. We've aimed to give you a good sense of those dependent on campaigns, elections, and similar events. Historically, during past recessions, these deposits have actually grown. Therefore, we do not feel excessively vulnerable to any particular segment or event.

Okay. That's helpful. For my final question, could you provide a bit more detail on the construction loan that became non-performing this quarter and whether that was already included in the previous comments?

Yes. That loan had been considered for special mention but did not qualify at the end of the previous quarter. It is structured in two parts: an A part that is performing at about $5.5 million, and a B part that we moved into non-accrual this quarter. This deal involves a partnership with a government entity. In our opinion, some of the issues might be related to timing, as financial reporting requirements and funding cycles do not always align. Over time, we are optimistic about the prospects for full repayment. We are still addressing some challenges with the deal, but we feel confident about the overall collectability, even though it may take a little longer to see the results.

Our next question comes from Janet Lee with J.P. Morgan.

Congrats on your 100th year anniversary. I have a few questions. I just want to, I guess, start with deposits. So as part of the factors that you pointed to for decline in core deposits, excluding brokered CDs, you mentioned slow new customer acquisition. Was this driven by some of the recent events in March? Or is it more weighted towards customers looking for higher yields elsewhere outside of the bank? What led to that slower pace of client acquisition?

Janet, thanks for that question. I'll jump in and answer. I think really, that's slowed new customer acquisitions more centered around post-SVB and Signature announcements. We had seen some new deposit wins during the quarter. A lot of our pipeline sort of obviously took a little pause in terms of moving banking relationships as the events sort of unfolded. We feel reasonably good about what our pipeline still looks like, although it's going to take probably a little bit longer than we originally thought at the beginning of the year to get those conversations back going and see those customers start to move in our direction. But we did have some wins in the quarter, we felt pretty good about. A little bit of that was offset by some folks seeking yield, and we feel like we had a good treasury alternative. Deposits come off the balance sheet that way, but it remains sort of with the bank through our investment management arm, and we get a little bit of a pickup probably in future quarters in non-interest income there. But in terms of people seeking yield, there really wasn't a reason for slowing of new customer growth. In fact, I think we did whatever we thought was necessary on certain exception pricing for key customers and anybody that was coming into the bank that was new. We think we found competitive pricing for them that matched up with what their fiduciary needs were.

The only thing I'll add to that is that the fact that we had new commercial customers coming into the bank at a rate that's comparable to prior years. And as we look at our pipeline, albeit a paused one, we do expect that over the course of the year, the projections we've given are sound and good.

Okay, great. Regarding your outlook for net interest income, I understand that the forecast for deposit growth has been lowered due to corporations. Last quarter, the guidance indicated average deposit balances increasing by about 5% on a conservative basis. How should we interpret the revised outlook for deposit growth, excluding brokered certificates of deposit?

Right. So yes, we're thinking that the same way excluding brokered CDs. I'd probably say it's somewhere in the range of about 2% versus the 5% that we talked about earlier. We still think there'll be an opportunity for average deposit growth over the course of the year. There's been some announcements in the political space that hopefully will start to jumpstart some of the fundraising that would occur for the presidential. And there is, as Priscilla mentioned, still a pipeline for us to be working through with regard to new customer attraction, and we feel okay about. But certainly, the pause, as I mentioned and Priscilla mentioned as well, has given us reason for us to reforecast on the deposit growth, and we think that 2% is probably a better number for the end of the year.

Right. That 2% excludes brokered CDs, and I know you've already reduced brokered CDs by $200 million in April. Is your plan to further lower brokered CD balances as you gain more customer deposits in the next couple of quarters, or do you intend to keep those balances somewhat higher for a while to maintain liquidity? How should we view brokered CD balances in the near term?

So yes, to clarify, yes, the growth number I quoted to you was based on ex-brokered deposit balances. In terms of the brokered CD, yes, we are down a couple of hundred million, but I think that's just a timing-related moment. We do think that the brokered market is a really good source of liquidity for us. I do think that we'll try to maintain brokered CD balances appropriate with our balance sheet and limit our need to use short-term borrowings unless, of course, the pricing changes in some way that the brokers become a little bit more expensive. So I think you can think of the March 31 results as sort of a benchmark for how we'd like to see our funding mix relative to total deposits with brokered and any short-term borrowings. I think our idea, also, as we pointed out in the revised guidance, is to keep our balance sheet from a total assets point of view, neutral to where we finished the quarter, which basically is neutral from where we finished last year. And that ought to give you a good indication of how we'll try to manage the kind of the total liability side of the balance sheet in terms of our funding composition.

Got it. And on your CECL reserve build in the quarter for day one effect, which is $21 million. Can you walk through what reserve coverage ratio was assumed for your consumer solar loan portfolio and the dollar amount of reserves specific to that segment out of that $21 million?

The majority of the CECL build was associated with the consumer solar portfolio, which we mentioned in previous quarters. We anticipated adopting CECL at the end of the year and had already filled our consumer solar portfolio throughout 2022, so we don't expect to engage much more in consumer solar in 2023. The main part of the CECL build directly relates to the consumer solar segment. Analyzing the charge-off ratios from 2022 and the average life of that portfolio indicates a need for an additional build. We're optimistic about the charge-offs and have established protections within some of these structures. We're beginning to meet those protections and see some benefits. We hope that over time, charge-off rates will decrease, leading to advantages from the reserves established in the CECL model. This summarizes the CECL impact related to consumer solar.

Okay. So basically, can we assume that the total CECL reserve specific to consumer solar was sort of the net charge-off ratio that you guys have experienced in the recent quarters, but then obviously multiply that by like however long the duration of that portfolio. Is that the right way to think about it?

I think so. If it helps from a consumer solar point of view, we think of those from a duration point of view as being similar or sharing similar characteristics to our residential 1 to 4 portfolio. So hopefully, that gives you a sense. And yes, the charge-off rate, but I wouldn't look at it just as the charge-off rates we've seen in the more recent quarters; we've taken them over a longer life, which has a little bit of a lower implied rate. But again, if you take that sort of charge-off rate history and take that against a duration, it looks like a 1 to 4 family style property or style duration, that could give you a good indication of how we think of the modeling.

The next question is from Chris O'Connell with KBW.

I was hoping to start off on the expenses. I think, if I heard you're right, they should be trending down towards $36.75 million to $37 million run rate for the remainder of the year. Is that correct?

Yes. So what I've been referring to in my commentary was that we had thought we'd be in that $36.75 million to $37 million on a quarterly run rate going forward. And I was also making a comparison to the previous quarter. I think our expenses were a little bit lower optically as a result of some accrual releases and some sales tax refunds that we're able to recognize in the fourth quarter. So it kind of normalized last quarter to about $37 million. And I think $37 million is still a good quarterly run rate going forward on an average basis. We saw a little bit of an uptick in this particular quarter because of some timing. There was a third payroll that occurred in March, which saw some of our payroll tax expense and some other related compensation items, a little bit elevated from what it would probably look like on a quarter with one less payroll on a normal basis. I think we also had a little bit of temporary personnel expense that flowed through as we needed to support a couple of areas in the business that have now had permanent hires and then some benefit increases that we saw in terms of premium expense in the quarter. But we think those are largely temporary and can be brought back to a more normalized number in coming quarters going forward. But we are seeing expense pressure. There's no question about it. And so holding that $37 million will be a challenge, but that's something that Priscilla and I are focused on. I don't know, Priscilla, if you want to add anything there?

No, I think you articulated it well. We definitely believe there are important areas to invest in throughout the business. These will not come as a surprise to you as they align with what we've discussed since launching the Growth For Good strategy. As we've mentioned before, we will gradually incorporate those investments into the business. Therefore, you won't notice distinct increases in expenses; instead, you will see offsets, with net offsets occurring in other areas of the business.

Got it. That's helpful. And then on the office portfolio, can you just kind of go over the LTVs and what the reserves are held for the two on special mention? And then maybe how much of the office portfolio is coming due during 2023?

Sure. I believe we included additional information in our presentation to provide clarity. Regarding the two properties mentioned, there is no specific reserve due to the strong loan-to-value ratios and the fact that they are still making payments. Overall, our reserve coverage is solid, though I don't have an exact figure at the moment, but I can follow up on that. Excluding the CECL impact, we're looking at around 110% to 115% in total reserve coverage, and I believe it's well-distributed across the different asset classes. It's also important to note that we report a GAAP figure of $327 million in our commercial real estate portfolio. However, when we break it down, there are about $70 million in office-related investment credits, which should help mitigate some of the risk for the overall portfolio. The loan-to-value ratio for that group stands at roughly 38%, which gives us confidence in the collateral involved. In terms of maturity, typically, about 20% of the portfolio matures each year. I would need to check the specific numbers for the office portfolio, but I believe 20% is a reasonable estimate.

Got it. And do you know if either of the two special mentions mature this year?

Neither do I know that, but they're not long in the maturity table.

Great. And then as far as loan growth for the remainder of the year, I know it's supposed to be relatively subdued on a net basis. But if you could go over what areas you are looking to add and that you see good demand and good risk-reward relationships on versus some of the areas that might be pulling back on or kind of declining to offset that?

Yes, sure. Absolutely. I think high-level, we have said that we expect our loan growth to be led by our commercial portfolios, mainly multifamily real estate and C&I, particularly in our sustainability segment for C&I. We'll probably do less in residential lending. We'll do less in consumer solar, as I mentioned before with Janet; we've sort of filled up our basket there, and we also have a really terrific alternative for solar-based consumer lending with our residential PACE product, which we do expect to see some decent growth throughout the rest of this year. With regard to the CRE, I'm sorry, to the C&I and the multifamily, we didn't really show much growth in C&I, but I think that's a little misleading. We did about $47 million in originations during the quarter. Almost all of that were impact-related loans and a lot of it was climate-related particularly. We had a couple of paydowns that occurred kind of late in the quarter, and we also had one payoff, which wasn't a regardable loss. So I think that that business is going to continue to be able to generate and contribute to our 2% to 3% sequential growth target for the upcoming quarters. And on the multifamily side, I think the team that we've built out is really strong, is really generating a lot of relationship-based business. And we're hopeful that not only will we continue to see some origination on the multifamily side to bolster our lending for the year within New York, but also start to see some development in the Boston market and hopefully in the San Francisco market as we place some new real estate bankers, respectively, in those areas, Chris.

Great. If you could share what the current origination yields are on loans, that would be appreciated.

Sure. Just give me one moment. In the Commercial and Industrial sector, we're currently in the mid-6s range, about 6.75%. For Commercial Real Estate, it's around 5%. We're aiming for a total real estate figure near 5.75%. In the Property Assessed Clean Energy sector, it falls within the 6.6% to 6.7% range as well.

Great. And I know you guys are going to be lowering the pure securities book over the course of the year to help fund loans, but it sounds like there will be some resi pace growth. I think a net-net basis, I guess, how do you see those combined factors growing or declining over the course of the rest of the year?

Yes. So I think target-wise, let's just kind of go through our PACE. I think we've got about $85 million of capacity left on our flow arrangement with PFG. I think about $25 million a quarter in origination is probably an appropriate number, maybe a little bit more, but probably about $25 million per quarter in our PACE. That will be offset by some pay downs. The pay downs are running about $15 million a quarter, somewhere in there; sometimes it's higher, sometimes it's lower depending on the timing of the payments. Probably do a little bit less in CPACE mainly because of the duration associated with some of those deals. So I don't see a lot of growth in CPACE but probably some. And then from there, I think we'll continue to let the securities portfolio amortize. It's amortizing at about $50 million a month on the traditional securities portfolio between AFS and HTM. And then we'll also continue to sell pools of securities to reduce our exposure but also to do some funding. What that ultimately ends up with net-net, I think it will be still a decline overall in the total securities portfolio when you factor in PACE. But I don't have an exact number for you at that point. I think the way I kind of more look at this is, we're really looking to keep the balance sheet from a total assets point of view level and how we manage that mix will be a little bit of art and a little bit of science throughout the year.

Great. And for the brokered CDs, what are you guys seeing for the rates there relative to the alternative funding from borrowings?

Earlier, we observed some very appealing rate spreads. We began entering the brokered market towards the end of 2022 and significantly increased our efforts in early 2023. Initially, we saw about a 40 basis point spread, which I believe has narrowed somewhat. Ultimately, we are closely monitoring the rates for those brokered CDs. We are balancing between shorter-term and longer-term brokers, including some five-year options. I don't have a definitive answer regarding how we compare the pricing of short-term FHLBs with brokerage options, but we consistently pay attention to the interest dynamics. It’s crucial for us to ensure we create a solid funding composition while also maintaining a certain level of net interest income throughout the process.

Great. And last one for me. Are you guys considering or thinking about at all utilizing share repurchases going forward as TC builds on a fairly tepid balance sheet growth?

Yes, we did engage in some share repurchases in the first quarter, amounting to approximately $2.4 million or around 80,000 shares. We still have about $25 million to $26 million available under our previously announced program. So it's definitely an option for us. Given the current stock price, we find it increasingly attractive to buy shares, as we believe the stock is considerably undervalued right now, similar to the perspective of several other banks. My focus is very much on capital, and I aim to see our overall capital ratio improve throughout the year. It's essential to strike a balance between our earnings, market fluctuations, and what we can allocate for dividends and capital repurchases to ensure that we maintain our TCE levels and a growing leverage ratio.

Thank you. At this time, I would like to turn the call over to Priscilla Sims Brown for closing comments.

Thank you. Thank you all for your questions, and thank you for your time and interest today. We appreciate all of that, and we know that we'll be continuing the conversation offline with some of you as well. We also feel that we hold an important place in the market by providing capital and services to our mission-aligned customers. And that's not only the right thing to do, but it also is something that is good for business, and we're grateful that your understanding that as well. I could not be more excited with what the future holds for the bank for Amalgamated, our shareholders, and our customers. I also want to just mention that in this era of sort of focus on the short-term headwinds, the cycle that we're currently in. We feel it's our responsibility. We hope you have seen that we have for several quarters now, talked about TCE and conservative credit alignment and other things that we think are really important for the defense of our book and the protection of our shareholders as well as other stakeholders. But we continue to be really focused on the longer term as well and growing the business. So that as we come out of this cycle, we continue to benefit from the tailwinds that come from the continued focus on net zero among many in the asset management and investment community and corporations more generally. And we stand ready to benefit from the return to a focus on these longer-term goals that businesses and communities have. So thanks again for your time today. We look forward to talking to you in the future as well.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.